Asses Your Financial Readiness
What do lenders require?
Mortgage lenders use two calculations to help determine your eligibility for a mortgage – you Gross Debt Service (GDS) ratio and your Total Debt Service (TDS) ratio.
Gross Debt Service (GDS) ratio
Your GDS ratio is the percentage of your gross monthly income used for mortgage payments, taxes and heating costs or – if you are buying a condominium – half the monthly maintenance fees. As a general rule of thumb, your GDS ratio should not be more then 32% of your gross monthly income.
To calculate your GDS, lenders try to figure out the proportion of your income you would be paying each month to own a particular property. First, the lender will estimate your annual mortgage payments, property taxes, heating costs and 50% of your condo fees (if applicable). The lender will then add that up and divide it by your gross annual income. If the answer equals less than 32 per cent (industry standard), the lender can feel confident in your ability to pay your monthly housing costs.
Total Debt Service (TDS) ratio
Your TDS ratio is the percentage of gross monthly income required to cover monthly housing costs, plus all your other debt payments, lines of credit payments and any other debt. Generally, your TDS ratio should not be more than 40% of your gross monthly income.
To calculate your TDS, the lender will take the same GDS calculation but add in any other monthly payments you might have to make, including loans or the minimum payments on any credit card debt. So, the lender adds together your mortgage payments, property taxes, heating costs, 50% of your condo fees and debts, and divides the total by your gross annual income. If the answer equals less than 40 per cent (industry standard), the lender will know you have the money to make all of your monthly payments and you will be on track with getting approved for a mortgage.
What if I don't meet the criteria?
If either of your answers go over than the industry standards, you may want to save more for your down payment and/or pay off some existing debt before buying. However, the 32% GDS and 40% TDS standards are guidelines, not rules. If you have a high credit score or some valuable assets, you may still qualify for a mortgage, even if your GDS and TDS are slightly higher than the industry standards.
