Calculate Your Mortgage Amount
Lenders use Gross Debt Service and Total Debt Service ratios to determine if you can manage mortgage payments. These ratios show how your debt relates to your income. You'll only get a mortgage you want when your ratios stay within specific limits.
What Are TDS And GDS Ratios
Gross Debt Service ratio is the percentage of a total monthly income used to cover housing expenses, incuding mortgage payments, municipal taxes and heating. It shouldn't be more than 32% of your gross monthly income.
Total Debt Service ratio is the percentage of a total monthly income spent on housing plus any other debts (like loans and credit card payments). It must not exceed 40% of your gross monthly income.
How Much Mortgage Can You Get
Let's explore an example of how mortgage payments can be calculated. Property tax and heating cost are usually rough estimates.
$1,550 per month meets TDS and GDS criteria. This is a mortgage payment you qualify for. Reach out for a mortgage calculator like this one to learn about your principal.
Pick your term and amortization, and adjust the mortgage amount until your monthly payment equals to $1,550. This is the largest mortgage amount you can borrow.
If you add your down payment to that amount, you will get the price of the most expensive home you can afford.
How Lenders Assess You
When you tell a lender what mortgage you want, they will calculate monthly payments specific to the amount you want to borrow and motgage conditions you have chosen.
Now the ratios will be calculated for the monthly amount required. They must not be more than allowed maximum values. You have to meet both GDS and TDS criteria to qualify.
This is how the same example looks like from the lender's perspective:
Your GDS and TDS ratios are acceptable. There's no surprise because you already knew from your own computations you asked for a mortgage you would qualify for.
What Are Good Ratios
It's in your best interest to get your ratios below maximum levels as much as you can. Most lenders regard TDS and GDS ratios much safer if they are no more than 36% and 28%.
When you move your numbers into this comfort zone, you will have a good reason to believe you are ready to buy a property.