In the age of the internet, consumers are a lot more savvy and do a lot of research on their own as the first step in their buying decisions.  Mortgages are no different.

The only problem with this is that online mortgage calculators only do half the job and can provide false information to a consumer about what they can afford when it comes to a home purchase and a mortgage.

Lenders want to understand if you are able to “debt service“ the mortgage payments.  This is the ratio of cash available (i.e. monthly income) to make the principal plus interest payments.

They do this using two different ratios: Gross Debt Service (GDS) ratio and Total Debt Service Ratio (TDS) ratio.

GDS

Your Gross Debt Service ratio is the calculation that the typical online mortgage calculators use to determine affordability.  This looks at your gross monthly income, before taxes, and compares that to the principal, interest, taxes and heat payments for the property you are looking to mortgage.  The calculation is:

Principal+ interest + taxes +heat
Gross monthly income
 
This ratio is reflected as a percentage and cannot exceed 35%.
 
TDS
You Total Debt Service ratio looks not only at the repayments for the mortgage in question but also your monthly repayments on all other debt including: other properties, credit cards, lines of credit, personal loans, vehicle loans, spousal/child support, student loans etc.  It then compares this to you gross monthly income using the following calculation:
Principal+ interest + taxes +heat + other debt
Gross monthly income
 

This ratio cannot exceed 42%.  

TDS can be further complicated by rental income and child/spousal support.  These are not treated the same by all lenders so it is imperative that you talk to a mortgage broker to determine affordability.

If you are self-employed it is even more important to talk to a mortgage broker before you start the home shopping process.  Lenders want a lot more documentation from someone who is self-employed.  Their are programs for self employed individuals so start by talking to a mortgage broker to determine what the lenders are looking for when determining your affordability.  For more information about mortgages for the self-employed, check out our Resources page.

If you have really good credit (i.e. a score of 700+) some lenders will allow you to go to 39%  GDS and 44% TDS but as we’ve seen in the past few years, mortgage rules are changing with the wind so it’s a good idea to, once again, talk to a mortgage professional before you start looking so that you are not disappointed.  Many a clients do not engage a mortgage broker until they already have an accepted offer only to find out that the new car loan they have greatly impacted their ability to qualify.

Now you can see why the online tools available to you might fall short when telling you what your maximum affordability is.  Start early and talk to me to avoid disappointment!