Debt Servicing: Can you afford your new home?
Once you have proven your income source you now must prove your ability to make your future mortgage payments.
To do this the lender will want to know all your current debts, car loans, lines of credit, and credit cards. All consumer debts will be used in calculating your debt servicing ratios.
All lenders work with your debt ratios to calculate what you can afford when buying your new home. They use two debt ratios:
1) GDS: Gross Debt Servicing
2) TDS: Total Debt Servicing
The first thing lenders look at is your monthly housing costs and this ratio should not be more than 32%. Housing costs include monthly mortgage principle and Interest payments along with the property taxes and the heating expense based on the new home you want to purchase.
If you are buying a condo they also take into consideration 50% of the condo fees.
Lenders add these all up to determine your percentage of your gross monthly income. This figure is known as:
GDS: GROSS DEBT SERVICING
The simple math for this is:
Your gross monthly income (before taxes) $
Your spouse’s gross monthly income $
Any other monthly income, investments and such $
Sub Total all the incomes $
Multiply the Sub total of all incomes by 0.32 to equal your GDS Ratio =
The second rule is taking into account your entire monthly debt load and it should not be more than 40% of your gross monthly income. Having said that most lenders can stretch this to 42% if you have good credit scores over 700 on the beacon score.
This ratio is called the:
TDS: TOTAL DEBT SERVICING
The math for this is:
Add all housing costs, credit cards, car loans, lines of credit and any other debt owed.
Take the total monthly income from the GDS sub total $
Multiply this total by 0.40 to get the TDS =
These ratios are the important ones to all lenders
If your ratios are in line with what I described above and your credit score is decent there is a very good chance you will be pre-approved for your new home.
If the ratios are above these maximum amounts, lenders will scale back your pre-approval amount or may even decline the file altogether. They may also ask for a co-signer to go on the file with you to help provide more stability for the loan.
It is very important to know what your ratios are as you can lower them by doing some simple debt repayment. The best way to lower high debt ratios is either with more income or by paying down debt. Even consolidation is a good thing if it lowers the minimum payment on your debt.
Be aware of your debt ratios when looking to buy a home. If you find this hard to figure out than get a pre-approval done with a mortgage broker or bank.
If you would like to get a pre-approved mortgage now or discuss further please email me at Daryl@maxmort.ca I would be pleased to answer any questions you may have and help you get pre-approved.
Please note I can only help folks in Canada as we are not allowed to do mortgages in the United States.