You’re ready for homeownership, are your finances?

You have gone through all the pros and cons and have decided that it is time to become a homeowner. Now what?

Before you go any further take our five Financial Fitness tests at mycreditunion.ca. This will not only tell you where you are financially but also will give you really important information you will need to determine how much mortgage you can afford, what type of terms are best for you financially and what if anything needs to change in your budget. This is not the time to be faint of heart when it comes to your finances. If there are some financial skeletons in your closet it is time for them to see the light of day.

Your mortgage lender will be looking at four key areas to determine how much you can afford and what type of financial risk you are. The first area looks at your expenses related to housing in comparison to your gross monthly income. Housing costs include your mortgage payments, property taxes and heating. These expenses cannot total more than 32% of your gross household monthly income. The percentage calculated is called the Gross Debt Service (GDS) ratio. Secondly, the lender will calculate your Total Debt Service (TDS) ratio by taking your housing debt load and adding all your other debt payments (car loans/leases, credit cards, lines of credit and other debt). This total cannot exceed 40% of your total gross household monthly income.

Once these first two numbers are calculated you can get a sense of how much of a mortgage payment you can afford. If your GDS is too high then you need to have smaller mortgage payments. That means either you have to have a larger down payment or a less expensive house. Likewise, if your TDS is too high you may have to wait to pay off some of your other debt before you can qualify for a mortgage.

Thirdly, the lender will consider how much of a down payment you have saved. This is an important figure as it determines how much house you can afford and whether you need mortgage loan insurance, which protects the lender from mortgage default. The amount of mortgage loan insurance is determined by the percentage of the loan and the size of your down payment. Mortgage loan insurance is an additional expense but because it reduces your lender’s risk, you will qualify for a higher mortgage.

Lastly, your lender will look at your credit score to determine your credit risk and how much you can borrow. So if you have had some spotty credit in the past or your credit cards are maxed, now may not be the time to apply for a mortgage. But it is time to start paying down your credit cards and making payments on time. Most negative information drops from your credit report after seven years.

Once all the information is in hand and you have qualified for a mortgage it is a great idea to get a mortgage pre-approval. Not only do you know how much home you can afford, you are protected from interest rate increases and can make a solid offer when you find your home. Seem like a lot? Come in and talk to your financial advisor, we C.U. so you can own your home.