When considering the possibility of financing a home, some may overlook a few important considerations for lenders. Those buying a home with cash have less need to be concerned about the debt carried when buying a home compared with other applying for a home mortgage loan. Though higher mortgage interest rates and high debt levels can make it difficult to qualify for conventional mortgage options. Learn more about the debt-to-income ratio and how it may impact the ability to buy a home.
Household Debt in Canada
According to a recent Angus Reid Institute survey, debt is the reason that 18 per cent of participating Canadians have yet to purchase a home. High debt levels can make it harder for individuals to attain certain milestones outside of buying a home, such as getting married or having children. While high household debt is a concern, many are still managing to pay their bills and make mortgage payments.
Lenders continue to be interested in a potential borrower's level of debt. Many Canadians are able to manage their debt, including payments for car loans, higher education and credit card bills. Lenders consider ideal borrowers for a home loan to be those with relatively low levels of debt as they have more funds available to make regular and timely mortgage loan payments.
Explore Debt-to-Income Ratio
Debt-to-income ratio or DTI ratio is determined by the lender but individuals may choose to run their own calculations. In the ratio, the amount of debt carried is compared to a borrower's income. A lender is looking for those applicants with relatively low DTI ratios, as it makes them feel more secure about the borrower's ability to repay the loan and not default.
When making a determination, consider who will be applying for a home mortgage. Where one member of a couple has a poor credit history, it may not be worthwhile to consider their pre-tax income as part of the calculation. Compare an applicant's pre-tax income to their total monthly debt payments, which may include:
- Child support payments;
- Credit card payments;
- Rent payments; and
- Car loan payments.
Some recurring bills may be part of the equation. However, the charges on some bills may change, such as that on auto insurance or utilities, when moving into a home. There are online calculators that can help individuals get an idea of their DTI ratio. Simply going through the process can help individuals see whether they need to pay down debt or establish another income stream before applying for a Copperfield new home mortgage loan.
A Better Ratio
Lenders often do not feel confident lending money to those with a DTI ratio exceeding 50 per cent. Approval is easiest for those with a ratio in the 30s and lower. DTI ratio is not the only factor reviewed by a lender, as one's credit and employment history are also important to them.
All is not lost for potential borrowers with a high DTI ratio. It is possible to improve it and become a homeowner. Spending time eliminating credit card debt, curbing unnecessary expenses and taking on a second job can be useful in lowering that DTI ratio.
It doesn't pay to get into a home one cannot afford. Becoming more financially responsible by looking at current expenses, the total amount of debt and credit history can help one get into a better financial position for any large purchase in the future.