There’s a lot of work that goes into a mortgage pre-approval. Collecting bank documents, verifying income, checking your credit score; the last thing you want to do after you’re pre-approved is change something in your file.
However, something strange happens to people after they are pre-approved—they want to spend money. Money that isn’t part of their home shopping budget.
I think it has something to do with clients seeing that approval amount and being surprised. I’ve heard more than once, “I didn’t think could qualify for that much!” Seeing that number feels good and gives clients a sense that they have more money than they actually do. That usually leads them to the furniture store or worse, the car dealership, to spend that money they don’t have.
My number one rule for after you’re pre-approved is to avoid taking on new debt on anything you don’t need until after your mortgage has closed and you have moved in. Why? Because that new car or furniture could mean you no longer qualify for the same purchase price.
Your Debt Servicing Ratios: A Review
As I previously talked about, there are two ratios I use in your mortgage pre-approval: Gross Debt Servicing (GDS) and Total Debt Servicing (TDS) Ratios.
Reminder: Your GDS Ratio, which is your mortgage payments, utilities, and condo fees and property taxes should only be at or less than 39% of your gross monthly income. Your recommended TDS amount, which includes any other debt payments plus your GDS, should be at or less than 44% of your gross monthly income.
When you buy a new car, that payment becomes part of your TDS ratio and changes your entire ratio profile. Let’s go through a couple of examples.
Example 1:
Gross Income: $75,000
Debt: $0
Minimum Downpayment: $18,250
Qualifying Rate: 4.79%
Pre-Approval Purchase Price: $365,000
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Gross Income: $75,000
Debt: Add a $500 monthly car payment
Minimum Downpayment: $16,750
Qualifying Rate: 4.79%
Pre-Approval Purchase Price: $335,000
Just by adding a $500 monthly car payment, this client would be approved for $30,000 less!
Example 2:
Gross Income: $135,000
Debt: $0
Minimum Downpayment: $48,000*
Qualifying Rate: 4.79%
Pre-Approval Purchase Price: $730,000
______________________________________
Gross Income: $135,000
Debt: Add $800 monthly car payment
Minimum Downpayment: $42,500
Qualifying Rate: 4.79%
Pre-Approval Purchase Price: $675,000
Just by adding a $500 monthly car payment, this client would be approved for $45,000 less! *Based on CMHC sliding Scale for a purchase price over $500,000
When Do You Buy a New Car?
In the examples above, these clients could have afforded that new car no problem, especially with no current debts (something we all dream of!) But, a new car payment dramatically changed what they were able to qualify for.
$30,000 - $45,000 is a lot! That could be the difference between a townhouse or a single-detached home; having a garage vs. parking on the street; having a fully finished basement vs. no basement! Is having a new car worth losing $45,000 more of house?
The number one thing I tell clients when we’re in the pre-approval process: don’t buy ANYTHING until your mortgage is closed and you’re moved in.
And don’t worry. That new garage will still be there when you eventually do buy the new car.