Can you get a mortgage? A numbers break-down.

I’m not a mortgage broker, banker or financial advisor. I am just a person who’s been through this process recently and did a fair bit of research. I’m also a person who interacts daily with people who want to buy a home but don’t know if this is a possibility for them or not. I want to try to help.

I think there are some well understood basics. Most people know you need a down payment, decent credit and sufficient income. But what do those things really mean? Is that all there is to it? I want to break down some of the mystery behind the mortgage industry so regular people like me can understand their position. In this fast paced market, I’ve seen brokers, banks and agents, eager to make a commission, favouring higher income clients and underserving the hard working low income earners who really need their help. If you have answers to some important questions before you start the process, you can advocate for yourself and make sure you are getting the service you need from your professionals.

Income

How much money do you need to make to qualify for a mortgage? While you may find numbers online indicating the minimum income needed to purchase an average home in certain markets ($178,499 in Toronto!) I’ve not found any true minimum number for mortgages in general. While your income will dictate how much mortgage you get approved for, and may prevent you from getting your dream home in an urban location, even with a single full-time minimum wage income, approval is possible.

If you have been employed at the same company for over a year and have a fairly steady income (salary or guaranteed minimum hours for example) you should be in good shape. Under certain circumstances other income can be included as well, such as child tax benefit. They key is that lenders are looking for consistent sources of income that are likely to continue for the duration of your term.

If your income is from self employment or more complicated sources, it may be more difficult to prove, and the lender will likely require more information over a longer period to see the whole picture. Don’t be deterred, but to be prepared to work a bit harder.

Credit Score

When I googled the minimum credit score for a mortgage in Canada the first page results listed numbers anywhere from 600 to 680. It’s simple enough to say the higher the better, but that leaves a lot of people in the low 600’s scratching their heads. So here’s the deal. If your score is less than 600, you are unlikely to find a lender who will approve you without a co-signer until you bring it up. If your score is over 680 and you meet the other criteria, you should have no trouble getting a mortgage, but the interest rate will be better the higher your score is.

Every lender has their own minimum requirement, which is part of the reason it’s difficult to give a hard number. But on top of your lender, there are other organizations standing in your way. If your down payment is less than 20%, you will require mortgage insurance. The biggest insurer in Canada is CMHC, and they require 680 or more. There are other insurers, if your lender works with them, and they may accept a lower number.

All this is to say it may be difficult, but not impossible to get approved with a score under 680. If you have hopes of buying I suggest actively working on improving your score, and researching low credit lending options with an experienced broker. This post (What you need to know about your credit score) may help you understand what makes up your score, and what you can do to improve it.

Debt Ratios

This is where the numbers start to get complicated and some of your past choices may come back to haunt you. There are two debt service ratios that lenders use to calculate how much of a payment you can safely afford. The Gross Debt Service Ratio (GDS) deals with the amount of house related debt you can take on, and the Total Debt Service Ratio (TDS) is for all of your debts combined.

There are many free calculators available online but I wanted to break down what these ratios are for and what you can do to make them work for you. I’m going to focus on the TDS because this is where I’ve seen a lot of people fall short. The total debt service ratio should be no more than 42% of your income. That means that after paying all of your housing related costs and all other debt, 58% of your income should remain for all other expenses.

I think it’s easiest to look at this ratio backwards to see how much “debt room” you have. Start with your gross income. For a full time minimum wage employee in Nova Scotia that would be roughly $2245. 42% of that would be $943. So that is the maximum amount a bank will allow you to pay for housing if you have no existing debt. Now take that $943 and subtract your month debt payments. Car payment, student loans, credit card minimums etc. Let’s say that comes to $250. So you only have $693 left, and that needs to cover a mortgage, interest, taxes and heat. You can see that the amount left might not be enough to cover the kind of home you would like. If your debts are lower finding an affordable home may not be very hard, but if you are paying more debt, such as a high car payment, there may not be enough debt room left to get even the most modest home.

My calculation, to simplify is Gross income * 42% – total debt payment.

So what now?

If your credit score is a little low or your debt service ratio is too high, it’s probably best to focus on improving those numbers before continuing your search. The most effective way to improve is by reducing your debt load. Pay down credit cards, trade your car for a cheaper option or sell any other toys or furniture you have financed. And definitely do not take on any new debt. Reducing debt has the bonus effect of increasing your credit score. Plus it gives you more long term financial flexibility when you do buy a home.

If you’ve already met these minimums, that’s fantastic! You can now confidently start on your path to homeownership. Get a pre-approval, find a great realtor and start your wish list.

It may seem impossible to buy a home on a low income, but hopefully these tools will help you understand what lenders are looking for so you can prepare. The biggest hurdle, I believe, is spending money before you have it. If buying a home is the top priority in your life right now, that is where your money should be focused.

With Love

Melissa