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.
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:
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.
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.
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.
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.
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.