Acronyms and Your Mortgage Application

Yep.

There are 2 or 3 major factors when applying for a mortgage. For us insiders, they are given handy acronyms so it makes us sound really smart. These are;

Math.

LTV (Loan to Value) - ie. How much money are you wanting to borrow vs the actual value of the home in question. You want to buy a $1 million home and have $500,000 in cash? That's a 50% LTV. That's good. Lenders LOVE a low LTV.

However, due to reality, very few people, especially first time home-buyers have that sitting in their bank account. That's why there are two definitions of a mortgage - Conventional, in which the borrower has at least 20% of the LTV for a downpayment and High Ratio, in which the borrower has the minimum 5% to 19% of the LTV. A High Ratio mortage requires an extra insurance charge to protect the lender in case of bankruptcy. The main insurers for home mortgages in Canada are CMHC, Genworth and Canada Guaranty.

Easy come, easy go

TDS (Total Debt Servicing)  This number is tied to your income. Now income could be considered as employment or pension or 'other'. Recent media coverage of suspicious foreign-purchased luxury homes in the Lower Mainland has highlighted some borrowers as being simply 'housewives' or 'businessperson' without documentation stating exactly how they create this income. All that matters is that is foreign investment coming into Canada under the guise of real estate ownership.

But for us Canadians, you have to provide proof of how you come to have income in Canada, both presently and in the future. This income has to prove that you can afford your daily expenses such as groceries, utilities, credit card payments as well as the cost of a mortgage payment. The magic number for your TDS - Total Debt Servicing must be 40% or less. Again, the lower the score, the stronger your application.

A basic view of how your credit is scored.

CB (Credit Bureau) - This is your financial resume. It provides proof through a neutral 3rd party (either Equifax of Transunion) of your history paying off bills and loans. The copy I receive is an amalgamation of mixed numbers and words in a near indecipherable code for the average person. However, I did find this link online which I only wish was as clear and concise when reviewing a credit history. A credit score ranges between 300-900. Unlike the other two acronyms, the higher the number the better. Most lenders won't look at giving best rates to anyone under 600. But not to worry, there is a complete other side of mortgages (called the B side) which takes on higher risk clients, for higher interest rates to reflect that risk.


These 3 acronyms are the most important letters in your life when it comes to being approved for a mortgage. Everything else is just peripheral evidence gathering. Your mortgage broker can help you discuss your scores and what can be done to improve them if needed. Buying a house is not an impulse buy - the best value you can get for your money is to take a balanced, well-informed look at your present finances and then you can make a plan or path towards home ownership.