Understanding Mortgage Qualification Ratio’s
Buying a home is a significant financial commitment, and securing a mortgage approval is a crucial step in the process. Understanding how mortgage qualification works can help you plan and position yourself for success. Lenders need to ensure that borrowers can comfortably manage their payments without putting themselves at financial risk. To reduce the likelihood of missed payments, lenders rely on two key calculations—known as debt service ratios—to determine how much of your income can reasonably be allocated toward housing costs and other financial obligations.
🔍 What Are GDS and TDS?
Think of GDS and TDS as two "budget checks" lenders use to see if you can comfortably afford your mortgage payments along with your other debts. These ratio’s look at your gross income and weigh it against your housing costs (GDS) and your housing costs plus all other debt (TDS).
On a standard mortgage, the maximum GDS is 39% and TDS is 44%. If your ratios are within those limits, you’re more likely to qualify for a mortgage. If you have less than a 20% down payment, these ratios are set in stone. In some cases, if your down payment is more than 20%, some lenders will let you exceed these ratio’s if you have very strong credit, net worth and income. These exceptions are on a case-by-case basis and often come with higher interest rates.
📊 How Are GDS and TDS Calculated?
🏠 GDS Formula
GDS = (Principal + Interest + Taxes + Heat) ÷ Gross Annual Income
💸 TDS Formula
TDS = (Principal + Interest + Taxes + Heat + Other Debt Payments) ÷ Gross Annual Income
Let’s go through what each part means:
Principal & Interest: Your mortgage payments, based on your loan size, contract rate (stress tested) and amortization schedule. The stress test is the rate used to calculate your mortgage payment for qualification purposes only. The stress test rate is the greater of 2% above your contract rate or 5.85%. Your actual payment will be based on your contract rate alone.
Taxes: Property taxes for the home (some lenders allow property taxes after the homeowner’s grant and others don’t)
Heat: Your monthly heating cost (most lenders have a formula they use based on square feet) or actual heating costs if you can obtain that information from the sellers.
Condo/Strata fee: 50% of condo fees must be included (if applicable)
Other Debt: Credit cards and unsecured LOC (3% of balance), car loans, student loans, personal loans, etc.
Gross Income: All your income before taxes (amount used is based on type of employment and income structure)
🧮 Example!
Let’s say you earn $90,000/year and are buying a home. Here are your monthly expenses:
Mortgage (Principal + Interest): $1,800
Property Taxes: $300
Heating: $150
Condo Fees: $400 → Include 50% = $200
Car Loan: $400
Credit Card Balance: $5,000 → Include 3% = $150
Step 1: GDS Calculation
GDS = (1800 + 300 + 150 + 200) ÷ 7,500 (monthly income) = 2,450 ÷ 7,500 = 32.7%
✅ GDS is under 39% – good!
Step 2: TDS Calculation
TDS = (GDS items + 400 + 150) ÷ 7,500 = (2,450 + 550) ÷ 7,500 = 3,000 ÷ 7,500 = 40%
✅ TDS is under 44% – also good!
🚗 What if you Take on more debt? Let’s look at this same scenario again, but with an added car payment of $700
TDS = (GDS items + 400 + 150 + 700) ÷ 7,500 = (2,450 + 1,250) ÷ 7,500 = 3,700 ÷ 7,500 = 49.3%
❌TDS is over 44% – bad!
✅ Final Thoughts
Understanding your GDS and TDS ratios helps you take control of your home-buying journey. By keeping your debts in check and your income steady, you can improve your chances of qualifying for the mortgage you want. Sometimes it’s as easy as:
Waiting to buy a new car
Paying down high interest debt
Increasing your income
Of course there is more that goes in to qualifying for a mortgage than just ratio’s, such as your credit, employment and income stability and the property you are looking at. If you’re uncertain about where your debt ratios stand, I’m here to provide clarity and expert guidance. Let’s review your numbers together and develop a personalized strategy to help you qualify confidently for the home you want.