Do you know how much you can afford when it comes to home buying? Let’s discuss borrower’s affordability.
Gross Debt Service & Total Debt Service:
A lender determines a borrower’s affordability by determining their Gross Debt Service (GDS) and Total Debt Service (TDS) ratios. The GDS ratio is a comprehensive measure of a borrower’s monthly housing expenses. The TDS ratio is similar to the GDS ratio; however, it includes all of a borrower’s debt and is not just focused on housing.
Gross Debt Service (GDS) Ratio:
The GDS ratio represents the maximum percentage of a borrower’s gross income to be
allocated to principal, interest, and property tax payments (PIT). The gross debt service
ratio may include heating costs (PITH). A borrower’s current monthly mortgage payment is the primary expense. Other expenses may include monthly property tax payments, home insurance payments, and utility bills. To calculate the GDS ratio, the total monthly expenses are divided by total monthly income.
The GDS ratio can vary between 27% and 32% for lenders in the marketplace. Increased limits may apply under certain situations if a borrower has a high credit rating. GDS for a purchase, excluding heating costs, is calculated as such:
GDS formula = (annual mortgage payment + annual property taxes) divided by the gross
Gross Debt Service (GDS) Ratio:
Example:
Buyer Fred’s income is $65,000 and yearly principal, interest, and tax payments are $20,960. Therefore, $20,960/$65,000 = .32246 or 32.25%.
GDS Ratio for a Condominium:
In condominium purchases, the lender will include a portion of the monthly maintenance
fee in the GDS calculation. The lender will likely use 50% of the fee to ensure the borrower has the capability of paying both the loan payment and the condominium fee, however, lender policies may vary.
GDS for a condominium is calculated as such:
GDS = (annual mortgage payment + annual property taxes + 50% of the annual maintenance fees) divided by the gross annual income annual income
Total Debt Service (TDS) Ratio:
The TDS ratio includes everything in the GDS calculation plus all other debt obligations. The TDS ratio includes charges for principal, interest, and property taxes, plus other debts, including personal loans (such as auto or furniture loans, and credit card debt).
TDS ratios can vary between 37% and 40%. Higher limits may apply in certain situations
given high consumer credit scores. The TDS ratio is calculated by adding all the borrower’s monthly debt and dividing it by their monthly income.
TDS is calculated as follows:
TDS = (annual mortgage payment + annual property taxes + annual total loans) divided by the gross annual income
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