When applying for a mortgage, your broker or lender may use terms and acronyms you’re unfamiliar with, such as total debt service and gross debt service. They are not the same thing!
Mortgage lenders look at several bits of information about your finances before they are able to determine the amount they are willing to lend you to buy a home. Your household income is a major factor, but there are two other numbers that matter a lot, too: gross debt service and total debt service.
Gross Debt Service is the percentage of your monthly income needed to cover all your housing expenses for the month, which includes the principal and interest on your (new) mortgage, as well as property taxes and heating. If you are buying a condo or townhome that requires additional monthly fees, 50% of that number needs to be accounted for in this calculation, too.
Add up all your monthly housing costs, divide that number by your gross monthly income (your gross income is your pay before deductions!), then divide by 100, you’ll get your gross debt service (GDS) ratio.
Most lenders want that number to be under 35% to qualify for a mortgage.
Your lender will also calculate your Total Debt Service (TDS). That is, the percentage of your income you use each month to cover all of your debts. Add up the monthly amounts of your mortgage payment, car loan, credit cards, child support – all of it. Then divide that figure by your total gross monthly income, divide by 100, and that’s your TDS ratio.
Most lenders want your TDS to be under 42%.
These ratios are just one part of qualifying for a mortgage. The more you understand, the easier it will be for you to buy a home!