ASK THE LADY OF MONEY: Wondering if you qualify for a mortgage or a loan? Here’s how to figure it out
Dear Money Lady, a few years ago you had an article on how to qualify with a bank. Could you enlighten me on the procedure to follow? Jim
Dear Jim, this is a great idea, especially at the start of the year when people are always thinking about money and future purchases. So let’s all think like a banker!
Money stress occurs when we take on too much debt, accumulate too quickly, or shop without thinking about it. Here is a simple tip that lenders use to establish service for any increase in your lifestyle – This is a great way for you to instantly determine if a larger mortgage payment, an additional car loan, or an additional loan payment may be possible. fit your budget.
I want you to determine your TDS, Total Debt Service ratio. Think of your TDS ratio as a BMI score for a healthy lifestyle and don’t go over 40 percent no matter what you want. Don’t make the mistake of being drawn to instant gratification – sticking to this maximum ensures that you will always be able to meet your financial commitments.
Here’s how it works: First, figure out your monthly mortgage payment or rent, property taxes, and debt or loan payments. You will also need to take your annual gross income and determine the monthly amount. This is your gross income, not your net income. So, if you earn $ 50,000 per year, your gross monthly income is $ 4,167 ($ 50,000 divided by 12). Here’s the formula (I know some of you say, “I hate math,” but that’s literally how your bank calls you), so let’s do it together.
MR + CL + TAX + $ 100 / MI = TDS x 100 (percentage)
- MR = monthly mortgage or rent payment
- CL = monthly credit card or loan payments (add everything up)
- TAXES = monthly property taxes or $ 0 if you are a tenant
- MI = gross monthly income
Here’s an example: A married couple want to move to a bigger house, but they don’t know if they may qualify. The value of their home has increased significantly since they bought it, but so have every other home in their area, limiting what they can spend on their next purchase. Partner 1 earns $ 52,000, Partner 2 earns $ 26,000, total = $ 78,000 divided by 12 = $ 6,500 each month. Their current mortgage payment is $ 1,970 per month and property taxes are $ 285 per month. Current debt repayments, including lines of credit, are $ 971 per month. Here is what it would look like.
($ 1,970 + $ 971 + $ 285 + $ 100) divided by $ 6,500 x 100 (percent) = 51.17 percent
Obviously, this couple would not qualify with the banks as presented because their monthly debt load is too high, ($ 971 per month) and that puts them above the 40 percent threshold.
How to qualify for more?
There are only three ways to align the ratio:
1. Add more income
2. Less debt
3. Consolidate into a new mortgage and spread out the payment to reduce monthly expenses.
To find out if this couple could actually sell and move to another residence, we’ll need to determine if they had enough equity in their home to consolidate debts, cover expenses, and still have a down payment from the sale to buy another home. .
Here’s a quick example of a higher monthly mortgage payment with higher property taxes but no debt, assuming it was paid off with the proceeds from the sale of their home and keeping the same income. Assume a new mortgage payment of $ 2,126 per month and new property taxes of $ 310 per month.
($ 2,126 + $ 0 debt + $ 310 + $ 100) divided by $ 6,500 x 100 (percent) = 39.02 percent. Alto! Now they qualify!
Try this on your own budget. Having monthly loan repayments hinders your ability to improve your situation. If you calculate your TDS and go over 40 percent, you are probably already feeling it financially every month.
Why not consider consolidating, downsizing, or finding new ways to eliminate your debt? Talk to your banker. Do it now, before interest rates rise. Remember that high interest is the common man’s “silent killer” for his future.
Good luck and best wishes,
ATML – Christine Ibbotson
Written by Christine Ibbotson, national radio host and author of three books on finance, as well as the Canadian bestseller “How to Retire Debt Free and the Rich”. Visit www.askthemoneylady.ca or send a question to [email protected]