As of 2017, anyone applying for a mortgage must pass a mortgage stress test. This means new home buyers (even existing homeowners who simply want to switch to a different lender) must meet a number of requirements before their application will be successful. Essentially, lenders just want to know that you'll be able to meet your monthly payments, especially if interest rates rise. Fear not, we've got a few handy tips that should help get you ready!
One of the things you'll be expected to know when undergoing a mortgage stress test is your gross debt service ratio, or GDS. You need to be able to qualify under the mortgage interest rate on your contract plus two per cent, or the Bank of Canada's five-year benchmark rate, whichever is higher. Lenders want to be sure that your mortgage isn't too large compared to the value of your home. Your GDS is the percentage of your pre-tax income that is needed to pay for all of your housing costs. This includes your monthly mortgage payment as well as utilities and property taxes. Lenders want to see a GDS of no more than 32 per cent.
Another important figure required as part of the mortgage stress test is your total debt service ratio, or TDS. This amount includes all of your debts, not just those that are housing-related, such as student loans, lines of credit, credit cards, etc. This number should total no more than 42 per cent of your monthly pay in order for you to pass.
One of the steps you can take to boost your application is to have a co-signer for your mortgage. It adds a level of confidence on the part of the lender and makes your application that much stronger. While this isn't always possible or easy, having a co-signer can help you secure a larger loan than you could get on your own. This helps explain, in part at least, why so many applicants have received—and gratefully used—down payments as gifts from their parents since the mortgage stress test was adopted two years ago.
This tip is pretty straightforward and intuitive: to make your application to a lender more attractive, simply ask to borrow less. This is a smart approach for several reasons, not the least of which is the less you borrow, the easier it will be for you to pay it back. Lowering the ceiling on your borrowing cap gives you more financial freedom in the present; it can also increase your odds of passing the mortgage stress test! Being realistic about how much you can actually afford to borrow can make your life much easier down the road.
To take at least some of the stress out of the mortgage stress test, play with the numbers first using an online mortgage qualifier tool. You can plug in all of the figures and adjust as needed to see how your financial situation stacks up. The calculator will help you determine whether or not you can qualify based on your current income and expenses. It can serve as a realistic check on your home buying plans and keep you on the right track.
Know where you stand before you apply for a mortgage; it will make the process go much more smoothly and minimize any surprises along the way. Thanks for reading and don't forget to follow the Marina Homes blog for more great home financing tips.