How Does the Bank Determine Your Maximum Affordability?

Video #2 – Gross Debt Service Ratio and Total Debt Service Ratio

It’s a good idea to understand how the bank/lender will calculate the maximum amount they will loan you for a mortgage. The two calculations a bank/lender calculates are: your gross debt service ratio (GDS) and your total debt service ratio (TDS). To see how both calculations work, watch the video and read more below.

Gross Debt Service Ratio (GDS)

To calculate your GDS, lenders try to figure out how much you would be paying each month to own a particular property. First, the lender will estimate your monthly mortgage payment, property taxes, and utilities. The lender will then add that up and divide it by your gross monthly 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 Ratio (TDS)

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 minimums on any credit card debt. So, the lender adds together your monthly mortgage payment, property taxes, utilities and debts, and divides the total by your gross monthly 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 happens If I’m Over the Industry Standard?

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.

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