When you start earning more money than you used to, many of you will find it is a good time to make your first big purchase. Maybe you have been driving a vehicle you are not particularly fond of, but you drive it anyway because it gets you from point A to B. But now that you are starting to earn more money, your next decision is to treat yourself and buy the nice new car that you have worked so hard to afford. Yes, while you may have worked hard, and you may also be able to "afford" this car, is it really the best for your financial situation or your future goals? You may be thinking, well, if I was approved for the vehicle, then there should be no issues when I purchase a property. It will be the same thing. Wrong. What many people don’t understand, and neither did I before I became a broker, is that debt service ratios are the make it or break it for mortgage approval. Let me explain.
There are two different types of debt service ratios: gross debt service ratio (GDSR) and total debt service ratio (TDSR). GDSR is the principal, interest, taxes, and heating costs divided by your gross annual income. To be approved for a mortgage, this number needs to be below 35% if your credit score is below 680 and 39% if your credit score is above it. Now for the important part: TDSR is calculated using principal, interest, taxes, heating costs, and other debt obligations. For mortgage approval, your TDSR must be below 42% if your credit score is below 680 and 44% if your credit score is above it. This is where so many people go wrong. They put themselves in an awful financial state, making it much more difficult to purchase a home. For every $400 in monthly car payments, it equates to about $100,000 in mortgage approval value lost, that you would have otherwise been approved for. A home will always appreciate and a car will always depreciate. I have seen far too many situations in which people cannot purchase a property and are then forced to rent or live with their parents because of an ill-informed past decision. Do your future self a favor before purchasing a new vehicle. Figure out your TDSR and determine if buying a car is the right financial decision, or if it can wait until you have a foot in the real estate market. For any questions regarding this blog or anything else mortgage related, please contact me at cmayner@mortgagewellness.ca.
Commentaires