Qualifications and general lending criteria for low-rate financing
Four main aspects that lenders require and assess:
1. Income
2. Current liabilities (credit cards, loans, car payments, lines of credit etc)
3. Credit
4. Property
Income
Lenders assess income based on two ratios.
1. Gross Debt Servicing Ratio (GDS)
2. Total Debt Servicing Ratio (TDS)
For GDS, this is your income against your mortgage payment and shelter costs (property tax & heating), expressed as a %.
The maximum lenders allow your income to go is 39%. For example, if you earn a $100.00 a month, the maximum the lender will allow you to pay on your mortgage is $39.00. Even if you feel that you can afford $40.00.
For TDS, this is your income against your mortgage payment, shelter costs and any liabilities that you have, expressed as a %.
The maximum lenders will allow your income to go is 44%
Again, if your income is $100.00, the maximum lenders will let you use is $44.00 to pay for your mortgage + shelter costs and credit. Even if you feel that you can afford $45.00 a month.
Liabilities
Fixed payment debts
If you have a loan, car finance or lease payment, lenders take the payment as the liability.
Revolving unsecured debts
If you do not pay the full balance of your credit cards/ lines of credits, then lenders calculate the remaining balance as 3% as the liability.
E.g. credit card outstanding balance of $1,000 *3% = $30.00 – this what will be included in the TDS calculation.
For lines of credit that have higher balances (over $20,000) most lenders use an amortized calculation of 25 years and use the 5year Bank of Canada rate as the liability.
Credit
Lenders usually want to see a minimum credit score of one borrower with at least 680. However, I have seen exceptions to this rule where they are willing to look at 650 as a minimum, but they would reduce their maximum debt-to-service ratios to 35 GDS and 42 TDS. This would mean the borrowing amount would reduce.
Beacon scores is one thing that lenders look at. There are other things that lenders assess. I have provided you some examples:
Number of trade lines, utilization of credit in comparison to the limit, how long you have had credit for. If you have had previous bankruptcy or Consumer Proposal.
Previous repayment history of your credit and if applicable, mortgages.
Sometimes, you can have a high score but a very turbulent history of which may result in a lender decline of your application. Unfortunately there is only one way of finding out and that is to pull credit and apply for the mortgage you are looking for. There are 3rd party credit agencies that offer free credit reports. However, they do state that the scores can differ when applying elsewhere of which makes it difficult to know what your credit score is. I have seen credits be around 605 on the free report, but when pulling from my brokerage, it ended up being 666. A huge difference and resulted in a much cheaper lender, saving nearly $20,000 in cost savings over the term of the mortgage.
Property
As lenders are securing the funds based on the property, lenders typically look at the following when assessing the appraisal report:
Value of the property
Condition of the property
Comparable sales used in the appraisal report
Zoning-type
Structures and buildings that may affect the salability of property e.g. close to industrial units or overhead power cables etc