Basics of mortgage debt ratios

How the TDS and GDS are calculated

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Basics of mortgage debt ratios (Getty Images / Nigel Carse)

Basics of mortgage debt ratios (Getty Images / Nigel Carse)

Typically, mortgage lenders use the “Five C” rule when analyzing someone’s ability to afford a mortgage:

1) Capacity to repay (your income)
2) Current economic conditions (your profession’s current economic status as well as your city and country’s economic situation)
3) Capital put down (the down payment you provide, which is the amount of equity you’re offering to secure the asset)
4) Collateral (what the home is worth)
5) Character (your history of paying off debts, otherwise known as your credit history)

To qualify for a mortgage, lenders will examine two ratios:

#1. The GDS: Gross Debt Service is the percentage of the borrower’s income that is needed to pay all required monthly housing costs (mortgage payments, property taxes, heat and 50% of condo fees).
#2. The TDS: Total Debt Service is the percentage of the borrower’s income that is needed to cover housing costs (GDS) plus any other monthly obligations that an individual has, such as credit card payments and car payments.

Keep in mind, however, that these ratios are used by lenders to assess your debt load potential—it should not be used as a way to determine if your debt loan is manageable. That’s because these debt ratios do not take into consideration everyday expenses. So, even if you are comfortably under the 32% GDS threshold or the 40% TDS threshold when it comes to mortgage, property taxes and heating costs, you may still struggle to cover your various monthly expenses.

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3 comments on “Basics of mortgage debt ratios

  1. Hi Romana,

    If I own a rental property, which debt ratio does that get included in? GDS or TDS or both?

    In other words, which debt ratio do you add the rental property mortgage payment, rental income, taxes and heat to?

    Thanks

    Reply

  2. Anyone? Bueller?

    Reply

    • Hi Bob,

      Thanks for your question. Put simply: a rental property earnings and expense will be added to your TDS.

      Reply

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