Most mortgage applicants don’t know how mortgage underwriters think and evaluate, what the standards (policies) are, and relationship between mortgage rate and credit history. Here we will introduce details about lenders’ policy and what they think about your mortgage application.
First, you need to recognize one thing, is that it’s the lender lend the money to you and you are a stranger to the lender. The lender doesn’t know anything about you, except from some documents you offfered, like application form, credit report, job letter, pay stubs etc. So, these documents you offer take a very important roles in whole mortgage application procedure. Any mistake or problem from these documents will delay your application or directly lead to be rejected. The lenders always consider your application based on the following points:
- Capability: The ability of borrowers to repay loans. This is the most critical point the lenders consider. Lenders can access a borrower’s capability to repay a loan through the application of debt service ratios, as well as a careful review of payment history on existing credit relationships.
- Capital:the amount of money that borrowers have invested in the property, like down payment. The lender likes more investment you put in your property. This is why the more down payment you put in, easier mortage you can get.
- Character: is the general impression of how trustworthy borrowers are to repay loans. The borrowers’ length of employment helps determine job security, which is a key component of their borrowing character. So, the type of job and income becomes very important.
- Collateral:is the guarantee in form of additional security that can be provided to the lender. The property you want to purchase, location and its other characteristics will be collateral, but it must be easily resale and insurable. Otherwise, no lender will approve you mortgage for a property that will be very difficult to sell. This is why all lenders want a copy of your Purchasing Agreement and Property Listing Information.
- Credit: the borrower’s credit history is essentially the only way the lender can predict the borrower’s propensity to make future payment. This is why most high ratio mortgages need at least 650 of borrower’s credit score.
From the above 5 Cs, you will find out easily that a lender will mainly focus on 3 things for a mortgage application:
- Stable Income which can be affordable your monthly payment
- Down Payment Percentage
- Credit Score and Payment History
If you have a good credit score and payment history (e.g. 800), and a good job with stable high income, the lender will easily approve for a 95% loan or even 100%. But if you have only a credit score of 650 with worse credit history under the same income of the above, the lender may only approve for a 90% or even 80%. This is to show you how important the credit report will be.
Lenders do not recognize all income. Types of eligible income are listed following:
- permanent full time employment: 2-year consistent history in the same field.
- permanent part time and secondary employment: 3-year consistent history
- overtime, commission, bonus, and profit share: 3-year history
- investment income: last 2 years of T5s support
- pension income: permanent pension income can be used
- rental income: 50% can be used
- maternity leave payments: 100% with job letter showing she will go back to work at a certain date
- child support and alimony: need 6 ~ 12 months of bank statements
- disability income: permanent disability, supported by insurance company
- trust income: need statement
Please read the next item “Document Needed by Lenders” if you want to know detail what kind of documents lenders want to verify.
Lenders will typically calculate TDS and GDS for applicants. Detail about TDS and GDS are listed below:
1. TDS (Total Debt Service Ratio):
TDS = (PIT + Loan Payments) /Income
TDS = (PIT + 50% of Condo Fee + Loan Payment) / Income
TDS must be less than 38%. For good credit history person, TDS could be max. to 44%.
PIT = Principal + Interest + Property Tax
for blended mortgage, your mortgage monthly payment = (Principal + Interest) /12
Loan Payments = Total loans yearly payments, like credit line, credit card balance, automobile loan etc.
Income = Yearly income
Your Max. Mortgage Monthly Payment (YMMMP):
YMMMP = (TDS x Yearly Income – Yearly Loan Payments – Property Tax)/12
= 35% x Monthly Income – Monthly Loan Payments – Property Tax/12
All lenders will use TDS to calculate your mortgage loan.
2. GDS (Gross Debt Service Ratio):
GDS = PIT/Income
GDS = (PIT + 50% of Condo Fee)/Income
GDG must be less than 30%, for good credit history person, GDS could be max. to 32%.
PIT = Principal + Interest + Propery Tax (for blended mortgage, your mortgage payment = Principal + Interest)
Income = Yearly income
Your Max. Mortgage Monthly Payment = (GDS x Yearly Income – Property Tax)/12
= 30% x Monthly Income – Property Tax/12
E.g: Your monthly salary is 5000.00, your wife’s salary is 3800.00, you have 2 cars with total monthly payment is 876.00, your credit card balance zero and you have a line of credit, balance is 23,000.00, monthly payment is 210.00
1. For TDS: Your max. Mortgage Monthly Payment including property tax = 35% x 8,800 – 1086 = 1994
2. For GDS: Your max Mortgage Monthly Payment including property tax = 30% x 8,800 = 2640
If property tax of the house you want to buy is 3800 per year, then
1. For TDS: Your max. Mortgage Monthly Payment Affordable = 35% x 8,800 – 1086 – 3800/12 = 1677
2. For GDS: Your max Mortgage Monthly Payment including property tax = 30% x 8,800 – 3800/12 = 2323
How much Total Amount of Mortgage you will get, it’s really related how much the mortgage rate you got. You can use our mortgage calculator to calculate for different mortgage amount, years of amortization and mortgage rate.
For more about how to calculate, please visit “Self Evaluation” page.