Factors Used in Mortgage Approval

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.

Credit History

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.

Income stability

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, salaried individuals will require a minimum of one year in the current job while in the case of 100% commission and self employed individuals, a three year 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.

Income size

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 32%.

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 40%.

As most lenders will allow GDS/TDS ratios of 32%/40% a family with an annual income of $50,000 can anticipate home ownership costs of $1,333.33 per month, as long as other expenses are below $333.33. If ones other liabilities are over 8% of the gross family income, the amount available for home ownership is decreased.

Net Worth

The higher ones net worth, the less likely they are to find themselves in a situation where they are unable to fulfill their financial obligations to the lending institution. This will have a favorable 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 (RRSP, Savings Account, 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 favorably.

Property Being Mortgaged

Lending institutions want to be certain that the property represents good security for the mortgage they advance.