The second important criteria when qualifying for a loan is "debt service" ratio. There are two ratios being considered: gross debt service (GDS) and total debt service (TDS).
Total Debt Service (TDS): Mortgage Payment + Other debt payments + Heat + (1/2 condo fee + leasehold monthly costs if applicable)
The first affordability rule is that your total monthly debt cannot exceed 40% of your monthly income. This includes housing costs and other debts, such as car loans and credit card payments. Lenders add up these debts to determine what percentage they are of your gross household monthly income. This figure is your Total Debt Service (TDS) ratio.
For credit score lower than 680, it must be 40% or less; for score >680, it must be 44% or less.
Gross Debt Service (GDS): Mortgage Payment + Heat + (1/2 condo fee + leasehold costs if applicable)
The second affordability rule is that your monthly housing costs shouldn't be more than 32% of your gross household monthly income. Housing costs include monthly mortgage principal and interest, taxes and heating expenses — known as P.I.T.H. for short. Lenders add up these housing costs to determine your Gross Debt Service (GDS) ratio.
For credit score lower than 680, it must be 32% or less.
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