Questions about the Mortgage Qualification Process
How is a loan application assessed?
Most lenders base their affordability calculations on two traditional debt to income ratios. First, your Gross Debt Service Ratio (GDSR) is based on your monthly housing costs, including mortgage payments, property taxes, heating costs, and 50% of applicable condo fees. Lenders prefer that this ratio does not exceed 32% of your family’s gross monthly income.
Second, your Total Debt Service Ratio (TDSR) is your monthly housing costs plus all other debt (loans, credit cards, lease payments). Lenders prefer that this ratio does not exceed 40% of your family’s gross monthly income.
As part of the mortgage qualification process, your lender will also review other important factors, such as your credit history or credit rating.
What information is needed when applying for a mortgage?
Before you sit down with a lender think about your goals, and your ability to manage new debt. Ask yourself how much you think you may need, and consider how much extra cash you have each month to cover a loan. Also decide if your cash flow is regular enough to permit monthly or weekly repayments.
To help your lender understand your financial situation, bring key documents that:
- Show your monthly income;
- Show your current monthly housing costs or rent;
- Indicate the value of vehicles, properties or savings you may have;
- Confirm the balances and monthly payments of your current debts, including loans, credit cards and lines of credit.
GDS RATIO (Gross Debt Service Ratio):
The percentage of gross annual income required to cover payments associated with housing. Payments include mortgage principal, interest, property taxes and sometimes include secondary financing, heating, condominium fees or pad rent.
TDS RATIO (Total debt service ratio):
The percentage of gross annual income required to cover payments associated with housing and all other debts and obligations, such as car loans and credit cards.
Example – GDS – Gross Debt Service Ratio
| Monthly mortgage payment: (principal and interest)* |
$1,191.84 |
| Property taxes: (monthly) | $150.00 |
| Heating costs: (monthly) | $105.00 |
| Other:** | $50.00 |
| Total monthly payments: | $1,496.84 |
| Gross monthly household income: | $6,000.00 |
GDS= (TOTAL MONTHLY PAYMENTS /Gross Monthly Income) x100
GDS=($1,496.84/$6,000) x 24.95%
* Principal and interest must be based on the total insured loan amount, including CMHC insurance premium (if you choose to add the premium to your mortgage and not to pay the premium up front). Mortgage payment is based on a $200,000 mortgage, 5.25% interest rate, 25 year amortization.
** If you are purchasing a condominium, you must include 50% of the monthly condominium fee. If the mortgage is for a mobile home (chattel mortgage) include 100% of the monthly site (pad) rent.
Example – TDS – Total Debt Service Ratio
| Total monthly housing payments: (from GDS calculation):* |
$1,496.84 |
| Other debts: (personal loans, car loans, credit cards, etc.): |
$350.00 |
| Total monthly debts: | $1,846.84 |
| Gross monthly household income: | $6,000.00 |
TDS = Total monthly payments (x 100)
Gross monthly income
TDS = $1,846.84 (x 100) = 30.78%
$6,000.00