The GDS ratio calculates the portion of a borrower's gross income required to cover housing-related expenses. These expenses typically include mortgage principal and interest payments, property taxes, heating costs, and, if applicable, half of condo fees.

Calculation Example: Suppose a borrower earns $80,000 annually and has housing-related expenses totaling $24,000 annually, including mortgage payments ($15,000), property taxes ($4,000), heating costs ($3,000), and half of condo fees ($2,000). The GDS ratio would be calculated as ($24,000 / $80,000) * 100 = 30%.

Lender Guidelines: Lenders often prefer a GDS ratio below 35% to ensure manageable housing costs but will accept 39% and higher as long as borrower has exceptional credit and/or lower LTV. A higher GDS ratio may signal potential financial strain, impacting a borrower's eligibility for a mortgage. Most insured and insurable mortgages will allow a maximum of 35% GDS for credit scores below 680 and 39% for credit scores above 680. We will discuss beacon scores and credit scores in more detail in a later chapter.

Total Debt Service (TDS) Ratio

The TDS ratio considers not just housing-related expenses but also other debts and financial obligations a borrower has. In addition to the costs factored into the GDS ratio, the TDS includes payments for credit cards, car loans, student loans, and any other outstanding debts and mortgages.

Calculation Example: Expanding on the previous scenario, let's assume the borrower has additional debts, such as credit card payments ($6,000 annually) and a car loan ($3,000 annually). The total annual debt obligations sum up to $33,000. If this borrower earns $80,000 annually, the TDS ratio would be ($33,000 / $80,000) * 100 = 41.25%.

Lender Guidelines: Lenders typically prefer a TDS ratio below 42-44%. This includes both housing-related and non-housing-related debts. A higher TDS ratio indicates higher financial obligations relative to income, potentially impacting a borrower's ability to secure a mortgage. Most insured and insurable mortgages will allow a maximum of 42% TDS for credit scores below 680 and 44% for credit scores above 680.

Significance in Mortgage Approval

Both GDS and TDS ratios serve as critical indicators of a borrower's financial capacity to manage mortgage payments and other debt obligations. Lenders evaluate these ratios to assess risk and determine a borrower's eligibility for a mortgage.

Understanding and optimizing these ratios is crucial for prospective homeowners. Managing and minimizing debts, estimating housing-related expenses accurately, and ensuring affordability within these ratios can enhance a borrower's chances of mortgage approval and sustainable homeownership.

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