Today's article has to do with common sense, even if you qualify
for a mortgage. As I have said in the past, all lenders appraise
your ability to repay a mortgage by the same rules. The rules are
based on your payment to income ratios. These ratios, termed GDS
(Gross Debt Service) and TDS (Total Debt Service), are the proving ground
for all lender decisions on whether or not you will get approved to borrow
that Lender's money. The system calls for maximum payments on the house
(inclusive of taxes and heat) not to exceed 32% of gross family income,
and all payment of debt (inclusive of house) not to exceed 42% of gross
family income. If you fit the guidelines, and your credit is good,
chances are you will get approved. If your payment to income ratios
exceed the norms, no matter how good your credit is, chances are the Lender
will decline your application. We are not going to challenge the
rules today, we are going to look at a safety net, even if you qualify.
This is a reprint of an old article, but circumstances dictate repetition.
Marc and Celine enjoy a combined family income of $58,000. They have
a monthly car loan payment of $400 and credit card payments of $80.
According to the rules described above, if the property taxes and heat
account for $240 per month, then they qualify for mortgage payments of
$1306. This is how we arrived at those figures:
$58,000 times 32% = $18560 per year, divided by twelve = $1546
per month, less the heat & taxes = $1306 monthly mortgage pmt.
That payment, amortized over 25 years at a rate of 7.00% (Five year
term) would indicate that our couple qualify for a mortgage of $186,000.
Even coupled with their other debts, their GDS & TDS read 32 &
42% of salary, therefore, they meet the criteria.
Now let's look at our couple from a common sense approach. Hearing
that they qualified gave them a feeling of accomplishment. Their
Lender was happy to issue a pre-approval to them. They went out to
celebrate. At dinner, Celine mentioned to her hubby that she was
somewhat worried that their mortgage payments of $1306 exceeded their rent
payment of $850 by a whopping $456 per month. How will they afford
that? Marc had not thought of it in those terms. He had became
lost in the novelty of being approved.
Indeed, being at the higher limits of GDS & TDS, normal Ottawans
could term this the "Kraft Dinner Syndrome". You must analyse from
a budget perspective, your own payment comfort of this new venture.
Lending Institutions as a whole will attempt to satisfy your application
for mortgaging, trusting that you can indeed live up to the norms.
Very few lending officers will analyse the difference between your present
day rent and your new mortgage payments, although, from my perspective,
this is indeed an integral part of qualifying.
Before desert was finished, Marc and Celine had decided that even if
the Lender had approved them on their qualification standards, soul searching,
and budget crunching indicated the purchase of a less expensive home.
They decided to buy a freehold townhouse instead of a detached home with
a purchase price of $128,000. With a minimum down payment of $13,000
and monthly payments of less than a $1000, their GDS & TDS now read,
22% & 32%. They can visualize making the jump from $850 to $1000
to become home owners.