APPLYING FOR A MORTGAGE


If you are just starting to look for a house, you may want to read 'Buying a Property' first.
It explains the buying process, from choosing a team of professionals to assist you, to when you receive the keys to your new property.


HOW DO THEY CALCULATE HOW MUCH CAN YOU AFFORD?

After completing a pre-approved mortgage application, your mortgage broker will calculate for you the maximum that you can afford as a purchase price. Mortgage brokers do this by using the information you have given them, together with some 'rules' set by the mortgage lenders.

The first 'rule' is your GROSS DEBT SERVICE (GDS).
Your monthly housing costs are generally not allowed to exceed 32% of your gross monthly income.

Housing costs include - your monthly mortgage payment, and an amount for property taxes and heating. If you are buying a strata property then it will also include 1/2 of your strata fees.
The total of these monthly payments divided by your gross monthly income will give you your Gross Debt Service.

For example:
  • If your housing costs total $950.00 and your gross monthly income is $4,500.00, then your GDS equals 21.11% - well below the 32% allowed.

  • However, if your housing costs total $1,550.00 and your gross monthly income is $4,500.00, then your GDS equals 34.44%. In this case it may be possible to extend the amortization (this reduces the mortgage payments), or increase your equity (which lowers the mortgage needed & therefore reduces the mortgage payments). If these options are not available you should look for a cheaper property.


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The second 'rule' is your TOTAL DEBT SERVICE (TDS).
Your entire monthly debt payments cannot exceed 40% of your gross monthly income.

This includes your housing costs PLUS all other monthly payments.
The total of all your monthly debts divided by your gross monthly income will give you your Total Debt Service.

What about the other 60% of your income?? This is considered to be used up by 'normal' monthly expenses, such as Income tax, phone bills, hydro bills, vehicle or house insurance, entertainment etc.

NOTE: 'rules' one and two concerning GDS & TDS ratios are ignored by some lenders when the downpayment is substantial, usually 35% or more, of the property value.


The third 'rule' is your CREDIT RATING.
The mortgage broker (or loans officer) will get your permission to obtain a credit bureau report.
Your credit bureau report will show previous and current credit ratings.
For example: you may have received a Sears credit card in May of 1978; you have a credit limit of $3,000; you currently owe a balance of $478; your minimum monthly payment is $24; and you have always paid on time (before the 'due date'). This is referred to as an 'A1' credit rating.

If you have had some credit problems: for example, you have occasionally been a bit late in making a payment (for example twice per year) don't worry, this will not effect your credit rating TOO much - but please get your act together. It takes seven years for any 'bad' information to disappear!

However, if you are usually 'sloppy' about your payments - for example, if you make payments when you get around to it, you will have seriously hurt your credit rating.
If the problem is not too severe, you may still be approved for a mortgage but you will probably have to pay a higher than normal rate.
If the problems are severe - for example, if you constantly pay late, or if you do not pay your bills, you could be declined for a mortgage. Some lenders will still consider your application if you have a large downpayment or a financially strong co-signor.

Your credit bureau is important because it shows how well (or not) you handle credit. If you do not handle credit well, you will either be charged a higher rate or your application will be declined.

If you have previously declared bankruptcy this will show on your credit bureau for seven years after your discharge.
A few lenders will consider your application two years after your discharge, others not for seven years. In the meantime you will be able to start again with new credit (try gas station cards and department stores first).


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THE MORTGAGE APPLICATION

At some point during the purchasing process your mortgage broker will need to complete a mortgage application on your behalf.

The following information will be needed for each applicant and any guarantors.

  • Full name and date of birth,
  • Address and postal code, how long you have lived there,
  • Previous address and how long you lived there,
  • Social Insurance Number,
  • Number of dependants,
  • Home and work phone number,
  • Name and address of employer,
  • How long you have worked there and your present position,
  • Your gross annual income, (see below for self-employed)
  • Your previous employment details,
  • Your current assets and liabilities,
  • How much you have for your downpayment.
  • All monthly payments.


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THE FOLLOWING ARE DEFINITIONS FOR THE ABOVE INFORMATION


GROSS MONTHLY INCOME

Gross annual income is the total income that you are paid by a company before any deductions are subtracted. Divide by 12 for gross monthly income.

