Knowing your budget is key when buying a home. In this episode, we discuss how the banks determine how much you can get pre-approved for a mortgage, the significance of your beacon score, the impact of a previous mortgage and if you should spend to your pre-approval limit.
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Hi everyone and welcome to another edition of Homebuyer's School. Today I'm joined by Mujtaba Syed, Mobile Mortgage Specialist with TD Canada Trust. Today the question we're going to answer is one that's very, very a popular one:
How much can I actually get pre-approved for a mortgage?
So Mo, how much, if I go right now [00:00:30] and talk to you or a mortgage specialist, what's the maximum I can get pre-approved?
That's a really good question Karl.
Technically what we look at is we'd look at a bunch of different factors when we're looking at the amount that you can get pre-approved for.
The most important thing we do is look at your credit score.
A credit worthiness is an important part of the approval process so there are certain criteria and guidelines we like your credit to be at to see maximum, minimum approval amounts.
I'll try and explain that a little bit more.
If your Beacon score [00:01:00] is technically above 680 where we want to be at, we want your TDS, which stands of total debt ratio.
A total debt ratio is what we take is we take your income, we take your monthly obligations plus the new monthly obligations of your home you're looking at buying, which is going to be your mortgage payment, property taxes, utilities.
You want that to be around 44% of your income. And the reason why the banks want to be able to do that is we want the extra 56% [00:01:30] to be available just in case you might need it.
We don't want you to be house poor, for sure.
If your Beacon score is above 680, we can go to a maximum of 44% of your TDS but unfortunately if it's lower than 680, we want to be at 42% of TDS. These are just bank accounted guidelines that we take a look at.
We also look at something called GDS which is your gross debt ratio which is just technically the housing cost that we talked about.
For the housing cost, once again, [00:02:00] it's just your mortgage payments, your property taxes and your utilities that technically could be part of the home.
You want that to be, once again if your Beacon score is around 680, you want that to be around 39%, which is the maximum. If your Beacon score's less than 680, we unfortunately can't go more past 35%.
Once again, just bank accounted rules to see exactly how much you can get pre-approved for.
Karl Yeh: When you're talking about, let's step back [00:02:30] a bit here,
What is a Beacon score?
Absolutely. A Beacon score is a cred score. It's a whole bunch of different things that combine into making a risk rating for the bank.
What we do, we can look at a whole bunch of different situations:
- We could look at how long you've opened your credit bureau.
- What of kind of debts you have on your credit bureau.
- How you make your payments.
If you switch your job frequently. We want to be able to show stability. [00:03:00] If you switch jobs often or you move addresses often, that could actually result in a lower score. We want to show stability, we want to show comfort.
Technically a score, where I like to explains to my clients is just a statistic.
When we say someone has a Beacon score of 680, it just means to the bank that one out 680 people will most likely default on a loan compared to someone who might have a Beacon score of 700. One out of 700 is [00:03:30] less riskier to the bank compared to one out of 680 or even one out of 600.
That's how the banks will get it. It is a little bit more complicated. It's a little complex.
But it's just a brief idea of who you are as a person, technically how you come across to the bank.
Does a previous mortgage affect your Beacon score as well?
Absolutely yeah. A previous mortgage could definitely affect and depending on your repayment work. How you made the payments.
The amount. It could definitely [00:04:00] impact it in a positive way or it could impact in a negative way.
Would you recommend then having let's say you're in the process of selling a home and looking to buy another home, either another home or transitioning out of that, in your opinion would we be better to make sure you sell your home first or does it really matter?
To me I don't think it really, really matters because when we actually look at the pre-approval process, we can factor all of that into the application.
We [00:04:30] can look at what makes the most sense for you? If it makes the most sense to you because you feel like selling based on your financial obligations, we can look into that.
We can also look in getting you pre-approved or approved for a mortgage by currently holding that property as well.
A lot people think they want to sell but then they decide that they might want to turn it into a investment property or rental property.
There are many, many different ways we can work around the application. There's no one way to do that.
Should I max out in terms of how much I can get pre-approved for?
Once again it just depends on where your comfort level is.
If you think that that's your dream home and you're very comfortable with it and you see yourself moving in there and living there for a very long time, you might consider buying that house.
It might be a little bit close to your maximum limit but you might know that your income potential is just going to keep on getting more and more.
That's something that definitely you could speak to your specialist about. [00:05:30]
I always tell my clients, as long as you're comfortable with the payments. Make sure you do the monthly budget, those monthly obligations and see exactly where that fits in based on your lifestyle.
If that makes sense for you based on your lifestyle, it's a comfortable payment, you don't feel you're stretched, you don't feel that it's a little bit too much for you, that is the ideal place to be, in my opinion.
Karl Yeh: Great, do you have anything else to add?
No, I think that's technically it.
Once again, I just want to reiterate that just really sit down with your [00:06:00] specialist, talk about your obligations, talk about your financial situation, talk about where you see yourself in the future. All that can have a really big impact on your decisions today.
You want to be able to look into the future and see, does this make sense in the future as well? Not just today.
Perfect. Thank you very much Mo. Thank you very much everyone for joining us and we'll catch you next time.
Let us know if you have additional mortgage questions or home buying questions that we can answer by submitting them in the comments section below.
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About Mujtaba Syed:
Mujtaba is an experienced mobile mortgage specialist with a demonstrated history of working in the banking industry. Skilled in Negotiation, Commercial Lending, Banking, Sales, and Credit Analysis. Strong product management professional.