Joan Manuel

ROYAL LEPAGE Sales Representative
Email: isellhomes@joanmanuel.com
(416) 443-0300

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How To Pre-Qualify Yourself For a Mortgage

The first thing we are going to address is how you can pre-qualify yourself for a mortgage. This step is an important step for two reasons:

First
By going through the pre-qualification check list together, we will be able to make a well informed, logical decision on the price range of homes that will be comfortable for you to handle relative to you current income. Once we have gone though this pre-qualificaiton check list together, you will know just what price range is right for you.

Second
Your pre-qualification check list will have every bit of information you will need to apply for a pre-approved mortgage
Why is this so important? First, it will confirm that your pre-qualification calculations are the same as those of a professional lender. Second, it will put you in a much better position when it comes to making as offer on the home of your choice.

Gross Debt Service Ratio (GDSR)

Your GDSR is the first thing that most lenders will look at as they consider your application for a mortgage. As a general rule, your GDSR should not exceed 30% of your gross monthly family income.

Couple A has a gross monthly family income of $6000. Their monthly carrying cost for a home should not exceed 30% of $6,000 or $1,800 per month.

The $1,800 must cover the mortgage payment including principal and interest plus real estate taxes. If Couple A assumes that their monthly real estate taxes will be $200 a month, this expense leaves $1,600 available to cover their mortgage cost.

We will take the conservative route and assume that their lender will use the 30% ratio which means that couple A will have $1,600 to cover their monthly mortgage payment after they have paid their monthly real estate taxes.

After consulting their mortgage specialist and assuming an 8.5%, 25 year mortgage, Couple A is able to conclude that their $1,600 will carry (approximately) a $197,000 mortgage with a monthly payment of about $1,599.*

*Please note: For illustrative purposes, several examples appear throughout this chapter which indicate mortgage payments and mortgage balances at various stages under certain conditions. These figures are approximate. The numbers have been rounded in order that they be easier to read and understand. For exact calculations, visit your mortgage specialist.

Total Debt Service Ratio (TDSR)

Your TDSR is the next item that a professional lender will look at as they consider your financial situation relative to your application for a mortgage. Your TDSR should not exceed 40% of your gross monthly family income. Your Total Debt Service (TDSR) is the percentage of your monthly income that is committed to fixed monthly expenses. Your TDSR includes your monthly carrying costs for your home PLUS any other monthly commitments such as car payments, personal loans and credit card payments.

Couple A has a gross monthly family income of $6000. They have no other monthly commitments. If they assume a monthly mortgage cost of $1,800 including taxes, their TDSR ratio will be a comfortable 30% which is well within the 40% that a professional lender will require.

They would still be in a comfortable financial position if they calculated that 40% of their monthly income could be used to carry their new home. At 40% of $6,000 they could carry a monthly payment of $2,400. If they assume real estate taxes of $200 per month, they will have the resources to carry a monthly payment of $2,200.

After consulting their mortgage specialist and assuming an 8.5% mortgage over 25 years, Couple A is able to conclude that their $2,200 will carry (approximately) a $271,000 mortgage with monthly payments of $2,169. However, lenders will lend only on the lesser of a 30% GDSR or a 40% TDSR. In this example, the maximum mortgage available to Couple A would be $197,000.

Couple B has a $7,000 gross monthly family income.

Their GDSR: By using a GDSR calculation, Couple B assumes they can handle a monthly payment of $2,100 per month. They subtract $200 per month in real estate taxes from this $2,100 and assume that with a monthly mortgage payment of $1,900 they will qualify for a mortgage of about $257,000 at an 8.5% interest rate.

Their TDSR: Couple B has a $500 per month car payment. They are still paying off college loans at $450 per month. They have credit card monthly payments of $325 per month and their charge accounts require $300 per month.

In order to qualify for a mortgage, their TDSR cannot exceed 40% of their gross monthly income. In their case, 40% of $7,000 is $2,800. However, they have monthly commitments of $1,575 which leaves only $1,225 to apply toward their monthly mortgage costs. If $200 of this goes toward taxes, this couple can only manage a monthly mortgage payment (principal and interest) of $1,025. Assuming a 8.5% interest rate, they will only qualify for about a $127,000 mortgage and not the $257,000 they calculated using their GDSR.

Professional lenders would be reluctant to advance funds to Couple B. Their monthly commitments are very high relative to their gross monthly family income.

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NOTE: To obtain a copy of the book for yourself please do not hesitate to contact Joan Manuel.
If you would like to print out a copy of the provided portion of chapter 2 for your own reference please refer to the printable version.

Last Update: March 14, 2000

Copyright ^© 2000, Joan Manuel