Applying for a mortgage is a straight-forward process. When you are prepared, it is unlikely you will receive any surprises. A mortgage lender needs information about your work history, debts and assets to establish your credit worthiness and ability for repayment. The bank will establish your gross income and potential payments and property tax expenses to arrive at a Gross Debt Service ratio (GDS). This is usually limited to 30-35% of your gross income. Debts will be added to establish a Total Debt Service ratio (TDS), which can’t exceed more than 40 percent of your gross earnings.
The lender needs to satisfy two risk requirements:
- Can you make your scheduled monthly payments?
- Second, if you default (don’t make your payments) can the proceeds of the sale of the home cover the cost of the loan?
To answer these questions, a lender will ask about your net worth. This is the difference between the value of everything you own and your debts. They will consider your bank balance, investments, real estate holdings, vehicles, debts, and credit card balances, along with your employment history.
The lender will also review your credit history. This shows your ability to repay your mortgage, as it indicates how you have handled past debts or become insolvent (bankrupt).