One of the key factors in applying for a mortgage is your debt ratio. Mortgage lenders use this debt ratio to figure out what you qualify for in terms of a mortgage.
When determining if you can afford a mortgage lenders will look at two different debt ratios.
GDS Ratio (Gross Debt Service Ratio) – this is the ratio of your mortgage debt into your income. Your GDS ratio includes the following:
• Mortgage payment (most lenders use a stress test rate for this)
• Property taxes
• Strata fees (if condo)
The GDS ratio is calculated by taking the total of the above items and dividing it into your income.
If your credit score is less than 680 then the GDS Ratio has to be less than 35% of your income. If your credit score is greater than 680 then it can go as high as 39% of your income.
TDS Ratio (Total Debt Service Ratio) – this is the ratio of all your debt into your income. Your TDS ratio includes all payments from your GDS ratio above plus all other debt payments including:
• Credit cards – lenders use a payment of 3% of the balance regardless of what the actual payment is. Therefore it is important to limit what balances you carry on credit cards.
• Unsecured lines of credit – lenders use a payment of 3% of the balance regardless of what the actual payment is.
• Secured lines of credit – if you have a line of credit secured by your home the payment is most likely interest only. However, lenders will use a payment of the balance owing amortized over 25 years at the stress test rate. Some lenders will use the payment based on the limit rather than the balance owing so we have to make sure this does not impact your approval.
• Personal loans – lenders will use the payment shown on the credit bureau.
The TDS ratio is calculated by taking the total of the above items and dividing it into your income.
If your credit score is less than 680 then the TDS Ratio has to be less than 42% of your income. If your credit score is greater than 680 then it can go as high as 44% of your income.
As you can see from the above there are different ratios based on different credit scores. Also, in many circumstances lenders use higher payments than what are actually shown on your bureau.
With regards to your income most lenders also follow a couple of general guidelines:
• If you are an employee, lenders will use your guaranteed hours times your guaranteed wage.
• If you earn bonus or overtime income then they will use a two year average of your income.
• If you are self-employed as a sole proprietor then lenders will use a two year average of the net income on your tax return plus 15%.
• If you are self-employed and incorporated then lenders will use a two year average of the net income on your tax return.
These are just general guidelines and there are circumstances where we are able to use more income than indicated above.
We suggest contacting our office if you are looking to get a figure pinned down for what you qualify for. There are many variables in determining both income and debt payments and we can give you the exact details you need.
If you need more information regarding mortgages or if you need any advice on your personal situation please contact our office at 604-556-3893 or email at [email protected]
For more information on our mortgage products and your preferred Abbotsford Mortgage Broker please visit our website at www.ymscanada.ca.