Purchasing a home can often be an overwhelming experience for many people, especially a 1st time home buyer. In this edition, I will cover some terms commonly heard and used in the financial world. Although the subject can be dry, the information can be invaluable.
To begin with, “LTV” (Loan to Value) is the amount of the loan requested in comparison to the value of the property. “NOA” (Notice of Assessment) is the document issued to you from the “CRA” (Canada Revenue Agency), once your yearly income tax return is completed and submitted.
“GDSR & TDSR”. (Gross Debt Service Ratio & Total Debt Service Ratio), these two combined with your credit score are the determining factors in how much money you are able to borrow, as they are a measure of your total gross household income. I will talk about credit into more details in a later editorial but for the time being, the higher your credit, the better so you need to pay your bills on time.
“GDSR” includes the monthly principal and interest portion of the mortgage payment, the monthly property tax payment, a reasonable monthly heat estimation and when applicable, half the monthly strata/condo fee. Depending on the lender and insurer, this ratio ranges from 28% to 35% and can often be disregarded. The “TDSR” is a combination of the GDS components plus any other monthly obligations you may have such as a car payment, student loan, credit line or credit cards The maximum TDSR is 44% of gross income.
A Conventional mortgage is a loan where the LTV does not exceed 80% of the purchase prince and the client must give a minimum 20% as a down payment. Alternately a high ratio mortgage is a loan that can go up to 95% LTV. This comes with a cost, and it is in the form of a mortgage insurance premium. This insurance premium is levied by an insurance provider such as CMHC, Genworth or AIG and it is added to your requested mortgage total. Applicants who have less than a 20% down payment must pay for this premium. This is implemented to safeguard the lender. The reason being, if you were to go into default in your mortgage payments, the lender would be reimbursed by the insurer.
Finally, Credit Rating. This is a score or point system that is given to you based on your ability to manage your credit. The Equifax credit rating ranges from 300 to 900 and most people are around the 700 mark. Generally, for Self Employed people, the minimum score is 700. For salaried people and in order to obtain the best products & rates you need 680+. Once your score is below the 680 mark, some restrictions start to come into play until we hit the 600 mark where things begin to be more difficult and expensive and you require more down payments as lenders will lend less money.
Carl McLean CD, BCom AMP specializes in residential mortgage financing and credit management in Victoria BC. He is an Accredited Mortgage Professional with Dominion Lending Centers Rochar Financial, 2950 Douglas St. carl@rocharfinancial.com 250-405-4352