Qualifying for a mortgage
Connecting the dots
You spent the last few years saving for your first home and now you want to know what happens next. Learning how to qualify for the mortgage you want, with payments that fit your lifestyle, is key to understanding if you can afford your dream home. It’s important to understand how the process works and how the details of your income, expenses, and debts help to determine what you can afford.
How much will you be able to borrow?
Once we have all your information, a Meridian Mortgage Specialist can determine how much you can borrow. To do this, we apply the following tests:
Gross Debt Service Ratio
No more than 32% of your gross annual income should go to paying your annual shelter costs (mortgage principal and interest costs, plus property taxes, heating costs and if applicable, 50% of condo fees).
Total Debt Service Ratio
No more than 40% of your gross annual income should go to paying your annual shelter costs plus all of your other household expenses including credit card, line of credit and loan payments.
Canada Stress Test
The Government of Canada’s mortgage stress test is designed to answer the question, “Could you still afford to pay your mortgage if interest rates went up?”
Important: In some cases your Meridian Mortgage Specialist will consider ratios up to the industry standard maximums of 39% GDS and 44% TDS.
Your income and expenses
Together, we evaluate your current income and expenses to ensure that your mortgage payments will not make your overall expenses exceed the limits in the three tests above. If it looks like you might be at or near the top of the ratios, we can recommend some ways to help you pay off debt and lower expenses before you apply for a mortgage. This may result in more manageable monthly payments, with options to pay off your mortgage faster. For a more complete list of income and expenses, check out How much mortgage can I afford?
Your credit score
Your credit score rates your ability to manage debt. Scores are generally between 300 and 900. A high score is an indication that you will be able to make your mortgage payments, which will have a positive effect on your application. You can check your credit rating through one of Canada’s credit-reporting agencies. They can provide you with an online copy of your credit score as well as a credit report. Here’s a quick overview of credit scores ranging from good to great:
660 to 724 = Good
725 to 759 = Very good
760 and up = Great
You can learn more about your credit score and how to increase it in Getting creditworthy – how to get your score up
The total cost of ownership
To help you stay within a comfortable budget, we’ll look at the cost of owning the type of home you want to buy. For example, maintenance fees vary greatly between condominium developments and property taxes vary from neighbourhood to neighbourhood. The sum of all your expenses, including mortgage principal and interest payments, property taxes, heating costs, condo fees (if applicable), credit card interest, car payments, and loan expenses add up the cost of carrying your new mortgage and affording the lifestyle you want.
We also consider whether you are eligible for government programs like the First Time Home Buyers Plan, which allows you to withdraw money from your RRSP to purchase a home. Learn more in Help for First Time Home Buyers.
We make sense of all this information to determine what you qualify for and help you choose a mortgage that’s right for you.