When completing a mortgage application, there are 3 main factors that are looked at to ensure borrowers qualify. 2 of these factors are ratios helping determiner the borrower’s affordability and the 3rd factor is credit.
Gross Debt Service aka GDS
Gross debt service is a ratio that calculates the expenses of owning the home. This includes the mortgage payment, heat, property taxes and if buying a condo, ½ the monthly condo fees are included as well. After adding up the expenses we divide that by your income to determine the ratio. In order to qualify under ‘insured’ or “insurable” guidelines, this ratio generally cannot exceed 36-39%.
Total Debt Servicing aka TDS
Total debt service is a ratio that calculates all the same housing costs PLUS all your monthly finance expenses, such as lines of credit, car payments, credit cards, student loan etc. divided by your income. In order to qualify under the “insured” or “insurable” guidelines, this ratio cannot exceed 42-44%.
Credit scores have a large impact in showing your credit ‘worthiness’. When applying for a mortgage your credit report will be run to help identify how well you manage borrowed money. Ie. Credit cards, lines of credit etc. Scores range between 300-900, 300 being poor and 900 being excellent. The higher your score the better chance you’ll be approved and given opportunity for lower available rates. The lower your score it’s likely you will be given a higher rate or even declined.
When obtaining a pre-approval 90% of the time it is automatic, focusing on these 3 factors. To learn more in depth qualifying guidelines that lenders look through to determine the overall approval, click here!
If you have questions regarding qualifying for a mortgage or interested in buying your first home, contact me today!