How banks/lenders weigh your mortgage application

Understanding the Gross Debt Service Ratio (GDS) and the Total Debt Service Ratio (TDS) and how it affects your mortgage application.

Before a lender approves your mortgage application, they will attempt to quantify how your debt affects your finances and predict your ability to make mortgage payments. They measure your affordability using two ratios: the Gross Debt Service Ratio (GDS) and the Total Debt Service Ratio (TDS).

Gross Debt Service Ratio (GDS)

The GDS looks at the percentage of your income that is needed to cover your required monthly housing costs; this includes your monthly mortgage payments, property taxes,heating costs, and 50% of your condo maintenance fees (if applicable).Generally, this percentage must not exceed 32% of your gross monthly income, to qualify for a mortgage. For example, if your gross monthly income is $3,500,you should be spending less than $1,120 on monthly housing expenses.

Your GDS ratio max limit: $3,500 x 32.0% = $1,120

Total Debt Service Ratio (TDS)

The TDS ratio takes the GDS ratio one step further, by including ALL debt obligations into the calculation, such as car payments, credit card debt, lines of credit, and alimony (if applicable). The percentage of your income that is needed to coverall monthly obligations must not be greater than 40%. For example, if your gross monthly income is $3,500, you should not be spending more than $1,400 per month.

Your TDS ratio max limit: $3,500 x 40.0%= $1,400

Both the GDS and TDS are tools used to measure your credibility and risk. The guideline limits are enforced by the Office of the Superintendent of Financial Institutions (OSFI),which is the primary regulator of banks and other financial institutions in Canada.

Falling outside the limits

Can you still get approved if the bank determines your GDS and TDS ratios are just outside the upper limits?

“The limits to the GDS and TDS ratios aren’t set in stone; however, banks do treat them as a hard guideline,” said SteveLevine, a mortgage broker with True North Mortgage. “Every lender is a little different, in terms what they are willing to accept beyond the max limits. Some banks will accept TDS ratios of 41% or 42%, depending on the situation, so there is a bit of wiggle-room. However, no bank will accept a TDS ratio that is 5% above the limit.”

When asked on what mortgage applicants need in order to get an exception with high GDS/TDS scores, Mr. Levine says that consumers need “clean files” with strong credit scores.

“Mortgage brokers have unique relationships with lenders, so if I have a client that is slightly above the limit, I might call a mortgage underwriter with a particular bank and explain my clients’ case, so long as I believe the client has a quality file – one that the lender will find appealing.”

If you find yourself outside the GDS and TDS limits, you may also implement four strategies to lower your GDS and TDS percentages, before submitting your mortgage application:

1) Increase your down payment amount

2) Reduce your overall debt

3) Increase your gross household income (i.e. add on a spouse’s income)

4) Choose a less expensive property

Understanding your Gross Debt Service Ratio and Total Debt Service Ratio is important before you plan to buy a home, because these ratios are used to determine your credit worthiness to lenders.


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