When qualifying for a mortgage, your income and debts that you have determine what purchase price you are able to buy at. I hear quite often from clients that they have worked hard to build and maintain great credit, saved a down payment and are ready to make the leap into home ownership. However, after I review their eligible income and debts they may be carrying, it is very sad to have to inform them that the price point they were hoping to buy is not achievable due to carrying either a large vehicle payment or credit card debt. I thought I would go over the basics of mortgage qualifying in today’s world. If you have a desire to buy a home whether now or in the near future, think twice about buying a new car or adding credit card debt to your plate.
When calculating what one can qualify for we use two formulas and apply them to your specific financial profile. You need to keep these in mind when starting to prepare for your mortgage pre-approval.
GDS Ratio – Gross Debt Service
We are allowed to use 34% of your gross income (39% if your credit score is great) to account for your housing costs such as your mortgage payments (principal and interest), property taxes, heat and condo fees if applicable. We do however have lenders that have exceptions to this however expect the interest rate to be a little higher than a traditional bank.
The income coming into your home that is acceptable varies between lenders, some lenders allow income such as Child Tax Credit to be used for qualifying while others do not. This extra income can increase ones purchase price. If you are self-employed, lenders calculate income completely differently, some allow add-backs, some allow your income to be increased by 15% which is why working with an experienced mortgage professional who has access to many lenders can make all the difference in what price point you may be able to qualify for.
TDS Ratio – Total Debt Service
These ratio’s allowed by lenders can vary from 40 – 44% depending on credit and the product you are applying for. This must account for your total housing costs (GDS) as noted above plus any other consumer debt you may carry such as student loans, credit card debt, personal loans and car payments. This is where a high vehicle payment or other debt payment can affect or lower the mortgage amount you qualify for.
Simply, the higher your income, the less that car payment will affect your mortgage qualification. Here are a few tips I’d like to share to help you qualify for a mortgage.
Timing is very important, if you plan to qualify for a mortgage now or in the distant future, think twice about taking on any new debt. This includes credit card debt, auto loan payments, lines of credit and “don’t pay for a year” borrowings. It is all about the payments so if you have to take on new debt, try and keep the monthly payments as low as possible. You can always pay extra toward any of the above debt but having your payments set as low as possible means your purchase price potentially could be higher.
If you currently carry high consumer debt (credit card debt) sometimes acquiring a debt consolidation loan to restructure your payments into a longer amortization will lower your monthly payments as well as lower the amount of interest you have to pay to the bank to pay it off.
It’s kind of a double-edged sword because while you need debt to build credit, yet too much debt can have a negative effect on your mortgage application. If you are thinking of buying a home, consult with a Mortgage Professional to discuss your options.
Here is a tip to keep in mind:
- For every $20,000 in income you earn you roughly qualify for $100,000 in mortgage money
- For every $14,000 you carry in credit card debt cancels out $100,000 or mortgage money.
- For every $450.00 in vehicle payments cancels out roughly $100,000 in mortgage money.
So pay close attention to this as you move forward and think twice about buying that new car or taking on more credit card debt. Buy the home first, then buy the car.
Do you have mortgage questions? Contact Eva Neufeld, Accredited Mortgage Professional at (Mortgage Tailors) at 780-244-0505 or by email to firstname.lastname@example.org