Qualifying for a mortgage is not rocket science. Lenders look at your credit profile in conjunction with two qualifying ratios – Gross Debt Service (GDS) and Total Debt Service (TDS). That being said, all lenders have different internal underwriting policies that affect the way these ratios are calculated. This is why your mortgage may or may not be approved across the board or at a certain rate. Generally speaking, people have a tough time understanding why it’s not consistent, so let’s dive in and take a closer look.
Credit
Creditworthiness is important to lenders for obvious reasons. They take into account your credit/beacon score, length of credit and behaviour. Lenders like to see a minimum of two trades (i.e., credit card, car loan, credit line, etc) active for at least two years. They like to see a healthy re-payment history and responsible use within the credit limits. In terms of score, 750 and up is outstanding, 700 to 750 is excellent, 680 – 700 is good, and 600-680 is workable but not great. Below 600 is not good. “A” lenders don’t want your business. You’ll have to consider “B” lenders at this point depending on the property and how much equity you have.
Gross Debt Service (GDS)
The GDS ratio is calculated by dividing PIT (principal, interest and property taxes) + H (heat) + S (strata/condo fees) into INC (gross income) | (PIT + H + S) / INC . This number cannot exceed 39% if your credit score is 680 or higher and 35% if your score is less than 680. Lenders don’t want your housing related costs to exceed 35-39% of your gross income.
Total Debt Service (TDS)
The TDS ratio is calculated by using the same formula as GDS with the exception that you need to factor in other debt obligations (DO) into the numerator (for those who haven’t done grade school math in a long time, the numerator is the top and denominator is the bottom of a fraction). Accordingly, the formula becomes (PIT + H + S + DO) / INC. This number cannot exceed 44% if your credit score is 680 or higher and 42% if your score is less than 680. Lenders don’t want your housing related costs and other debt obligations to exceed 42-44% of your gross income.
The Reality of Qualifying
All of this is pretty straight forward. The complications come into play when multiple properties are involved and whether or not you are occupying a property or renting it out. Every lender has a different calculation for how they factor in rental income. Some use an add-back option to total income on the denominator of the equation, which has a fairly benign impact on the ratios. Others use a rental offset, which is quite aggressive and drastically lowers the numerator relative to the denominator, which has a material impact on your qualification range. Still, others use rental worksheets, which allow you to eliminate the entire liability of the property and add or subtract net rents back to the income. This is equivalent to a debt coverage ratio and also has a large impact on how much you qualify for. Anyhow, the point isn’t to confuse, but rather to educate on why you can’t qualify at all lenders and rates. If you have a plain vanilla file – i.e., you’re buying one property to live in, have good credit, and can prove your income – you will qualify everywhere and can be selective on rates. If your file is more complicated, then you potentially could have fewer options depending on which lender’s internal underwriting guidelines are best suited for your situation. This will ultimately determine your rate.
There are other considerations, including, property type, geographic location, time at job, down payment amount, citizenship, income type, down payment type, mortgage amount etc., that will all determine which lender will consider your file, but it gets extremely convoluted and is constantly evolving.
Here’s our affordability calculator. It’s effective. Use it – if your numbers work, you’ll have a wide selection of rates.
