What is included in my mortgage application as debt?
What is included in my mortgage application as debt?
One of the biggest controllable factors influencing the amount of mortgage you qualify for is your level of personal debt.
What’s included? The simplest answer is any credit facility/liability that is open and active under your name (regardless of whether or not it’s being used).
Why? The reason is because once you sign up for a liability (i.e. a credit card, a car loan) the payment becomes a non-discretionary obligation (meaning, payments are MANDATORY).
For quick reference I’ve included a few examples of non-discretionary liabilities below:
Car loans
Lines of credit (typically the payment is 3% of the limit or 5% of the outstanding balance)
Student loans
Loans/mortgages that you’ve co-signed on/guaranteed
Mortgages on real estate
Credit cards
Consumer store cards (even if payments are deferred, ie. no payments for 18 months)
Income tax payments
Legally mandated payments (i.e. child support, spousal support)
Court-ordered payments (i.e. judgements, settlements)
Private loans (i.e. if you have borrowed money from somewhere other than a traditional lender like a friend/family member this still should be disclosed)
These items are included in your Total Debt Servicing calculation (TDS) https://www.cmhc-schl.gc.ca/en/Finance-and-Investing/Mortgage-Loan-Insurance/Calculating-GDS-TDS
But what difference do credit cards and loans really make?
To give you an example, for a person with an $80,000 income looking for a $300,000 mortgage who has 1 $5000 credit card, 1 $300/month car loan and 1 $10,000 line of credit, even adding just 1 additional credit card and increasing their line of credit limit from $10,000 to $20,000 would put them over the recommended TDS. Short answer? It doesn’t take much to influence the numbers.
So what’s not included?
Payments or obligations that are discretionary (meaning, payments are your CHOICE). For example:
Cell phone bill
Spotify subscription
Gym membership
Life insurance/health insurance
Car insurance
Daycare costs
I know some of the things on the list above can be confusing – I mean, how can you not pay for daycare or not insure your car? But the logic is that you control this outflow of cash and could make adjustments at your discretion – for example, if your neighbor offers to watch your child then you might cancel daycare, or if you get a job a block from home you might sell your car and walk, so there is an element of choice with the expenses.
Some lenders will exclude dormant credit accounts (ones that have been inactive of a period of time such as 12 months) but the safest bet, especially if you plan on purchasing a home in the near term, is to keep a close eye on what credit accounts you have and close off the ones you aren’t regularly using. This not only gives you the greatest range of affordability but also protects you from potential fraud.
Questions? Let’s chat.