There are many different types of mortgages and many different places to get them too. Each lender looks at borrowers differently, and each has their own set of rules for qualifying candidates. However, most of them lend money on a similar premise, using two ratios called the TDS ratio and the GDS ratio.
All Lenders Look At Your Ability To Repay The Loan When Pre-Approving Mortgage Candidates.
The general consensus among lenders and mortgage professionals, is that your monthly housing costs should not exceed 36% of your gross monthly income. If your annual household income is $100,000 (or $8,333 monthly), then your maximum monthly housing costs should not exceed ($8,333 x .36% = $3,000). In reality, with excellent credit, you could qualify for more, but then risk being mortgage poor.
The Two Ratios Lenders Use To Qualify Candidates For Mortgages
There are two ways lenders qualify clients. They take into consideration your Gross Debt Service (GDS) ratio and your Total Debt Service(TDS) ratio. Your GDS ratio is based on your monthly housing expenses; your monthly housing expenses should not exceed 30-35% of your gross family income. The second calculation lenders use, TDS, looks at your monthly housing expenses plus other monthly debts. TDS takes into consideration car payments, personal loans, and credit card debt. Your total monthly housing and loan payments, TDS, should not exceed 40% of your gross family income.
Examples Of TDS and GDS ratios
(TDS): John and Sarah have a combined family income of $120,000 (or $10,000 monthly). TDS ratio states no more than 40% of their monthly income can go to housing and other fixed debts. (10,000 X 40% = $4,000). They have a car loan of $200 and student loans of $300 monthly. Therefore, their maximum monthly housing costs are $3,500.
(GDS): John and Sarah have a combined family income of $120,000 (or $10,000 monthly.) GDS ratio states no more than 32% of their income can go to housing costs. (10,000 x .32% = $3,200). Therefore, their maximum housing costs should not exceed $3,200.
A lender will use a combination of the two of these ratios and take into consideration your credit rating to approve you for a mortgage.
Deciding How Much To Qualify You For
Working backward from your maximum mortgage payment, the current interest rate, and the amortization of your loan, a bank will work out your maximum loan amount.
To Apply For A Mortgage, Banks, And Lenders Will Ask For:
- Permission to pull your credit report
- Your Taxes for 2 years
- Employment letter
- and Proof of funds
If you’re looking for help connecting with a mortgage professional, contact us for a referral.