Distinguishing Bank and Non-Bank Lenders
There’s a distinct contrast in how bank and non-bank lenders approach debt ratios.
Non-bank lenders offer several benefits over traditional banks, such as better prepayment options, fairer penalties, and more competitive interest rates. However, when it comes to mortgage debt ratios, the banks have an edge due to their source of funds.
Banks, as balance sheet lenders that accept deposits, have the autonomy to set their rules for mortgage debt ratios. This means that if you’re putting down at least 20%, a bank might be more willing to entertain higher debt ratios than the standard 39% GDS and 44% TDS.
On the other hand, non-bank lenders don’t possess the same flexibility. Since they typically secure their financing from the mortgage-backed security market, non-bank lenders are often constrained by the standard maximum 39% GDS and 44% TDS debt ratios.
How Do Banks Determine Approval for Higher Debt Ratios?
When you’re dealing with a bank, they take a comprehensive approach to evaluate your eligibility for higher debt ratios. This assessment includes a thorough examination of your income, existing debt, credit score, assets, and the property you intend to purchase.
Here’s what banks typically look for:
- Stable Employment: Banks prefer to see a stable employment history. They usually require you to have been with the same employer for at least 2 or 3 years.
- Solid Credit Score: A robust credit score is a crucial factor. Generally, banks seek a credit score of at least 650, indicating a history of responsible financial behavior.
- Emergency Savings: Lenders want assurance that you have a financial safety net in case you can’t make mortgage payments. Demonstrating a healthy emergency savings fund can bolster your case for higher debt ratios.
Conclusions and Further Thoughts
Understanding the role of debt ratios is essential when aiming for a higher home purchase price.
While the standard limits for debt ratios are 39% GDS and 44% TDS, there is room for flexibility if you’re willing to put down at least 20%. It’s important to note that the source of your financing, whether from a bank or non-bank lender, significantly influences the latitude you have with these ratios.
Contact Huber Mortgage to talk through your options! Contact HERE.
PS – One of my hobbies is blogging about mortgages, debt and government policy. During the day I’m a MORTGAGE BROKER in Kelowna, BC!
Check out the Huber Mortgage Home Buyers Guide HERE