January 19 2016 Posted by Siemens Group
Loan to Value Ratios and Debt Service Ratios
Your qualification for a mortgage is primarily driven by two factors: The amount of equity you will have in the property you are purchasing, and what percentage of your income will be used for debt repayment.
Lenders base their consideration of the amount of equity you have in your home on a 'Loan to Value ratio' (LTV), which is an expression of the percentage of the value of your home that is financed by their mortgage. For example at a 75% LTV, you have 25% equity in your property. The lower your LTV, the more equity you have in your property, and the lower the risk is for the lender. Any purchase or refinance with a LTV higher than 80% requires that the borrower pay for mortgage loan insurance, which protects the lender in case of default.
The other most important consideration in determining your qualification for a loan is the percentage of gross your income that will be meet your debt obligations. This is divided into your 'Gross Debt Service Ratio' (GDS), which includes the mortgage payments, property taxes, condo fees (if applicable), and heating costs on the property you are buying or refinancinancing, and the 'Total Debt Service Ratio' (TDS), which includes everything in the GDS, as well as all other debt payments including car loans, credit cards, lines of credit, student loans, and payments on other properties. Most lenders require a GDS that is under 32-25%, and a TDS that is under 40-42%. The maximum allowable GDS for insured mortgages is 39%, and the maximum allowable TDS for insured mortgages is 44%; however, few lenders will allow ratios that high.
Other Factors in your Qualification
Although there the Loan to Value and the Debt Service Ratios are key in considering your application, there are other factors that will affect the underwriter's decision such as your credit history, net worth, amount of liquid assets, and employment stability. Underwriting a mortgage can be somewhat subjective, and subtle differences in guidelines between lenders can cause a file that is declined by one lender to be approved comfortably by another, so it is important that you entrust your application to an expert who knows which lender will view your application most favorably, and who knows how to present the application in the most favorable way.
In addition to approving you as a borrower, the lender needs to approve the property that you are planning to purchase. From a lender's perspective, it is important that the property is in good condition, and would be readily marketable if they ever needed to foreclose and sell it. As a result, lenders are more likely to be cautious of properties that have unusually low square footage, an unusually small lot, or are otherwise particularly unusual, as these properties tend to be hardest to sell quickly in a slow market.
Qualification, Pre-approval, and Approval
Qualification allows you to determine how much mortgage financing you can qualify for based upon your current information. You can get qualified by phone by calling us. We can make some quick calculations and determine your maximum mortgage amount, mortgage payments and price range.
Pre-approval takes you to the next step. You will provide documentation to confirm your income, verify the source of your down payment, and we will conduct a credit check. We will also secure a rate hold for you so that you are protected from market fluctuations for a period of 90 -120 days. It is best to complete the pre-approval prior to putting in an offer so that we can get your financing in place quickly once you have an accepted offer.
Even if you are fully pre-approved, you should include a “subject to financing” clause in your offer. Although we can confirm whether you qualify for the price range, the lender will still need to approve the property you plan to purchase as acceptable security for their loan. Nevertheless, having a pre-approval in place will ensure that this last stage of the process can occur quickly and without the stress of gathering documentation in a short time.
This occurs when the lender has reviewed and approved all of the documents relating to your property and your personal finances. At this stage, your mortgage information will be ready to be registered by your solicitor.