In the mortgage sector, the job of a mortgage broker and a potential lender is to calculate the risk involved in each mortgage loan that is negotiated. Mortgage approval is contingent on meeting criteria that are carefully laid out in the attempt to lessen the overall risk of lending mortgage financing to a borrower/homeowner.
Regardless of which type of mortgage financing a borrower/homeowner is seeking and whether it represents the first mortgage on a given property or second or even third mortgage the same principle holds. The same questions are asked:
- How Creditworthy is a given borrower?
- How many outstanding liabilities (household debts) does a homeowner juggle?
- How reliable is a borrower/homeowner when it comes to paying outstanding debts on time and in full monthly?
- What percentage does the ratio of debts compared to household income represent?
In other words, the criteria that mortgage lending is based on stems from the ability of a borrower to pay back the money so a lender can recoup their funds. With increased household debt that does not involve housing costs, there is less room to pay monthly mortgage payments consistently and reliably for the course of the mortgage loan.
To calculate the overall balance between what income is coming in monthly minus other household debt payments, mortgage brokers and lenders will assess both the Debt Servicing Ratio (GDS) and Total Debt Servicing Ratio (TDS).
A Closer Look at GDS and TDS
To help understand what criteria primarily determine mortgage approval among most Ontario lenders it is useful to have a grasp of what Gross Debt Servicing Ratio (GDS) and Total Debt Servicing Ratio (TDS) represent.
The Gross Debt Servicing Ratio (GDS)- This is a measure used by lenders to help assess the number of housing costs a borrower can reasonably carry compared to the household income. As of July 2021, CMHC underwriting criteria have set the percentage at 30% of a homebuyer’s income. Mortgage payments and any associated costs about housing expenses can not exceed this 30% threshold.
The Total Debt Servicing Ratio (TDS)- This measure utilized in the mortgage industry helps to determine what housing costs can be absorbed based on monthly debt payments and relative to income. When calculating all debts which include for example credit card payments, car payments, lines of credit, or other personal loans the total of these monthly payments should not exceed the 44% threshold.
These measures may seem restrictive, however, they are ultimately in place to help avoid financial pain down the mortgage road for homeowners. Taking on too much household debt is not beneficial for home finances and if many households are struggling to meet all associated monthly housing costs this can ultimately hurt the housing sector.
By mitigating risk, the potential for mortgages to fall into arrears is minimized and homeowners are not in danger of being unable to meet all monthly debt obligations.
Measures such as these are of more importance in the current Ontario housing climate due to several real estate trends:
- The continuing historically low mortgage rates.
- Limited housing inventory as compared to the number of buyers.
- Over asking bids on properties that have resulted in offers routinely over the actual appraised value of a given property.
If mortgage rates for example were to increase by even 1 percentage point during a five-year term mortgage, upon renewal of this mortgage, a homeowner may not be able to reliably cover mortgage payments. if debt levels are too high compared to household income,
With homebuyers willing to leverage more to keep up with over-asking offers on properties, homeowners could find themselves overburdened with monthly housing costs as they need to also meet other monthly debt payments.
Private Lenders Will Be Able to Overlook High Household Debt Ratios
Banks and trust companies/credit unions will demand specific percentages when determining the balance between household income with other household debt obligations. However, throughout the Province, there do exist well-established and experienced private lenders who will be able to overlook higher debt household ratios and poor credit when providing short-term private mortgage loans.
Banks and trust companies/credit unions in the mortgage industry are referred to as A and B lenders respectively. Household debt levels must remain low and credit scores must be exemplary to qualify for most A and B lender mortgage financing.
Private lenders referred to as C lenders will be able to have more flexibility to lend short-term mortgage financing when household debt levels are high and credit scores are poor. Mortgage Broker Store will be able to negotiate private mortgage financing directly to those with damaged credit.
With access to a broad network of private lenders throughout the Province, we can also point a homeowner towards a suitable private lender to help provide short-term private mortgage finance if the overall debt levels have been deemed to be too high by the banks.
Mortgage Broker Specializes in Private Mortgage Financing
Any concerns and questions about mortgage loans when credit may be an issue can be answered by any one of our private lending affiliates. We will be more than happy to sit down with you and look at your unique financial circumstances to better point an Ontario homeowner in the right direction when contemplating private mortgage loan options.
