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Measure Your Borrowing Ability: Debt Service Ratios

Published on December 13, 2016 in Mortgage Basics, Qualification Guidelines by Eva

The amount of mortgage you may qualify for depends on two things: income and the amount of debt you are carrying. Financial institutions use two different ratios to measure your borrowing ability. The first is your Gross Debt Service Ratio (GDSR). The second is your Total Debt Service Ratio (TDSR).

Gross Debt Service Ratio

Gross Debt Service Ratio (GDS) is the percentage of your gross income (before deductions such as income tax) required to cover home-related costs, such as:

Mortgage Payments

Property Taxes

Heating

50% of Condo Fees

Example:

Principal and Interest Monthly $915.59Heat Monthly $75.00

Taxes Monthly $125.00


Total for Debt Service $1,115.59

Gross Monthly Income $3,500.00

GDS Ratio Calculation

$1,115.59 / $3,500 = .318

GDS Ratio 31.8%

In the above example, the homeowner is spending 31.8% of their household income on housing expenditures.

To qualify for a mortgage, most lenders traditionally require that your GDSR is at or below 32%.

As of October 2006, the insurers and some lenders will allow a GDSR of up to 35% and, in some cases where a borrower’s credit is exceptionally strong, may allow for a GDSR of up to 39%.

This, coupled with the option of extended amortizations, significantly increases the consumer’s borrowing power. Extended amortizations are not available for insured mortgages.

Total Debt Service Ratio

Total Debt Service Ratio (TDS) is the percentage of gross income required to cover home-related costs (mortgage payments, property taxes, heating, and 50% of condo fees, if applicable), plus all of your other debts, such as:

Credit Card Payments

Car Payments

Lines of Credit

Student Loans

Any Other Debts

Example:

Principal and Interest Monthly $915.59Heat Monthly $75.00

Taxes Monthly $125.00

Car Loan Monthly $200.00

Credit Card Payments Monthly $50.00


Total for debt service $1,365.59

Gross Monthly Income $3,500.00

TDS Ratio Calculation

$1,365.59 / $3,500.00 = .3902

TDS Ratio 39.02%

In the above example, the homeowner is spending 39.02% of their household income on housing expenditures and other debt.

To qualify for a mortgage, traditionally lenders have required that your TDSR be at or below 40%. Since October of 2006, some insurers and lenders will allow up to 42% TDSR and in the case of a borrower with exceptional credit, may allow for a TDSR of up to 44%.

Compare Results with Estimated Costs of New Home

Estimate what the costs will be for your new home, including all the ones described in the GDS and TDS ratios. If the total costs you estimate are lower than the maximum amounts you calculated, you will probably qualify for a mortgage loan with the lender.

If you find that your debt service ratios are higher than you’d like, some of your options include:

  • Looking at homes in a lower price range
  • Saving for a larger down payment
  • Reducing your debts

Need More Information?

If you're interested in more information on this - or any topic related to home financing - please click on the button below.

Eva Poulson Mortgage Broker
BC & Alberta Mortgage Broker

Eva Poulson

When I'm not breaking the knuckles of different lenders for better mortgages for my clients - I'm kidding (or am I?) - you can usually find me visiting with friends or family, writing for this blog, or doing my best to keep from capsizing a dragon boat!

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