Today’s post is about what your cash flow means for your mortgage.
Buying a home: finding it, financing it, insuring it – and all the other steps involved – isn’t a simple process.
Helping you understand that process is part of my job as a mortgage broker, and this blog brings you info you need in bite-size pieces. My last few blogs have been in a series format, detailing the professionals you’ll work with through the process. The next series describes how the home financing process works, again in smaller chunks to make it a clear, easy-to-understand process.
Centum Future Mortgage Group arranges residential, commercial and construction mortgages. As a solution-driven organization, Future Group believes that a mortgage solution exists for everyone, regardless of income or credit concerns. We believe that every consumer deserves the best rates, care and service when purchasing or refinancing a home or business.
The fifth in this seven-part series looks at income vs. outgo.
Enjoy and, as always, I would be happy to answer any additional questions you may have regarding the purchase of a home or on how best to finance the purchase. Please contact me at 519-649-2502 Ext 3, bruce_smith@centum.ca
Cash Flow
Cash flow is commonly referred to as income. Lenders typically require that your housing payments are no more than 35 percent of your income. This calculation is commonly referred to as your gross debt service ratio. Calculated into this ratio are related mortgage costs, such as principal, interest, property taxes, heat, and half of all condo fees.
A second ratio lenders consider is your total debt service ratio. Additional debt, such as credit cards, lines of credit, car payments and child support payments etc, are added to your mortgage debt. All your debt payments combined should typically be no more than 42 percent of your income.
Debt to income example:
Yearly Gross income =$45,000 / divided by 12 = $3,750 per month income
$3,750 monthly income x .35 = $1313 allowed for housing/mortgage expense
$3,750 monthly income x .42 = $1575 allowed for housing/mortgage and other debt
There are many types of acceptable income but generally you will be reporting either employment income or self-employed income. If you are an employee, you should have worked with your current employer for a minimum of three months and be able to produce an employment letter and a current pay stub to verify employment. Lenders look to verify salary, position and length of employment. When planning to purchase a first home it is not the time to be switching jobs. Lenders like to see steady employment.
If you are self-employed, lenders typically look for a two-year history. Notices of assessments are the preferred choice to verify employment income, as these provide the lender with your income and verifies that your income taxes are current.
If you are self-employed and unable to verify income, there are mortgage products accessible to you as well, but you will require a higher down payment.
If you are employed but thinking of becoming self-employed, it would be best to wait until after your mortgage financing is in place.
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