Buying a home is in most cases the biggest purchase people make and there’s a lot of factors to consider.
The 3 ‘rules of lending’ focus on determining the maximum size of mortgage that can be supported by your provable (what you paid taxes on) income.
Rule #1 – Gross Debt Service (GDS)
Your monthly housing costs are generally not supposed to exceed 36-39% of your gross monthly income. Housing costs includes – your monthly mortgage payment, property taxes and heating. If you are buying a condo/townhouse, the GDS will also include 1/2 of your strata fees.
Rule #2 – Total Debt Service (TDS)
Your entire monthly debt payments should not exceed 42-44% of your gross monthly income. This includes your housing costs (GDS) PLUS all other monthly payments (car payments, credit cards, LOC etc.)
Rule #3 – Credit Rating
Everyone who will be on title to the property, will need to have their credit run. Your credit bureau is important because it shows the lenders how well you have handled credit in the past. This gives them an indication of how you will handle credit in the future, and will you be a good risk and make your mortgage payments as promised. If you handle credit well, you will have a high Credit Score and get the best interest rates from the banks/lenders and if you have a poor credit score, you will either be charged a higher interest rate, or your application can be declined.
Original article: www.dominionlending.ca