How do mortgage lenders decide how much to pre-approve you for?
Mortgage lenders will assess affordability for you too – they follow precise measuring guidelines to determine how much of a mortgage you are qualified to carry. Their method is pure arithmetic – they remove the emotion from the calculation. They calculate two very important ratios.
Your GDSR (Gross Debt Service Ratio). This is the sum of your mortgage, taxes. heating bill and half of your condo fees, if applicable, as a percentage of your gross income. Your TDSR (Total Debt Service Ratio). Includes ALL your other monthly debt obligations (credit cards, student loans, car payments etc.) combined with your housing costs as a percentage of your gross income.
Gross Debt Service Ratio (GDSR)
This refers to principal, interest, property taxes, and heating costs – in short, the costs of owning your home. If applicable, fifty percent of condo fees are added to this equation. To figure out our GDSR, we will take the household’s gross income (how much money you make from all income sources before any taxes are taken off) and divide these home ownership costs by that number.
Most lenders want your GDSR to be at or under 39%. For example, if you are looking to get a $1,000-per month mortgage payment, and your heating bill is $1,800 per year, while you pay $3,000 in taxes, then your cost (for mortgage purposes) for the year is $16,800.
You would have to earn at least $52,500 per year in order for lenders to consider you for this hypothetical home under most circumstances.
Total Debt Service Ratio (TDSR)
The second rule of thumb is your entire monthly debt load should not be more than 44% of your gross monthly income. Basically, the lender will take the number you used when you figured out your annual housing costs (PITH) and add any other debt that you have. This includes any car loans, credit card debt, alimony, child support, and any other loans.