How does your lender determine if you are eligible for a mortgage?

TDS and GDS explanation and importance when applying for a loan in Canada.

When you apply for a mortgage, your lender will consider to borrow you money by using these two ratios called GDS and TDS meaning Gross Debit Service Ratio and Total Debt Service Ratio.

Those two ratios will determine how much money can lenders borrow you and if you are applicable to buy the property you are looking forward to buy. I bet the lender process is completely different to the way you calculate your affordability, right? I will explain below how do these two ratios work so you can try it yourself.

The TDS ratio is basically all your monthly debts divided by your monthly income. If your TDS is less than 42 percent, your TDS is good to go. Here you have an example:

- Sara and Michael want to buy a condo. Their combined annual salary is 90,000, so their gross monthly income is $7,500. Their mortgage payment and property taxes will be approx $2,200, heat will be $70, and they’re making $300 in credit card and $300 in car loans monthly.

TDS = (2870/7500) X 100 = 38%

Calculating your GDS is going to be something very similar to your TDS. The difference is this time you will not use all your monthly expenses but only your housing-related ones and then divide them by your income just like your TDS. If your GDS is less than 35 percent, your GDS is good. Taking the same example from above we will calculate GDS now:

GDS = (2270/7500) X 100 = 30%

Easy right? Now you have an idea of how to know if you are eligible for a mortgage here in Canada and what do you need to consider before looking for houses.