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Lending institutions use Gross Debt Service and Total Debt Service ratios to estimate borrowers' ability to repay mortgages.
These ratios are universally accepted within the industry. Let's see how they work.
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| What Are These Ratios |
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Gross Debt Service (GDS) is the amount of money spent monthly for housing. GDS includes mortgage payments,
municipal taxes and heating costs.
Gross Debt Service Ratio reflects what percentage of the family total monthly income is used for the GDS. Depending on lender's policy the maximum allowed GDS ratio is in a range of 30% - 32%.
Total Debt Service (TDS) is the amount of money spent monthly on housing and other debts like loans,
car payments, credit cards payments, etc.
Total Debt Service Ratio is the percentage of the family
total monthly income which is used for the TDS.
Most lenders assume that the TDS ratio should not exceed 42% of the family gross monthly income.
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| How Much Can You Borrow |
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The lender will determine monthly amounts of your GDS and TDS. They are the maximum allowed GDS and TDS ratios expressed as dollar amounts
specific to your total family income.
Next, taxes and the heating cost are subtracted from your GDS and TDS. At this point your GDS income available for mortgage payments is already calculated. Then your TDS amount is further reduced by other debts you may have to define the second eligibility figure. If you buy a condo 50% of the monthly fee is deducted from the eligible monthly amount. The lower value of either GDS or TDS amount is what you may qualify for.
 How GDS/TDS eligibility is calculated |
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Total Monthly Household Income = $7,000
Maximum Allowed GDS Ratio = 30%
| | Gross Debt Service | 30% x 7,000 = $2,100
| | - Property Tax | - $200 | | - Heating Cost | - $110
| | Available Monthly Income ............................. $1,790 |
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Total Monthly Household Income = $7,000
Maximum Allowed TDS Ratio = 42%
| | Total Debt Service | 42% x 7,000 = $2,940 | | - Property Tax | - $200
| | - Heating Cost | - $110 | - Credit Cards
- Line of Credit
- Car Loan
- Student Loan
| - $200
- $200
- $200
- $300
| | Available Monthly Income ........................... $1,730 |
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| The qualifying monthly mortgage payment is $1730 - the lower value of the two numbers calculated. |
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| Can You Get What You Need |
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If you have a particular home in mind and already know how much money you need to borrow the process can be reversed.
In that case ratios will be calculated for the amount required. The lender will determine your GDS and
TDS ratios which must not be more than allowed maximum values.
You have to meet both GDS and TDS criteria to obtain the amount which you need.
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| How GDS/TDS Ratios are estimated |
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Gross Monthly Household Income = $ 7,000
Maximum Allowed GDS Ratio = 30%
| Monthly Mortgage Payment
+ Property Tax
+ Heating Cost | $1,300
$200
$110
| | Gross Debt Service (GDS) | $ 1,610
| GDS Ratio = GDSx100 / Gross Monthly Income
GDS Ratio = 23% ($1,610x100 / $7,000) |
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Gross Monthly Household Income = $7,000
Maximum Allowed TDS Ratio = 42%
| Mortgage Payment
+ Property Tax
+ Heating Cost | $1,300
$200
$110
| | Gross Debt Service (GDS) | $1,610
| + Credit Cards
+ Line of Credit
+ Car Loan
+ Student Loan
| $200
$200
$200
$300
| | Other Debts Total | $900 | | Total Debt Service (TDS)
| $2,510
| TDS Ratio = TDSx100 / Gross Monthly Income
TDS Ratio = 35.8% ($2,510x100 / $7,000) |
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| Monthly mortgage payments of $1300 can be approved since each calculated ratio is smaller than maximum allowed values. |
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