Your Credit Score that the lenders use, not to be mistaken by the Credit Risk Score you see when you check your own credit, is one aspect of determining your borrowing power. The better your score, the length of established credit and your payment history the better when it comes to mortgage financing.
Let’s assume that all parts of an application are equal (available down payment, income, monthly liability payments etc.) except for the Credit Score. Established credit in this case would be any credit report that has at least 2 accounts reporting with a limit of $2,000 for 2 Years.
Comparing the credit profiles of Jane and John both who make a gross annual income of $50,000 the following would apply:
First Gross Debt Service Ratio (GDS) is the combined shelter expenses (heat, property tax, half of condo fees & mortgage payment) in relation to the borrowers gross income. And Total Debt Service Ratio (TDS) is the GDS plus all other monthly debt liabilities in relation to the borrowers gross income.
Jane has a Credit Score over 680
GDS allowed is 39%
TDS allowed is 44%
John has a Credit Score between 600-679
GDS allowed is 35%
TDS allowed is 42%
Each year Jane may allocate $19,500 towards GDS and $22,000 towards TDS.
And each year John may allocate $17,500 towards GDS and $21,000 towards TDS.
Lets assume heat and property tax combined are $300/month. This means that Jane with her excellent credit can allocate $1,325 towards her mortgage payment and John can allocate $1,158 toward his mortgage payment.
Using the current Benchmark Qualifying Rate of 4.64% to qualify Jane may qualify for a mortgage of $236,066 and John may qualify for a mortgage of $206,313, a difference of$29,735.
As you can see there is quite the difference in mortgage amounts allowed under each credit rating. If you’re thinking of buying it’s best to consult a Dominion Lending Centres mortgage broker who will check your credit, help you determine your maximum mortgage amounts and if necessary help you make credit decisions that may improve your credit score and buying power.
By Kathleen Dediluke