When applying for a mortgage, one of the things lenders look for is whether or not the person/people applying for a mortgage can afford the mortgage payments. Makes sense, right? Obviously if they’re going to lend someone money to purchase a house, they want to be sure they can afford the payments each month.
There are two “debt service ratios” lenders look at when evaluating a mortgage application.
First, there is the Gross Debt Service (GDS) Ratio. This is the percentage of gross income (income before taxes) required to cover monthly payments associated with housing costs. This includes costs like mortgage payments (including principal and interest), taxes, heating costs and condominium fees. Many lenders require this percentage to be no more than 32% of the gross monthly income.
So if someone had a mortgage payment of $1200/month, with estimated taxes of $250/month, along with $100/heating (=$1550), the person/people applying for the mortgage would need to earn approximately $58,000/year before taxes to meet most GDS ratio requirements.
The other debt service ratio lenders look at when evaluating a mortgage application is the Total Debt Service (TDS) Ratio. This is the percentage of gross income needed to cover monthly payments for housing and all other debt and financing obligations. Many lenders require this percentage to be no more than 40%-44% of the gross monthly income.
Using the numbers from the first example (a mortgage payment of $1200/month, with estimated taxes of $250/month, along with $100/heating), and add to that a car payment ($300) and a student loan ($250), we’d have a total of $2100 in monthly expenses. This means the person/people applying for the mortgage would need approximately $62,500 in gross yearly income to meet a 40% TDS ratio requirement.
Sound a little complicated? It can be. And it’s made even more difficult by different lenders having different target ratios, and even different ways of measuring debt and payments.
Let your favourite mortgage broker give you a hand. We deal with these lenders (and their crazy, complicated ratios and requirements) on a daily basis, and most of the time our services are 100% free to our clients. If you’re getting ready to purchase your first home, looking to refinance the one you’re in, or simply looking to negotiate a better rate when your current mortgage comes up for renewal, contact your favourite mortgage broker – we’d be more than happy to help.
