Qualify for a Higher Priced Home: Paying Off Debts

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Are you looking to buy a home but don’t have the 20% down payment required for extended debt ratios?

Don’t worry, there are still options available to make your dream of homeownership a reality.

In this post, we’ll explore some strategies to help you reduce your debt ratio and qualify for a mortgage, even if you’re putting less than 20% down.

Understanding Debt Ratios

Before we dive into the solutions, it’s important to understand the two key mortgage debt ratios: the Gross Debt Service (GDS) ratio and the Total Debt Service (TDS) ratio.

The GDS ratio assesses the expenses related to the property you intend to purchase, while the TDS ratio considers these expenses as well as your existing debts.

To qualify for a mortgage, it’s crucial to maintain acceptable levels for both of these ratios.

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GDS and TDS Ratio Limits

When you’re putting less than 20% down on a property, there are specific limits for your GDS and TDS ratios.

You can go up to a maximum of 39% for the GDS ratio and 44% for the TDS ratio, with no exceptions.

Paying Off Your Debts

If you find yourself in a situation where your GDS ratio is fine but your TDS ratio is too high due to existing debts, paying off those debts is a straightforward solution.

You can use your personal savings or receive a financial gift from family to clear your debts, improving your TDS ratio and increasing your mortgage eligibility.

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Personal Loans to Reduce Debt

Sometimes, the way your debt is calculated can affect your qualification for the desired home purchase price.

Debt can be categorized into two types: revolving and loans.

Personal loans can be particularly helpful in improving your mortgage debt ratios. Extending the loan term can reduce your monthly payment, making it easier to qualify for a mortgage.

Additionally, converting revolving debt, such as credit card balances or lines of credit, into a personal loan can help because the monthly payment on a personal loan may be lower than the 3% minimum required for revolving debt.

Cashback Mortgages

If paying off your debts or restructuring them isn’t an option, you might want to consider a cashback mortgage.

With a cashback mortgage, the lender provides you with cash in exchange for accepting a slightly higher interest rate.

While this might reduce the amount you can borrow due to the mortgage stress test, the cashback you receive can be used to pay off your existing debts, improving your TDS ratio and increasing your chances of mortgage approval.

Conclusions and Further Thoughts

In conclusion, while putting less than 20% down on a property might present some challenges, there are solutions to help you qualify for a mortgage.

By paying off debts, converting revolving debt into personal loans, or considering cashback mortgages, you can achieve your homeownership goals even with a smaller down payment.

Remember that discussing your specific situation with a financial advisor and mortgage specialist is crucial in determinng the best strategy for your unique circumstances.

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

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