There are many factors involved when an underwriter reviews your application for a mortgage loan. This article will shine some light on how you can calculate two qualifying ratios on your own before you even start the mortgage application process.
First, let's look at the key pieces of data you'll need to calculate these ratios:
Monthly Housing Expenses
Your monthly housing expenses primarily consist of the monthly principal and interest payments identified in your mortgage agreement. In addition, housing expenses include property taxes and home insurance. For some people, condo/management fees would also be applicable. The sum of all these figures is your monthly housing expenses.
Monthly Personal Debt Obligations
Your monthly personal debt obligations include all of the payments you make to service your personal debt, from all credit sources. Examples could be credit card payments, student loans, car payments and payments on lines of credit. For revolving charge accounts where the balance stays the same every month, 5% of the balance is typically used to calculate the monthly payment. The sum of all your monthly debt service payments is your total monthly personal debt obligation.
Your income can be derived some several sources. The most important thing to have is documentation from the income source, which is typically your last two years Notice of Assessments and recent pay stubs. Here is a brief list of typical income sources:
Now that you've calculated your monthly housing expenses, personal debt obligations and income, you can use this data to determine two important qualifying ratios that underwriters use when considering your mortgage loan application. These ratios are called GDS (Gross Debt Service) and TDS (Total Debt Service).
GDS is the sum of your monthly housing expenses and heating costs divided by your monthly income. For cases where condo fees are applicable in the housing expenses figure, you only consider 50% of those fees in this calculation. The resulting figure should be no higher than 0.32, or 32%.
TDS is the sum of your monthly housing expenses (still only 50% of condo fees, if applicable), heating costs and personal debt obligations divided by your monthly income. The resulting figure should be no higher than 0.4, or 40%.
If your answers are higher than the guidelines written here, then in order to be approved for a mortgage, chances are you'll have to save more money for a down payment or pay off some existing debt. However, every case is unique, and if you have a high credit score or some valuable assets, that may help you get approved. If you calculate your ratios before meeting your broker or bank representative, you'll have a much better idea of your personal financial situation and how likely you are to be approved for a mortgage. For those who aren't likely to be approved, these calculations will give you a better idea of the things you'll need to work on in order to own to a home!