Written by Jeff Teed, Mortgage Agent with Dominion Lending Centres and member of the Ontario Condo Group….
The word “condominium” conjures up several images. You may be considering a high rise in a metropolitan area, close to amenities that include entertainment, city centre access, ease of transportation which might include any form of transit routes. Alternatively, you may be seeking a “bungalow” style condominium, affording you a one level style of living. Whichever type of condominium you are seeking there are a variety of choices for financing which take into account the considerations of both type and style.
When a condominium purchase is being looked at, the type of financing required should also be given careful consideration. Financial institutions often have different criteria for the purchase and financing of a condominium versus a traditional detached house. Condominium fees must be included as part of the calculation of affordability when financing is required. The question you willwant answered from lenders is , “What percentage of condominium fees do you use to calculate the affordability of this mortgage?”
There are two calculations all lenders are required to use in order to determine qualification for a mortgage. Your Gross Debt Service, or GDS as lenders affectionally call it, accounts for P – principal , I – Interest, T – taxes , and H – Heat (spelling the acronym PITH). Where a condominium purchase is being considered, typically 50% of the condominium fees must be added to the calculation. The total of these amounts is then divided by your income and a percentage calculation is derived which is recommended to be at 38% or less for many financial institutions. The other calculation that lenders use is called Total Debt Service, better known as TDS. This calculation takes into consideration the previous numbers as well as all other debts you currently carry including credit cards, loans, lines of credit or any other liabilities you may have. If you have favourable credit for the lenders requirements, you can expect that a ratio of 44% will be acceptable. Keep in mind, too, that the calculations for these ratios are based on your gross , not net, income. You may also find there are lenders willing to work outside of the guidelines of traditional ratios depending on percentage of downpayment and credit history.
With recent changes to regulations, lenders are required to use 3% of unsecured balances on credit which includes credit cards and personal lines of credit unattached to property. So the question becomes, “Can I get approved for my condominium purchase ?” . With credit considerations aside, (these will be discussed in a future article) assuming that your credit is healthy, here is a very simplified scenario to show how your ratios are calculated.
For sake of this example let’s say your total income is $ 72 000.00 on an annual basis and you want to purchase a condominium to call home. The purchase price is $ 350 000 and you have 5% or $ 17 500 as a down payment. In addition you have 1.5% of your purchase price available to you to cover all costs and fees associated with your lawyer and the funds he or she will disburse on your behalf to the seller and of course the local municipality where land transfer taxes are applicable. Considering the GDS and TDS calculations a purchase scenario could look something like this:
GDS Calculation (Principal & Interest) $1526 + (Taxes) $300 + (Heat) $90 + (50% of Condo Fees) $125 Total = $ 2041 divided by Monthly Income of $ 6000 = 34 % (GDS Percentage Calculation)
TDS Calculation (Above plus all other debts) $ 2041 + (Car Payment) $ 200 + (Credit Card) $60 Total = $ 2301 divided by Monthly Income of $ 6000 = 38% (TDS Percentage Calculation)
Given this scenario, you would be qualified for your condominium purchase. There are many other elements and factors that lenders will want to see in order to give you a full approval for purchase. That said, we always wonder, “Can I afford it ?”. My advice to my clients is to not have more mortgage than money at the end of the month otherwise you could come to resent your home. That is why it is always important to consult the experts including your realtor and mortgage professional for the options that will enable you to realize the best for your condominium buying and financing decisions.
Bettianne is a member of the Ontario Condo Group. Learn more about condos at www.ontariocondogroup.com.