10/31/2017

Before you go shopping for a home, you need to go shopping for something else — a home loan. Not as exciting, we’ll admit. But making sure that you are pre-approved for a mortgage can make the homebuying process faster, simpler and a lot easier on your nerves. Here’s a guide to the basics.

House and keysHow flexible is your piggy bank?

Whether you use a mortgage broker or go direct to a bank or credit union, your advisor is going to use similar tools to work out how much house you can afford. It’s called GDS for short — Gross Debt Service ratio.

GDS is mandated by government through the Canada Mortgage & Housing Corporation (CMHC) to protect consumers from excessive debt. And they have set the safe limit for CMHC-insured mortgage borrowing at 32% of gross income.

GDS calculates how much you can afford to pay each month towards owning your own home — and still leave enough in the piggy bank for essentials. GDS is interested in insurance, property taxes, and even energy bills, as well as the main mortgage repayment.

A balanced budget

So, if your gross income were $50,000 a year, GDS says you could afford $16,000 in housing costs, leaving you with $34,000 for everything else, including personal income taxes.

Your broker or financial institution will offer you a mortgage based on your potential monthly payments (in the case above, $1,333). You also need to remember that you will need a down payment of 5% on homes up to $500,000, and you will have closing costs, including sales commission and legal fees, ranging from 1-4% of home value.

Three steps ahead

Once you are pre-approved you have three considerable advantages over other less organized home buyers. First, you can move quickly because you know how much money you really have. Second, you give the seller confidence that you are serious, meaning your offer carries more weight. Last, but not least, your interest rate is locked in, so you can plan confidently.

Perhaps the best thing about pre-approval — it’s free! Home builders like Stepper Homes can also help with legal fees and special deals on mortgage rates. We have relationships with various mortgage specialists that focus on getting you approved. Contact your sales team for more info today!