Debts and financing

Having a plan is important.

I find far too often that people seeking mortgage financing are unaware how their other debts affect the amount of mortgage financing they can qualify for. What does a lender look at when determining if you qualify for a mortgage?

Typically, a lender wants to see the last two years of the applicant’s income, and will use the average of those last two years for your application. The more money they make, the bigger the mortgage you will qualify for, that’s no secret.  

However, what is important to keep in mind is that all your ‘liabilities’ that require regular monthly payments, also have a very big impact on what size of mortgage you will qualify for.

If you have a loan with a set monthly payment, such as a car loan, the actual monthly payments you’re responsible for making effect how big of a mortgage you will qualify for. This monthly payment is added to your application, and the more monthly payments, or commitments you have, the smaller the mortgage you qualify for.  

But on unsecured debts such as credit cards and unsecured lines of credit, the lenders typically take 3 per cent of the outstanding balance, and apply that figure to your mortgage application.  So on an $8,000 unsecured line of credit, you have a monthly commitment of $240 on your mortgage application. This often has a bigger impact on the application than people typically realize. Let’s look at a few examples.

Let’s say you’re seeking a mortgage to purchase a new home in Toronto and you have an income of $65,000. Assuming you have no other debts that require monthly payments, and based on a mortgage interest rate of 3.5 per cent, you would qualify for a mortgage of approximately $280,000.

Now, let’s look at the same situation, but let’s assume that the applicant has a couple credit cards with balances of $5,000 and $3,000, and an unsecured line of credit with a balance of $8,000. Assuming the same income of $65,000, the amount of financing you would qualify for drops down by almost $10,000, down to just over $270,000.

Now, let’s add a car payment of $350 per month onto this application. This now drops the amount you’d qualify for by almost $80,000, down to just over $200,000.

Talking to a mortgage professional you can trust, even years before you might be looking for mortgage financing can help to ensure you’re in a good position to get qualified for that mortgage you want.  

More Mortgage Guide