Will My Spending History Affect My Mortgage Qualification?
When it comes to mortgage qualification, there’s always one thing that lenders take an interest in: your spending history. From some of the more obvious things – like your credit score, income, employment status, and down payment – to some of the less obvious things, like foreseeing your future repayment capability. So, the big question is, will my spending history affect my mortgage qualification? The answer: yes, your spending history can in fact affect your mortgage qualification. Today we go over exactly why that is and how to best ensure you’re on track for a positive spending history review!
- Your spending history can play a major role in whether you qualify for a mortgage.
- Mortgage repayment ability is determined using the gross debt service ratio (GDS) and total debt service ratio (TDS).
- The lender verifies your bank statement by analyzing the financial documents made available to them.
Are you a first-time buyer?
How Your Spending History Impacts Mortgage Qualification
The primary reason that lenders require a ton of information during the appraisal process is to determine whether you can handle the additional debt you are about to take on. So, beyond your income, lenders are interested in seeing how you spend your money.
This gives them an idea of your priorities — whether you are a responsible spender and the general state of your financial health. If it is apparent that you have healthy spending habits, your chances of qualification improve significantly.
On the flip side, if you spend excessively and display a history of unhealthy spending habits, your chances of mortgage qualification can suffer a bit. Getting a mortgage with debt can only work if your spending habits show that you are regularly and consistently paying off your debt.
Why is this so important? During an appraisal, a bank statement for mortgage securing is a necessity.
Types of Spending Habits Banks Will Evaluate
Lenders do not assess your spending habits randomly; rather, there are specific things that they look at. These all serve to provide a great deal of information to them and allow them to draw a reasonable conclusion about your spending history and habits.
Here’s a quick list of what those things are (we’ll review them in more depth below!):
- Recurring expenses
- Credit card utilization
- Checking and savings account statements
Recurring expenses – which are generally a large portion of where your income goes — are of great interest to lenders. The nature of these payments can effectively determine whether or not you get approved for a mortgage.
Your credit report would typically be assessed by the bank to identify any unpaid debts including credit card debt and other loans. There’s a pretty strong relationship between the level of debt and mortgage approval. The bank would also look at the total amount that goes to these monthly payments.
If you have other debts, like alimony or child support, they are factored into your recurring expenses, too.
In short, these monthly payments are used by bank underwriters to arrive at a conclusion on your spending. If you have many overdue payments or accrued credit card debts, that’s a red flag to lenders.
Credit Card Utilization
Recurrent credit card use for payment can significantly impact your qualification chances in two ways. First, if you use your credit card often, even for heavy expenditures, and consistently pay it off monthly, you would boost your credit score and retain a positive spending history. That’s a good signal to lenders – you’re responsible and able to spend within your means.
On the other hand, if you are paying for things excessively with your credit card, and maxing out your available funds, that won’t be a good look for the lenders. The bank would be wary about your ability to repay the new debt you are looking to take on and conclude that you would likely only rack up further debt, and be a liability.
To stay on the safe side:
- Use your credit card sparingly
- Use less than 30% of your account limit
- Pay off credit card debt promptly
The relationship between debt and mortgage is one where lower debt could improve your odds of getting a higher mortgage amount.
Checking & Savings Account Statements: How far back do mortgage lenders look at bank statements?
Your verified bank statement can say a lot about your spending history. Usually, both your checking and savings accounts come under scrutiny, and then the bank would likely use statements from the most recent two months.
Prominent highlights such as itemized deposits and withdrawals would be reviewed by the underwriter and the bank would also be looking to see if you have a reserve amount that typically remains in your account(s).
Unusual withdrawals such as several hundred dollars at once or other peculiar charges that stand out will be reviewed further. In this case, the bank might require that you provide an explanation or even a paper trail as proof of where the money went.
It is very important to not make any unusual and significant withdrawals during the mortgage process as your approval chances may fall if your funds drop below the threshold amount required by the bank.
Understanding Credit Re-Pulls
Credit re-pulls are executed by the lender to ensure that your financial health is still stable. This stability is an essential requirement all through the mortgage approval process and at post-approval as well.
The bank typically pulls your credit at the beginning of your application process. However, there could be interim pulls during the process and at closing as well.
The interim re-pulls are to ensure that your spending habits haven’t impacted your credit, and in turn, your repayment capability. If your credit has been negatively impacted, the bank would have to reevaluate your debt-to-income ratio to see how much mortgage you qualify for now.
Similarly, your loan may be denied if you no longer meet the set standards. Activity such as inquiries from creditors may also need to be explained.
