Applying for a Mortgage? Calculate your Debt to Income Ratio First!
Are you ready to sign up for your first Canada mortgage? Do the current mortgage rates look affordable to you? Before you make a decision, take a look at your savings and expenses and evaluate in detail whether you can manage the additional debt or not.
Want to know what numbers and ratios are used to figure out your debt and income standing? The following information will prove to be helpful in this aspect. Take a look:
The Front End and Back End Ratio
During mortgage approvals, the front end and back end ratios are widely used for calculating the effect of debt in the borrower’s income in the long run.
The front end ratio is calculated through the total portion of your income that goes towards the mortgage installments. This percentage accounts for the amount of income that you are spending upon your housing costs every month and if the figure lies below 28%, you are good to go.
On the other hand, the back end ratio, as the name suggests, not only takes into account the housing debt and expenses but also any other loans on your account like credit card payments etc. Once a borrower qualifies for the pre-requisite percentages for both these ratios, the lender will approve for their required mortgage rate.
The Debt to income ratio
Simply put, the debt to income ratio expresses the relation between the total amount that you are earning and the total amount that you owe as debt to one or multiple lenders.
In case you find that your total debt to income ratio is getting out of hand and you may not be able to afford a Canada mortgage loan, use the following tips to plan a budget and manage your finances.
Here’s what you need to do to reduce the amount and impact of debt on your finances:
- Make a complete list of how much you owe and to whom. This way, you will have a clear picture of your finances in front of you and you can decide which areas demand your immediate attention and where you can make a few changes to bring down your monthly expenses.
- First things first, start managing your debt by managing your credit card. Avoid using the credit card as much as you can and cut down on impulse shopping to a bare minimum. Also, make it a point to make your payments on time. You will not only reduce your debt but also build a decent credit score which can get you an attractive mortgage rate from your lender.
- Start saving for a decent share of down payment. This way your total debt will automatically reduce and your monthly payments will also come down at a more affordable level.
- In case you already own a home and have an open mortgage, consider making faster payments and pay off your loan faster while the mortgage rates are low. You will not only get rid of debt faster, but also reduce the amount of interest you pay.