How much is debt impacting your borrowing power?
Contrary to the fear I hear all the time from prospective first time buyers, there is no rule saying that you must be debt free to get a mortgage.
You can have debt – it’s just about how that debt stacks up against your household income, and how lenders assess your ability to make it all work.
Each financial commitment you have, from your auto loans to credit card balances, influences how much mortgage you can qualify for. It’s not just about how much debt you carry, but how the monthly payments on these debts fit into your overall financial picture, particularly your debt ratios.
Understanding Debt Ratios
Lenders use debt ratios to decide if you’re a good candidate for a mortgage. These include:
- Gross Debt Service (GDS) Ratio: This is the portion of your income needed to cover monthly housing costs, which includes your potential mortgage, property taxes, and sometimes even heating costs and condo fees. A lower GDS shows you can comfortably handle your living expenses.
- Total Debt Service (TDS) Ratio: This ratio looks at all your debt obligations, including housing costs and other payments like car loans or credit cards. A manageable TDS ratio suggests you can handle your debts efficiently without stretching your budget too thin.
The real life impact of debt
Think about how a new car payment might affect your borrowing ability. For instance, spending $821 monthly on a $56,264 car could potentially reduce your mortgage borrowing power by around $110,000. This adjustment could limit your home buying options.
If you’re considering a significant purchase like a car, consider waiting until after you’ve bought your home. Postponing large new debts can improve your mortgage qualifications and open up more options for homes.
Before you start house hunting or thinking about that car upgrade, let’s talk.
We can review your financial situation together and figure out the best way to prepare for a mortgage. Understanding your debt ratios can help us determine what you can afford, setting you up for success as you plan your home purchase.