How Your Debt-to-Income Ratio Impacts Mortgage Qualification
Lenders look at your ability to make your mortgage repayments in addition to making all the other necessary expenses you already incur. This is imperative for them. As a result, they use two metrics to determine this:
- Gross debt ratio (GDS)
- Total debt service ratio (TDS)
Under the gross debt service ratio, the sum of payments going for the mortgage and other housing expenses comprising heat, property taxes, as well as 50% of condo fees (if this applies) should not exceed 32% of your gross income (or income before tax). This percentage may go up to 39% on occasion.
For the total debt service ratio, the total payment going for the mortgage, other housing expenses, as well as debt service payments comprising car payments, credit card minimum payments, as well as student loans should not exceed 40% of your gross income. This percentage may go up to 44% on occasion.
Provided your sum payments on housing and debt servicing remain within the 40% guideline, your mortgage affordability would not be impacted by your debt. However, if your TDS exceeds 40%, your mortgage affordability goes down by a dollar for every dollar that falls outside of the TDS limit.
If right now you’re wondering: So, does mortgage count as debt’? Yes, it does. It’s placed into the TDS limit.
Calculating Your Mortgage Affordability
The amount you can afford for a mortgage is greatly influenced by both the GDS and TDS. You can always use a mortgage affordability calculator to immediately determine how much you can afford.
In addition, the calculator can automatically convert monthly debt and housing payments into annual figures and convert your yearly income into monthly breakdowns.
In order to show the impact of these ratios, here’s an illustration:
For an annual household income of $150,000, total annual housing expenses, including mortgage payments, should be less than or equal to $48,000.
This places mortgage payments at $4,000 per month over a 25-year amortization period, following the GDS threshold of 32%. If $7,500 is the annual sum total of payments for heat, taxes, and assumed 50% condo fees, there is $40,500 left for mortgage payments for the year ($3,375 monthly).
GDS= $48,000 total property expenditure / $150,000 gross income = 32%
Total housing costs ($48,000) = $40,500 (mortgage carrying costs) + $7,500 (other property expenses)
This implies that mortgage payments in this particular scenario cannot go over $40,500 yearly, even without other debt.
Assuming there are other debts such as credit card payments of $5,400 annually or $450 monthly on a $20,000 balance and student loan payments of $6,300 annually or $525 monthly, the TDS becomes 39.8%.
$40,500 (mortgage carrying costs) + $7,500 (other property expenses) + $11,700 (debt repayments) = $59,700 (total payments due)
TDS = $59,700 total payments due / $150,000 gross income = 39.8%
Since their TDS is below the 40% threshold, borrowing power remains intact and unaffected. $40,500 remains the maximum annual mortgage carrying cost that the lender would approve and the loan qualification amount is unaffected as well.
However, if there is another debt present such as car loan repayments of $9,000 annually or $750 per month, the TDS ratio goes up to 45.8%, exceeding the 40% threshold.
$40,500 (mortgage carrying costs) + $7,500 (other property expenses) + $20,700 (debt repayments) = $68,700 (total payments due)
TDS = $68,700 total payments due / $150,000 gross income = 45.8%
This would result in the lender reducing the mortgage carrying costs by the excess ($8,700), causing it to go from $40,500 to $31,800, thereby maintaining the 40% threshold. In essence, mortgage affordability has been impacted by the car loan.
In short, for those that are still wondering ‘Can I get a mortgage with debt?’ The answer is absolutely! You just need to prove you are responsible for your debt and able to pay it back.
Frequently Asked Questions (FAQ)
Now that you know the ins and outs of how spending history can affect your mortgage qualification, let’s cover some of the most common questions we see below.
Do mortgage applications look at your spending?
Yes, mortgage applications look at your spending. This is to determine whether or not you are a responsible borrower. Factors looked at are commonly: the amount you spend on entertainment, groceries, car loan payments, and credit cards.
Does your credit card limit affect your mortgage?
Yes, your credit card limit affects your mortgage. Your lender would take your credit limit into consideration when determining your qualification status. If you have multiple cards, this could negatively impact your application because your lender would assume that you have high credit card payments to make monthly. However, if your credit history is good, and you pay your cards off monthly, you can get credit card debt mortgage approval.
What is considered a red flag in a mortgage application?
Red flags in a mortgage application indicate suspicious activity. An example would be large undocumented deposits, maxed-out credit cards, or poor credit repayment history.
If you know you would be applying for a mortgage, it is best to start planning ahead. This way, you don’t end up jeopardizing the process and you can go into it confidently! You should make sure that your credit card history is in top shape, you don’t take on any excessive debts, and any large transactions listed you can explain in writing. If you can do that, you’re good as gold!
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