How do lenders determine mortgage amounts?
On Behalf of Porter Ramsay LLP | Apr, 30, 2021 | Real Estate Law
When applying for a mortgage, the lender approves a certain amount based on what the underwriter thinks the applicant can afford. This is true whether one is applying for his or her first mortgage, getting an additional mortgage, or looking to add to the balance through refinancing. British Columbia borrowers can benefit from knowing what lenders are looking for when looking over their application.
Some of the numbers lenders look at when approving a mortgage are:
- Debt to income ratio (DTI)
- Gross income (pre-tax earnings)
- Mortgage-to-income ratio (how much gross income is allocated to for housing costs on a monthly basis)
- Back-end ratio (how much gross income is allocated to debt obligations on a monthly basis)
- Credit score
Lenders have good reason to scrutinize the financial means of applicants when they are looking to buy a home, but buyers themselves should also go through a similar process. This includes considering issues like income stability and life priorities. Is it important to have extra money for things like travel, or is having the best home possible the most important thing? Do they plan to stay in their job for the long haul, or is a career move on the horizon?
After thinking through personal budgets, the mortgage amount approved by a lender may be higher than what the buyer actually is comfortable spending. Alternatively, it could be lower than what is needed to enter the market, meaning that more income or debt repayment could be required to move forward. In addition to these financial questions, there are legal matters involved with any mortgage signing or refinancing. A British Columbia real estate lawyer can help individuals understand and explore these issues.