How do you determine how much you can afford? I will provide you with insight on how banks and lenders determine affordability. There are 2 important ratios to consider:
- Gross Debt Service (GDS)
- Total Debt Service (TDS)
GDS = (Mortgage principal + mortgage interest + 50% of condo fees (if applicable) + property tax + heat )/Gross income
TDS = (GDS + other debts such as car payment, lines of credit, credit cards and investment loans) / Gross income
Expenses such daycare, home insurance, cable, internet and cell phone are not included in the above ratios. The GDS/TDS ratios vary from one lender to another due to their internal underwriting guidelines. Furthermore, the ratios are more stringent for borrowers with less than 680 credit score. Generally speaking, a GDS/TDS ratio of 32/40 would increase the likelihood of getting a mortgage approved. For borrowers with a credit score of 680 credit score or higher, the TDS requirement can go up to 44.
In summary, lenders have various levels of credit risk and they look at unsecured debt (credit cards & unsecured lines of credit) differently. Another point to take away is strong credit score applicants have a better opportunity of getting approved for a larger mortgage amount.
It is best to consult with a mortgage professional prior to starting the home buying process to ensure one is qualified. To determine your affordability and financial goals, please click contact me.