When a lender checks to see if you qualify for a mortgage, they look at many different factors. One of the factors they look at is your TDS ratio (or Total Debt Service). The TDS formula is as follows:

(PITH + other shelter costs + liabilities)/Gross Monthly Income

Where PITH stands for principle, interest, taxes and heating.

For example, let’s say that you are seeking a mortgage of $200,000 @ 2.84% with monthly payments of $930.15 (that includes principle and interest), your yearly taxes are $2544 ($212/month) and your monthly heating costs are $125/month (which is pretty standard) and you have a credit card with a balance of $4666 on which you are making the minimum payments.  Let’s say that you have a gross yearly salary of $40K ($3333/month).

Note: for any unsecured revolving debt like a credit card, the bank uses 3% as the calculation so a $4666 credit card debt would equate to a $140/mth liability payment.

That means your total monthly payments (PITH + other shelter costs + liabilities) = $1407.15.

Your gross monthly income = $3333.

So your %TDS =42.2

This person would only qualify if they had a credit score of >680 because the limit for the bank (in this hypothetical example) is a maximum TDS of 42 for somebody with a credit score of <680. To make matters worse, with the new legislation, unless you had saved up a 20% downpayment to purchase the home, you would have to qualify at an exaggerated rate of 4.64%! That would make your payments jump from $930.15 to $1,122.56 increasing your TDS from 42.2 to 47.9%.

So, to avoid disappointment and any unexpected surprises, it is important to run through these calculations with a good mortgage broker and structure a deal properly before going to a bank.

Call Robert today at 905-574-9200 Ext. 215 to schedule an appointment today!