Understanding Debt Service Ratios
One of the primary considerations in determining mortgage
product suitability is an applicant’s debt service ratios. The Mortgage Industry looks at the current
income level for the applicant(s) and puts a cap on the maximum amount of money
to be advanced for mortgage purposes.
There are two ratios used in the underwriting process; Gross Debt
Service (GDS) and Total Debt Service (TDS).
Gross Debt Service Ratio
The GDS is determined by using the following calculation:
GDS = Principle & Interest + Taxes + Heat (PITH) + Condo
Fees (if applicable) / Total Monthly Gross Income
The P & I calculation is obtained from the monthly
payment for the desired interest rate and mortgage amount including any applicable
mortgage insurance premiums (CMHC, Genworth, or Canada Guarantee).
The monthly property taxes must be the current Municipal
billing level. Get this from the Listing
Realtor or Tax Roll. It should be
included on the Broker MLS document.
Many Lenders use set amounts for the monthly Heat
requirement. This amount is based on the
square footage of the subject property and is not necessarily the same amount
of expense you will pay when living in the home. This amount is for mortgage qualification
purposes only so obtaining the exact heating amounts from the home owner is not
necessary. Please check with your
Mortgage Professional.
The Condominium Fees are the current monthly requirement as
set by the property Board of Directors.
Get this from the Listing Realtor.
It should be included on the Broker MLS document.
This ratio can be no greater than 35% for applicants with
Beacon Scores lower than 680 or 39% for applicant’s with Beacon Scores higher
than 680.
Total Debt Service Ratio
The TDS is determined by using the following calculation:
TDS = PITH + Condo Fees + All other monthly obligations /
Total Monthly Gross Income
All other monthly obligations include Credit Cards, Car
payments, Student Loans, Child or Spousal Support payments, personal loans
etc. It does not include items like cell
phones and car or home insurance.
This ratio can be no greater than 39% for applicants with
Beacon Scores lower than 680 or 44% for applicants with Beacon Scores higher
than 680.
Please note that while the above stated ratio values are
industry accepted standards, some Lenders have different ratios to support
their products.
Examples
Now that we've defined the framework, let’s look as some
examples to see the effect on GDS and TDS.
Example #1
Down payment - $9,250 plus 1.5% for closing costs
(approximately $2,800 in this example)
Subject Property - $185,000 Single Family Dwelling 1,165 sq.
ft., Property Taxes - $2,000
Current 5-year “A” Interest Rate – 2.89%, 25-year
amortization
Applicant #1
Annual Income: $40,000 – Full time regular employment for past
5 years, Credit Score: 674, Visa Balance: $5,200, Car Payment: $325/month,
Student Loans: $175/month. For mortgage qualification purposes, 3% of outstanding
credit card payments are used. All other
obligations are taken at their contracted monthly rates. Therefore the total monthly debt payment is $656
for Applicant #1.
Applicant #2
Annual Income: $26,000 – Full time regular employment for
past 2 years, Credit Score: 700, Visa Balance: $2,900, Car Payment: $245/month. Therefore the total monthly debt payment is $332
for Applicant #2.
Crunching the Numbers
Based on this scenario, the GDS calculation would be as
follows:
GDS = Principle & Interest + Taxes + Heat (PITH) + Condo
Fees (if applicable) / Total Monthly Gross Income
GDS = $847.73 + 166.67 + $85 / $5,500 = 19.99%
Based on this scenario, the TDS calculation would be as
follows:
TDS = PITH + Condo Fees + All other monthly obligations /
Total Monthly Gross Income
TDS = PITH ($847.73 + 166.67 + $85) + All other monthly
obligations ($998) / $5,500 = 38.13%
Therefore, this deal would work as the GDS and TDS maximum
ratios for Credit Scores less than 680 of 35% and 42% have not been
exceeded. These applicants are within
their level of affordability.
Example #2
Down payment - $175,000 plus 1.5% for closing costs (approximately
$6,000 in this example)
Subject Property - $575,000 Single Family Dwelling 3,600 sq.
ft., Property Taxes - $6,000
Current 5-year “B” Stated Income Interest Rate – 3.09%,
25-year amortization
Applicant #1
Annual Income: $80,000 – Business owner for past 7 years, Credit
Score: 764, Visa Balance: $17,000, Car Payment: $725/month, Child Support
Payments for the next eight years: $450/month. For mortgage qualification
purposes, 3% of outstanding credit card payments are used. All other obligations are taken at their
contracted monthly rates. Therefore the
total monthly debt payment is $1,685 for Applicant #1.
Applicant #2
Annual Income: $26,000 – Full time regular employment for
past 4 years, Credit Score: 700, Visa Balance: $5,900, Car Payment: $560/month. Therefore the total monthly debt payment is $737
for Applicant #2.
Crunching the Numbers
Based on this scenario, the GDS calculation would be as
follows:
GDS = Principle & Interest + Taxes + Heat (PITH) + Condo
Fees (if applicable) / Total Monthly Gross Income
GDS = $1,915.62 + 500 + $115 / $8,833 = 28.65%
Based on this scenario, the TDS calculation would be as
follows:
TDS = PITH + Condo Fees + All other monthly obligations /
Total Monthly Gross Income
TDS = PITH ($1,915.62 + 500 + $115) + All other monthly
obligations ($2,422) / $8,833 = 56.07%
Therefore, this deal would NOT work as the GDS and TDS
maximum ratios for Credit Scores greater than 680 of 39% and 44% have been
exceeded.
While these applicants are
within their level of affordability for the GDS (housing) calculation, their
additional monthly obligations bring their TDS levels beyond accepted levels for
mortgage financing approvals.
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