More than half of all home purchases in Canada these days are financed through mortgage loans. Good homes are undoubtedly expensive and for buyers, having more than enough money to make an offer provides them a sense of security. This is most true in areas where properties put up on the market often attract multiple offers or bidding wars. Prospective buyers must then know how much money they can get from a lender for this matter. Fortunately, current lender’s equations aren’t that hard to understand.

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It is best to start by looking on an individual’s capacity to pay for a loan. A lender is naturally just being cautious in transactions. Why lend huge amounts of money to a borrower whom you are aware of being incapable of paying back diligently? Business is business and they need to make profits too. A lender, whether it’s a bank, private lending institution, or an individual is expected to look through the following details of a borrower:

 

Source of income: what is the employment status of the borrower? How many income streams are there?

 

Credit history/score: the higher the score, the better it will be for a borrower. Scores that are below 700 discourage lenders from approving big mortgage amounts.

 

Existing financial obligations: this would include living expenses, student loans, car loans, credit card bills, and other similar debts.

 

Other properties on hand: these could be used as collaterals and as an added way to gauge the current financial condition of an individual.

 

Cash on hand for down payment: this amount can be used to determine the final mortgage rate and/or interest that a borrower could qualify for.

 

When all the needed information has been compiled by a bank or lending company, the lender’s equations can be applied. This process provides an accurate way of determining an individual’s exact capacity to pay. Ultimately, it will also determine the mortgage amount he or she is qualified for. These measures of capacity to pay include the GDS and TDS.

 

Gross Debt Service Ratio or GDS is computed by adding up all the housing/living costs and dividing it by an individual’s monthly gross income. The GDS should never be higher than 32% of an individual’s gross monthly income. There are lenders, however, who can provide a little leeway for borrowers. They can set the GDS at 35% provided that other conditions are set and agreed upon.

 

The Total Debt Service Ratio or TDS is computed by adding up the housing/living costs and all other expenses that an individual would have to deal with monthly. The resulting amount is divided by the gross income. The ideal TDS percentage is 40% or less.

 

If both the GDS and TDS percentages turn up exactly or below the allowed figures, the loan mortgage amount applied for will definitely be approved by a lender.

 

By knowing the lender’s equations, a borrower will have a clear picture of what he can and can’t afford. When setting GDS and TDS, it is advisable for an individual to set percentages at the lower levels. The percentages that are generated by lenders are usually maxed out and are often designed to benefit only them in the long run. The use of online calculators and other similar tools would be practical too on these scenarios.

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