It’s simple to get carried away with all of the different mortgage options that are available. Establishing a debt-to-income ratio and utilizing online mortgage calculators can help you on your way, as well as meeting with a mortgage broker. These options will assist you so that you don’t end up with a mortgage that you can’t afford.
When meeting with a lender, they will use a debt-to-income ratio in order to establish how much you can afford in mortgage payments. A debt-to-income ratio is the percentage of your income that goes towards paying debts. This is divided into two categories.
The first is a Gross Debt Service (GDS) ratio. which divides your housing expenses by your income. Housing expenses include mortgage payments, heating costs, property taxes, and half of your condo fees (if applicable).
For example, using a mortgage of $1200 per month, you add that to your property tax, heating costs, and half of your condo fees (if applicable), and divide by your gross monthly income. This will give you your GDS.
The second category is a Total Debt Service (TDS) ratio. This divides your housing expenses plus recurring debt by your income. Recurring debt can be classified as credit card payments, car payments, and other
In order to determine your TDS, you add the example monthly mortgage payment of $1200 plus your property tax, heating costs, half of your condo fees (if applicable) and your recurring debt, and finally divide that amount by your gross monthly income.
The only difference between the two is that a TDS also includes recurring debt. From a borrower’s perspective, the TDS is more important since it will demonstrate whether you can afford the monthly payment with all of your debt. But from a lender’s perspective both of these categories are equally important when being qualified for a mortgage.
When qualifying for a mortgage, the lender generally looks at a debt-to-income ratio of 32/40. The first percentage is your GDS, and the second is your TDS. As long as your GDS and TDS figure are below 32 per cent and 40 per cent, you should be able to make your payments.
Lately lenders have come up with new guidelines and products and they sometimes allow for a debt-to-income ratio of 35/42, says Walter Koziej, mortgage specialist at Mercury Mortgages Inc. “If the credit is very good, they will look at a TDS of 44 per cent and no GDS requirement. Some banks, though, still use the old guidelines.”