There are many different factors to take into consideration when purchasing a home, including its location, size, and affordability. Affordability, is obviously one of the biggest factors that the lender will consider when you apply for a mortgage. However, the way a lender determines affordability and the way you determine affordability are probably very different. Therefore, it's important to get a good understanding of how lenders calculate the largest possible amount they will loan you.
To a lender, affordability translates into two things: Gross Debt Service Ratio (GDS) and Total Debt Service Ratio (TDS). GDS and TDS are the two mortgage formulas that the lenders will use to determine how much money they are willing to lend you.
Gross Debt Service (GDS)
A GDS ratio is the percentage of your income needed to pay all of your monthly housing costs, including principal, interest, taxes, and heat (PITH). You’ll also need to include 50 per cent of your condo fees, if applicable. Most lenders abide by a general standard of 35%, so your GDS should be lower than that to qualify for a mortgage. To calculate your GDS ratio, you’ll need to add all of your monthly housing-related costs and divide it by your gross monthly income. Then multiply that sum by 100 and you’ll have your GDS ratio.
Total Debt Service (TDS)
Your TDS ratio is the percentage of your income needed to cover all of your debts. The debt ratio formula calculation is the same as that of the GDS, except all of your monthly debts are taken into consideration. This includes car payments, credit cards, alimony, and any loans. The industry standard for a TDS ratio is 42%.
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