What Is a Sufficient Income to Get a Mortgage in the Present Day?

In an era of rising interest rates, mortgage qualification has become harder than ever, despite slight drops in home prices. If you, like many Canadians, are looking to buy your first home, you may be wondering how much income is required to qualify for a mortgage. While mortgage income calculators and mortgage to income ratios may give you some idea of where you stand, understanding the ways in which your income affects your approval process is the best way to set yourself up for success.

Factors Affecting Mortgage Eligibility

Before settling on a price range and shopping for a home, it is important to have a rough idea of how much mortgage you can afford. Lenders will approve you for a mortgage if they are confident in your ability to service your debts. Having sufficient income will play a huge role in your mortgage approval process, but it is not the only consideration. Here are a few other factors that can impact your mortgage eligibility:

• Debt-to-Income Ratio: Your lender will evaluate your application based on two ratios: your Gross Debt Service (GDS) ratio, and your Total Debt Service (TDS) ratio. Your GDS ratio measures how much of your gross monthly income is required to service all your monthly mortgage expenses including ​​principal, interest, property taxes, and utility costs. Your TDS ratio measures how much of your gross monthly income is required to service your mortgage expenses as well as all of your other debt obligations, including any credit cards, car loans, etc. Typically, prime lenders will want you to maintain a GDS ratio under 39% and a TDS ratio under 44%, although exceptions can be made with these institutional prime lenders. Alternative institutional lenders such as trust companies, credit unions, and monoline lenders, tend to have much more flexible GDS and TDS rations, and private lenders often times do not have limits on these ratios provided that the property is marketable and that the borrowers have a realistic exit strategy.
• Size of Down Payment: The larger your down payment, the better your mortgage terms will be. Putting down a down payment of at least 20% also prevents you from having to pay mortgage default insurance.
• Credit Score and Debt History: having a strong history of debt repayment will increase your odds of mortgage approval and qualify you for better terms. Typically, this is reflected in your credit score. In Canada, credit scores range from 300 to 900, with 620 often being considered the “minimum” credit score for mortgage approval on the prime side, and 500 being the minimum for mortgage approval form an alternate lender. In the case of private mortgage lenders, some do not have minimum credit score requirements. The higher your score, the greater your odds of mortgage approval at the lowest rate available to you at the time.

What is the Average Income Required in Canada?

The minimum income requirements for a mortgage can vary on a case-by-case basis. Across the entire country, the average required household income is $145,000 (CAD). This figure ranges from an average of $66,000 in Newfoundland to a whopping $236,000 in Vancouver. Urban cities will typically require mortgage applicants to have a greater income than suburban or rural areas.

Calculating Your Debt-to-Income Ratio

It can be argued that your debt-to-income ratio has a more significant impact on your mortgage application than the size of your income stream. This is because lenders will not approve you for a mortgage loan if you are unable to comfortably service the debts you currently have, on top of your new mortgage payments. As such, calculating your debt-to-income ratio before beginning your mortgage application process can help you get an idea of where you stand.

How to Calculate Your Gross Debt Service (GDS) Ratio

Your GDS Ratio is the percentage of your gross (pre-tax) income that is required in order to cover mortgage expenses including principal + interest payments, property taxes, home heating, and 50% of any condo fees. To calculate this percentage, add up all your monthly mortgage-related expenses (as outlined above), and divide your monthly gross income by this figure.

How to Calculate Your Total Debt Service (TDS) Ratio

Your TDS Ratio is the percentage of your gross (pre-tax) income that is required in order to cover mortgage expenses (principal + interest payments, property taxes, home heating, and 50% of any condo fees) plus any additional debt obligations you have (credit card payments, loan payments, etc.). To calculate this percentage, add up all your monthly debt expenses (as outlined above), and divide your monthly gross income by this figure.

Tips for Improving Your Chances of Getting a Mortgage

When considering how much to spend on a home, or what size mortgage to apply for, it is important to remember that your income pays for more than just your mortgage. Even if you are approved for a maximum mortgage amount, you may want to consider accepting a mortgage that is slightly below that figure, leaving more of your income available for daily expenses, outings, or travel. The lower your mortgage, and the higher your down payment, the better your mortgage terms and interest rate will be.

If you are worried that your current income is not enough to qualify you for a mortgage, there are a few measures you can consider:

First and foremost, you may want to consider looking at more affordable housing options. If you are having trouble qualifying for a mortgage to buy a home, you may want to look into buying an apartment unit or smaller condo, or searching in areas where housing prices are still relatively low. You could also look into obtaining a multi-generational mortgage.

Furthermore, you can employ a number of budgeting techniques to free up additional income that can be used to pay off existing debts. By paying off existing debts early, your TDS ratio will look more attractive to lenders, thereby increasing your chances of being approved for a mortgage.

Finally, if your current income is non-traditional (i.e. you are not paid a regular amount on a regular basis), self-employed, or largely tip/bonus based, your lender may not be properly assessing your true ability to service debt. Luckily, many alternative lenders recognize multiple forms of income, and may be able to provide you with a better quote than the big banks.

Here at Clover Mortgage, we have experience working with a network of over seventy different lenders across Ontario, both traditional and alternative. Whether you are looking to qualify for a better rate, or include your monthly bonus in your mortgage application, we likely have the lender for you. Contact us today to schedule a free consultation.