Preparing to get a mortgage
Before you start shopping for a mortgage, assess your financial situation. There are actions you can take to make sure you’re financially ready to buy a home.
Checking your credit report
A potential lender will look at your credit report before approving you for a mortgage. Before you start shopping around for a mortgage, order a copy of your credit report. Make sure it doesn’t contain any errors.
If you don’t have a good credit score, the mortgage lender may:
- refuse to approve your mortgage
- decide to approve your mortgage for a lower amount or at a higher interest rate
- only consider your application if you have a large down payment
- require that someone co-sign with you on the mortgage
- require that you get mortgage loan insurance even if you have a down payment of 20% or more
Staying within your budget
To qualify for a mortgage, you have to prove to your lender that you can afford the amount you’re asking for.
Mortgage lenders and mortgage brokers use your financial information to calculate your monthly housing costs and total debt load. They use this information to determine what you can afford.
Lenders and brokers consider information such as:
- your income (before taxes)
- your expenses (including utilities and living costs)
- the amount you’re borrowing
- your debts
- your credit report and score
- the amortization period
Total monthly housing costs
Your total monthly housing costs should not be more than 39% of your gross household income. This percentage is also known as the gross debt service (GDS) ratio. You may still qualify for a mortgage even if your GDS ratio is slightly higher. A higher GDS ratio means you’re increasing the risk of taking on more debt than you can afford.
Your monthly housing costs include:
- mortgage payments
- property taxes
- 50% of condo fees (if applicable)
Total debt load
Your total debt load should not be more than 44% of your gross income. This includes your total monthly housing costs plus all of your other debts. This percentage is also known as the total debt service (TDS) ratio.
You may still qualify for a mortgage even if your TDS ratio is slightly higher. A higher TDS ratio means you’re increasing the risk of taking on more debt than you can afford.
Other debts may include your monthly payments for your:
- credit card balances
- car loans
- lines of credit
- student loans
- child or spousal support
- any other debts
How the stress test can impact your qualification
Federally regulated entities, like banks require that you pass a stress test to get a mortgage. Lenders that aren’t federally regulated may also ask you to pass a stress test.
This means that you need to prove you can afford payments at a qualifying interest rate. This rate is typically higher than the actual rate in your mortgage contract.
Banks must use the higher interest rate of either:
- the interest rate you negotiate with your lender plus 2%
That's the case for insured and uninsured mortgages.
If you already have a mortgage, you’ll need to pass this stress test if you:
- refinance your home
- take out a home equity line of credit or
- have an uninsured mortgage and switch to a new lender
If you have an insured mortgage, banks are expected to allow you to switch lenders without passing a stress test.
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