How much of a mortgage can I afford (mortgage affordability)?
Your journey has begun. You are starting your search for that new home. Maybe you have already bought a house previously and simply didn’t notice the very thing that decided what you could be approved for or your mortgage affordability. There are ratios involved that pre-determine the maximum you can buy or what you have to put down as a down payment to increase this max. These ratios differ for all Borrower Types.
There are two mortgage affordability ratios:
- Gross debt service ratio
- Total debt service ratio
Undoubtedly, these rules of ratios do change in the industry from time to time. Currently, the GDS ratio for a Triple A lending approval is 39% GDSR (GDSR = Gross Debt Service Ratio). Let’s not get too complicated here. It’s basically your yearly income broken down monthly, against what you will pay as a mortgage. Also, this ratio includes your Property Taxes, and heat.
This amount is then multiplied by the gross debt service ratio. Let’s have a look below at the example:
Mr. Client has income of $60,000.00 per year. This is 5,000.00 per month. His gross debt service amount would be ($5000.00 x 39%) which is 1,950. This $1,950 is what Mr. Client would be max approved for. $1,950.00 would be Mr. Client’s mortgage payment which is (principal with interest) + property tax , and heat amount. Consequently, these factors make up your mortgage payment. In general Mr. Client maxing out at $1,950 would be approximately $325,000. in affordability. This is all based on the three factors that add up to the GDSR.
Now, let’s add in a wee bit more affordability in your ratios.
By allowing you to carry debt outside and above this gross debt max you can carry external debt. Fortunately, Mr. Client can still get the $325,000.00 home while carrying a small amount of debt.
This is the second ratio and is called total debt service ratio (TDSR). Let’s have a look below at the example:
Mr. Client, has one outside debt–a car payment of $200 per month. We need to calculate this amount using the total monthly income to see if we are over the max ratio. The ratio for TDSR is 44%. So, $1,950 + $200 = $2,150 (total debt payments plus the three factors that make up your mortgage payment) $2,150 / $5,000 = 43%.
Last but not least, the client will be approved for his home with his car payment. He is on his way to Mortgage Suite to get the best rate, and you could be too!
