How Much Can You Afford?

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So how does a lender determine how much you can afford. Well this question is has a multi part answer so I’ll give you the overview now and then we’ll expand on each of these parts in future posts.

It’s often been said that in order to determine how much of a mortgage you can qualify for is based on the “4 C’s”. Lets go through them.

1. Capacity. In a nut shell what this first element addresses is your total household income and a percentage of that income a lender is comfortable with you using in order to service your debts. There are 2 sub-elements they measure here. One is called the “Gross Debt Service” ratio and the second one is the “Total Debt Service” ratio otherwise known as the GDS & TDS ratios. Traditionally these numbers equate to 32% GDS and 40% TDS. Recently CMHC has made this part of the process a little cumbersome so we’ll have to cover it on my next posting.

2. Capital or in other words, how much cash do you have for a down payment and closing costs. In many cases, especially with rates as low as they currently are, many people qualify to borrow very large sums of money but they amount of cash they have for a down payment prevents them from buying is high as their income would allow. In the “No down payment” days this was less of an issue, but with the recent changes made to the mortgage rules, it’s a different ball game today.

3. Credit. This is where the lender looks at your credit history and looks for a patern of how vigilent you are about serving your debts. Do you pay them on time? Do you have any outstanding unpaid debts? Have you ever declared bankruptcy? This report reveals everything. Even if you have a good paying job and a down payment, a bad credit report can be the “fly in the ointment”. Again, we’ll expand on this point later.

4. Collateral or Covenant. This is where the appraised value of the house comes into play. Lenders never want to lender you more than what the property is worth, in fact it’s usually substantially less. You’ll hear the term “loan to value” or LTV. That simply means that for example if a house is worth $200,000 and the lender is only comfortable with a 90% LTV, the maximum mortgage amount they’ll go to is $180,000. There are a few other terms like conventional or high ratio that we’ll address later.

So that’s the overview of the “4 C’s. We’ll expand on these soon.

Make it a great day!

Walter Monteiro

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