Blurbs

The word "mortgage" seems big and scary, but it is just a big loan with your home as security. If you already have a good credit history and a stable job, you shouldn't worry.

To get a rough sense of how much of a mortgage you can get, just multiply your family's gross annual income by three - assuming you have steady employment, a good credit history and relatively little debt. To get a more precise idea you will need to focus on the four parts to qualifying for a mortgage: a stable income, strong enough cash flow to service your debt, a good credit history, money for a is the cash you will contribute to your house purchase. This does not include mortgage funds.

The larger your down payment, the easier it is to qualify for a mortgage. If your down payment is only five per cent of the price of the home, the banks have a strict lending criteria. But if you have a 50-percent down payment, they will be much more flexible.

You can buy with no money down, but mortgages of this kind are expensive and are difficult to obtain. Most people will need at least five or 10 percent of the purchase price for a down payment, and choosing a marketable property.

Your income is one of the most important determinants of getting a mortgage. Lenders can be strict about calculating your gross income. If your employment situation isn't strictly a 9-to-5 gig-that is, if you're self-employed or receive commissions, tips, bonuses, etc.-you'll have to have proof that your income is steady and has been for the last two or three years. The easiest way to do this is with your last two or three years of Notice of Assessments from the Canada Customs & Revenue Agency (formerly Revenue Canada). The average of your net taxable income over two or three years will be used to qualify you for your mortgage.

Once you've figured out your gross income, you can do the same math that your bank does to get a precise idea of how big of a mortgage you'll qualify for. The first ratio that lenders use is Gross Debt Service, or GDS. This is your monthly mortgage payment plus 1/12th of the annual property taxes, plus $75 for monthly heating costs. This figure is divided by your gross monthly income. If the answer to this formula is less than 32%, you qualify.

The second ratio is Total Debt Service ratio, or TDS. This is the same formula as the GDS, but incorporates other debts that you have, such as car leases, lines of credit and credit cards. Add your existing loans to your potential monthly mortgage payment, divide this number by your monthly income, and if the answer is less than 42 per cent, you qualify.

Here's an example:

Jon and Natalie have the following debts: car loan payment ($456), RBC platinum credit card (minimum payment of $75), Canadian Tire card (minimum payment of $50), student loan ($199 and $119), property tax ($263 - $3,152/12), heating costs ($75), water and gas ($75), insurance ($117 and $89). There monthly mortgage payments are $1,235. Jon's monthly salary is $7,000 and Natalie's is $4,500 plus commissions and bonuses. Because Natalie's commission and bonus is not assured it will not be included in the calculation.

Monthly payments/Monthly Gross income

GDS= $1,573 (Mortgage+Tax+Heating)/11,500=14%

TDS= $2,753 (Mortgage+Tax+Heating+other monthly payments)/11,500=24%.

Don't underestimate the importance of having a good credit history. Having dealt with a collection agency is the worst-case scenario, but even being consistently late on credit card payments will make getting a mortgage difficult. It's not just where you’re at today that matters, but your credit history over the past few years.

The amount that you're able to put as a down payment also affects the size of your mortgage and the lending terms you'll be presented with. It may be tempting to try for programs that require little or no down payment, but the interest on these will cost you a lot in the long term. The bigger your down payment, the more flexibility you'll have - and most people will need at least 10 per cent to qualify for a mortgage.

Since the property you're interested in is the bank's collateral for their loan, your lender will want to be sure that it's a good investment. The more marketable your property is, the more likely it is that you'll get a mortgage with attractive criteria. The more desirable your property and your neighbourhood will be in the future, the happier the bank will be to use the property as security.

The first thing you should do once you've decided to look for a home is get a pre-approved mortgage from your local bank, mortgage broker or Buyingblock. This will allow you to confirm if you will get the mortgage you are looking for, the maximum amount of the mortgage and it will also provide you with an opportunity to discuss all of the other details of a mortgage. Do not be afraid to ask questions, and don't worry if your queries seem too basic or obvious.

Simply do a little bit of homework and getting a mortgage will be a breeze.

Every year brings more and more mortgage options, as financial marketers try their best to woo customers. This can be overwhelming, but provides you with a lot of choice. So stay calm, and kept it simple: avoid gimmicks and remember what your basic needs are.

Your most important task is to keep your costs down, so pay close attention to interest rates and calculations. Low introductory rates are usually gimmicks that end up costing a lot in the long run-look at the effective rate over the entire term of your mortgage. This will be higher the more often your interest is compounded, so steer towards products with semi-annual interest calculations, and avoid those that are monthly.

You'll have to decide how long of a mortgage term to go with. The longer your term, the higher your interest rate will be-but you'll be more protected against economic turmoil. If your budget is tight, a longer term mortgage with a guaranteed interest rate will save you from having to suddenly find hundreds more dollars a month if interest rates change. This is a very personal decision, so make it carefully.

One new product that's been attracting attention is the variable rate mortgage. These generally base their rates on the bank's prime rate. When the prime rate goes up, your rate goes up; when the prime rate goes down, your rate goes down. There are no standard terms and conditions with a variable rate mortgage and every lender has their own version. Again, the bottom line is your effective interest rate over the entire term, not just the introductory period. These mortgages may have a long term (e.g. 5 years) but your interest rate is not guaranteed. If you are the type of person who is conservative or has a tight cash flow, this is not the product for you.

Flexibility is the other variable to look at: can you pay weekly, bi-weekly, semimonthly or monthly? How often can you make extra payments? Is your mortgage convertible to a longer term? What rate will they give you, the posted rate or a discounted rate?

Cost is more important than flexibility. Just keep remembering to look at the effective interest rate of the mortgage over the term you choose.