Debt service ratio

Transcription

If you’re shopping for a home, you’re probably asking “how much can I afford?” So it’s important to know how lenders will determine your maximum affordability. We’ve brought in mortgage agent Drew Donaldson to walk you through two calculations: gross debt service ratio, and total debt service ratio. Lenders use two formulas to determine whether you can afford a home. First is gross debt service ratio, or GDS. Now, let’s run through an example of GDS. First, you have your mortgage payment. Then, you have your property taxes. Finally, you have your monthly heating cost. Now, if you’re buying a condo we’d actually take half that maintenance fee and add that in, but because you’re buying a home we’re gonna run with this. Now last, we have what your income is. So that’s a monthly income – five-thousand-four-hundred-and-seventeen – that annualizes to sixty-five-thousand dollars a year and gives you a final GDS of twenty-eight-point-eleven per cent. Now, since your GDS is of twenty-eight-point-eleven per cent it falls within the industry standard of thirty-two per cent. Before you’re approved for a mortgage, however, the lender also calculates your total debt service ratio, or TDS. Now, TDS is very similar to GDS although it takes into account some very important other debts that the client happens to have including, for this example, a car payment. Also this client happens to have a student loan. Now if they had alimony, credit cards, that type of thing – it would be included in this as well. Now, we take all of this and divide it by the income which gives us thirty-six-point-six per cent TDS. When referring back to the TDS industry standard of forty per cent, we can now see that this client would be able to afford this property according to her TDS of thirty-six-point-six per cent. Since this client falls well within the industry standard of both GDS and TDS, they’re well on their way to being approved for a mortgage.