Mortgage Jargon Decoded: Terms Heard During the Application Process

Couple Applying for a Mortgage

Welcome to part two of our series on mortgage jargon.

Here is a list of terms you will most likely hear during the mortgage application process. Knowing what they mean will help you ask better questions and make more informed decisions.

CMHC: The Canada Mortgage and Housing Corporation is a Crown corporation that administers the National Housing Act. It is probably best known for providing mortgage loan insurance to homebuyers with less than 20% down payment. If your down payment is less than 20% of the purchase price, the CMHC insurance premium is added to your mortgage balance.

Credit Report: Lenders use this report to determine a borrower’s creditworthiness. The credit report shows how the borrower has managed debt and bill payments to date.

Down Payment: The down payment is the portion of the purchase price that is not financed by the lender. Typically it comes from the purchaser’s own savings although non-repayable gifts from family are allowed.  At a minimum, you need 5% of the purchase price of the home as a down payment. If you want to avoid paying a High Ratio Mortgage Loan Insurance premium through CMHC, you will need at least 20% of the purchase price as a down payment.

Gross Debt-to-Income Service Ratio (GDSR): GDSR is the percentage of your gross monthly income that will be applied to housing related expenses, i.e. your mortgage payment (principal and interest), property taxes and heating (and condo fees when purchasing a condo). Your GDSR should not exceed 32%.

Home Equity: Home Equity is the difference between the market value of a property and the mortgage balance. Home Equity is built as the market value of your property increases and as your mortgage is paid off.

Loan-to-Value Ratio: The ratio of the loan amount as compared to the actual value of the property, calculated as loan divided by value.

Net Worth: Your net worth is a measurement of your financial worth. It is established by subtracting your total liabilities from your total assets.

P.I.T.H.: Acronym for principal, interest, taxes and heating – these are the costs used to establish your Gross Debt-to-Income Service Ratio. The total of these costs should not exceed 32% of your gross monthly income.

Total Debt Service Ratio: The TDSR is the percentage of your gross monthly income that goes towards your housing expenses (mortgage payment, property taxes and heat) and other debt obligations such as credit cards, lines of credit, or loans. Most lenders will ensure that a house purchase will not push your TDSR to exceed 40% of your gross monthly income to ensure that you can live comfortably.

Read part one of our series on mortgage jargon: mortgage-specific terms.