For employment verification your mortgage broker will usually request that you obtain an employment letter from your payroll department confirming your information. A few lenders will allow you to prove income by showing two years of income tax returns and some current pay stubs.

The letter should be on company letterhead and include:
  • Your current gross or base income
  • The date your employment started with that company
  • Your current position or job title
  • Your status - full-time (no extra info needed), contract, regular part-time, or casual.


If you are on contract, then the letter must also state:

  • the details of your contract (a copy may be required).


If you are paid regular part-time or casual, then the letter must also state:

  • The dollars per hour that you are paid,
  • The number of hours per pay period that you work,
  • That the number of hours per pay period (or annually if seasonal) are consistent.
            OR
  • provide two years of tax returns
  • confirmation of gross income year-to-date.
If you received a bonus last year, then you can only use that bonus if you can show that you have received a similar amount for the past few years. Overtime income is treated the same way.


There are other types of income that can be used:

  • pension income,
  • social security income,
  • investment income,
  • dividend income,
  • income from annuities,
  • child tax credits,
  • child support income,
  • alimony income,
  • rental income (including illegal suites in some cases!).

any income of a continual nature can be included.


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SELF EMPLOYED INCOME / COMMISSION INCOME

When income can change from year to year, the mortgage lenders require different information.

Most require either two or three years of tax returns. Most will accept a tax return prepared by an accountant.
If you prepare your own tax return they will also want to see the 'notice of assessment' sent to you by the Government.

The lender will then take your average NET income. Some lenders will permit you to 'add back' some deductions to your net income. An office expense write off in your current residence is such an example.

other types of income that can be used:

  • pension income,
  • social security income,
  • investment income,
  • dividend income,
  • income from annuities
  • child tax credits,
  • child support income,
  • alimony income,
  • rental income (including illegal suites in some cases!).

any income of a continual nature can be included.

For example if you received a bonus last year, then you can only use that bonus if you can show that you receive a similar amount every year.
The total income is then used to calculate the 32% TDS and 40% GDS.


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ASSETS

These are items that you own.

Assets include:
  • Canada Savings Bonds,
  • cash in bank accounts,
  • cash surrender value of a life insurance policy,
  • GIC's (guaranteed investment certificates),
  • mutual funds,
  • RRSP's (registered retirement savings plans),
  • stocks,
  • superannuation from your employer,
  • vehicles,
  • other real estate property already owned.


LIABILITIES

These are your outstanding debts.

Liabilities include:
  • credit card balances,
  • credit lines,
  • loans,
  • other mortgages.
Your mortgage broker will need to know your current balances, your current payments and the dollar limit of credit cards and credit lines.


NET WORTH

The total value of all your assets, minus the total of all your debts equals your net worth. If your debts are more than the total of your assets, you are said to have 'a negative net worth'.


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DOWNPAYMENT

The amount of money that you are paying towards the purchase of your home is called the downpayment. This is also known as the 'equity' that you will have in the property. You should have a good idea of how much you have before talking to your mortgage broker.

You will have to show lenders proof of your downpayment - for example: if it is in a savings or investment account, or an RRSP, most lenders will require proof that you have had the funds for three months. This can be done by taking current statements with you.

If it is a gift from a family member, you will eventually have to get them to sign a letter saying that the money is a gift and not to be repaid. You will also need to show proof that they have the funds and the funds must be transferred into your account prior to closing date. One way to avoid all of this is to receive the gift, and deposit the funds into your account at least 3 months prior to you even looking for a mortgage or house.

Normally the minimum downpayment allowed is 5% of the accepted purchase price (or appraised value, whichever is lower). However, the less money that you need to borrow, the less you will have to repay!

If you have less than 25% as a downpayment then you have a High Ratio Mortgage and if you have more than 25% as a downpayment then you have a Conventional Mortgage.


TOTAL MONTHLY PAYMENTS

These include payments on your credit cards, credit lines, loans and other mortgages. However, it also includes other payments that you must make each month - such as child support, spousal payments and lease payments for a vehicle. Also included are any loans or mortgages that you have guaranteed for other people.

Other 'normal' payments such as Income tax, phone bills, hydro bills, vehicle or house insurance etc. are not included as they fall into the 60% of your gross income.


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