The primary factors used by institutions to make a lending decision are: credit history, income size and stability, net worth, size of down payment and the property being mortgaged.
A credit report from Equifax or Trans Union will provide the lending institution with a summary of your past credit history. This history is considered to be the best indication of your future credit performance.
Lenders want to know where your income is earned, how much is earned and how stable this income is. Depending on your employment type – self employed, offshore, commission sales, salary, hourly, etc. – different criteria will apply. The less guaranteed your income type, the more of a track record the institutions will want to see. As a general rule, for individuals earning a wage or salary, lenders will want to verify that you are not on probation, while in the case of 100% commission and self employed individuals, a two year income average is usually utilized. These are only general guidelines. A mortgage professional will have much more insight into the many options and programs designed for individuals who do not fit the standard criteria.
The size of your income will have a large bearing on the size of mortgage you can comfortably afford to carry. The standard guidelines used to determine what size of mortgage payment is affordable are Gross Debt Service (GDS) and Total Debt Service (TDS).
GDS (Gross Debt Service) is the total ownership cost of the property you are wishing to finance divided by your income (Mortgage Payment + Property Taxes + Heat + ½ Condo Maintenance Fees) / Gross Family Income. The maximum percentage allowed is usually 35%.
TDS (Total Debt Service) is the total of all of your liabilities divided by your income (Mortgage Payment + Property Taxes + Heat + ½ Condo Maintenance Fees + other liabilities) / Gross Family Income. The maximum percentage allowed is usually 44%.
As most lenders will allow GDS/TDS ratios of 35%/44% a family with an annual income of $50,000 can anticipate home ownership costs of $1,458 per month, as long as other expenses are below $375. If one’s other liabilities are over 9% of the gross family income, the amount available for home ownership is decreased.
The higher one’s net worth, the less likely one is to find him or herself in a situation where he or she is unable to fulfill their financial obligations to the lending institution. This will have a favourable effect on the mortgage approval.
Size and Source of Down Payment
Lenders will require confirmation of where the down payment is coming from. Are they from savings (RRSPs, savings accounts, other investments), gift from family member, or other sources? In most cases, a three-month account history is required to certify that funds are from legitimate sources.
A larger down payment increases the equity the borrower has in the property and reduces the risk to the lender. Typically, the lender will view a larger down payment more favourably.
Property Being Mortgaged
Lending institutions want to be certain that the property represents good security for the mortgage they advance.