When you are looking for a loan, mortgage, or credit card, your personal credit report is what lenders look at to make their decision. There are many factors that can affect your credit, some of which are:
- Number of credit accounts
- History of Credit accounts
- Amount of credit available and the balance owing in each account
- How regular you make your payments
- How often and how recently you have applied for credit
Debt Ratios
Determining your debt ratio can help you determine if they are willing to take the risk in giving you a mortgage. Traditional GDS and TDS ratios are 32% and 40% and if you exceed these debt ratios, mortgage lenders generally wont approve your loan. However, some lenders have different standards and some lenders are willing to let you exceed these ratios if you have a good credit rating. Mortgage lenders look at all your credit card bills, any loans, and how that mortgage would impact your ability to pay if they were to give it to you.
How to figure out your Debt Ratios
To figure out your GDS you work out your mortgage payment (including principal & interest) plus realty taxes + heat + 1/2 your condo fees (if applicable) for the year. Then you take your annual income and divide it by this. Giving you your Gross Debt Service Ratio (GDS).
To figure out your TDS you work out your mortgage payment (including principal and interest) plus realty taxes + heat + 1/2 your condo fees (if applicable) for the year. Plus you add all your other commitments. These other commitments may include personal loans, credit card debt, car leases, support payments and/or alimony, student loans and mortgages on other properties. Many lenders have different methods of calculating credit card debt. Sometimes they will include 5% of the APPROVED credit limit (even though they have nil balances) or they use 5% of the outstanding balance at the time of the application. Again you take your annual income and divide it by the total debt and this give you your Total Debt Service Ratio (TDS).
A Good Tip
It is very important that you maintain a good credit profile. By paying your bills on time, you stay in good credit standing. A good tip to remember is to review your credit report every year to detect any inaccuracies or possible identity fraud. If by any chance you do detect any fraud make sure you contact Human Resources Development Canada (HRDC) and your local police department.
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