Our user-friendly mortgage affordability calculator is a great tool for figuring out the amount you can comfortably borrow for your new home purchase. It’s also good to know how lenders determine the ceiling they will place on credit extended to you. Gross debt service ratio (GDS) and total debt service ratio (TDS) are the two calculations used by lenders for this purpose.
Gross Debt Service Ratio (GDS)
Lenders try to work out how much of your income you would be paying each month to own a particular property, and this constitutes your GDS.
Financial institutions use it as a rule of thumb to give an initial assessment as to whether an individual borrower is already in too much debt. It’s just a rough yardstick, and this ratio does not solely determine the approval of a loan application. GDS can be a good method to screen potential borrowers, especially when combined with other personal information.
Your lender will first estimate your property taxes, yearly mortgage payments, half of your condo dues (if applicable), and also your heating costs. He or she will divide the total of these costs by your gross yearly income. The lender is more likely to have confidence in your capacity to meet your monthly costs of housing if the answer equals less than 32 percent, which is the industry standard.
Total Debt Service Ratio (TDS)
Lenders use the same computation for GDS to come up with your TDS, but will add in all the other monthly commitments you might have, such as credit card minimum payments and loan installments. As with your gross debt service ratio, he or she will divide the sum of these monthly mortgage payments by your gross annual income. The lender now knows you have the cash to meet all your obligations if the answer equals less than 40 percent (industry standard), and you’ll be on target with getting approval for your mortgage.
The difference between GDS and TDS is that the former does not take non-housing related payments into account. Borrowers with high TDS percentages are more prone to struggle to meet their debt commitments than those with lower ratios.
What If My GDS and TDS is Above the Industry Standard?
It might be a good idea to make a larger down payment and/or retire some of your existing debt if either your GDS or your TDS goes over the industry standard. On the other hand, keep in mind that the industry standards are meant to be guidelines, not hard and fast rules.
You may still qualify for a mortgage if you have high-value assets or a high credit score, even if your TDS and GDS are somewhat greater than the industry standards. A larger lender might grant you a mortgage loan if in their view your high credit score, larger down payment, and healthy savings account prove that you can realistically pay the loan on time. The highest allowed GDS is 39 percent, and TDS is 44 percent.