Buying a house is not easy and the complex mortgage industry doesn’t make it any easier.
There are few factors that go into whether a bank or private lender will give you a mortgage. Some people think that as long as you have a good income getting a mortgage will be easy, but that is not necessarily the case.
Banks and other lenders rely heavily on debt servicing ratios to decide whether a person is eligible for a mortgage and how much they will lend. Gross Debt Servicing and Total Debt Servicing are calculated with every mortgage application to decide how much the lender is willing to finance.
What is Gross Debt Servicing?
Gross Debt Servicing (GDS) is a key debt servicing ratio that lenders look at to see whether they will finance a mortgage on a property. The GDS is calculated by adding up all your housing related costs (mortgage agents call this PITH, principal, interest, taxes, heat) and dividing it by your net taxable income. In Ontario your PITH generally cannot represent more than 39 per cent of your income.
What is Total Debt Servicing?
Total Debt Servicing (TDS) is another important debt servicing ratio that lenders look at. It is calculated by adding up you PITH plus any other debts or legal financial obligations you might have and dividing it by your net taxable income. This includes credit cards, lines of credit and other loans. Child support payments and alimony are legal obligations that are also included in the TDS calculation. In Ontario TDS cannot be more than 44 per cent of your income.
Why do lenders look at both?
GDS does not always paint an accurate picture of whether a person can afford a home. Sometimes, even though a person’s income may be high enough to support the mortgage their other debts and legal obligations can get in the way. If someone make $100,000 but they are legally obligated to pay half of that in alimony and child support, it doesn’t leave a lot to make the TDS work. That’s why lenders look at both GDS and TDS when figuring out how much of a mortgage they will finance.
Why work with a mortgage broker?
Mortgage brokers are your best ally when it comes to helping you navigate the mortgage industry and finding the right mortgage for you. They understand the ins and outs of TDS and GDS and also have connections with private lenders that the general public doesn’t have access to. These lenders can be more flexible than banks and give you a better chance of getting a mortgage for the house you want.
For example, some lenders will allow payers of child support or alimony to deduct the amount from their income rather than including it as a liability in the TDS. This can have a positive effect on your TDS and help you secure the financing you need for your future home.
That being said, a good mortgage broker will never advise you to go for a house that is completely out of your price range. They will help you look at the numbers realistically and advocate for you with lenders and banks to help you secure a home that you can both afford and love.