Debt payments when qualifying for a mortgage make a big impact in what you can afford to purchase. Lenders must use 3% of the balance on credit cards and personal lines of credit.
Let’s look at a $10,000 credit card balance at 3% equals $300.00 per month as a minimum debt payment. If you happen to have a credit card with a 10k balance and a personal line of credit with the same balance, your minimum payments would be $600.00 per month. Lines of credit typically require a smaller payment however we have to use 3% of the balance.
Student loans that are not in repayment vary between lenders but can be anywhere from 1% to 1.5% of the student loan amount. If you have a $10,000 student loan, we must factor in a $150.00 payment.
Did you know that for every $300 minimum payment you make lowers the mortgage amount by approximately $50,000. This is a significant impact when qualifying to purchase a home.
Here is an example:
We have a family making $80,000 year income, carrying a 10k credit card balance and a 10k line of credit balance. Because of their debt load their maximum purchase price is $345,000 with 5% down payment. If they happened to payoff one 10k debt, they could purchase for $390,000 with a 5% down payment.
In the Edmonton housing market, that extra $55,000 in home value means a significantly different type of house.
There are some ways we can help to lower the debt payments that need to be paid by you but knowing your full story and income and debt ratios ahead of time can really help us make a plan to get you in the right position to buy your Edmonton home. Check our my other article debt and income: https://www.mortgagetailors.com/debt-and-income/