Capacity or Income.

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Good morning. I hope you had a good weekend. Let’s pick up where we left off last week and talk a little bit about capacity or income.

Part of how a lender determines how much money they’ll willing to lend you will be based on how much of your income they’re comfortable with you using to service your debts. As mentioned in my previous post the two formulas they use to determine this are called GDS (Gross Debt Service) ratio and TDS (Total Debt Service) ratio. Typically the acceptable levels are 32% GDS and 40% TDS. The GDS includes your mortgage payment, property taxes, property insurance and sometimes heating cost. So for example if your total household income was $5000.00/mth (Gross before taxes) that simply means you could use a maximum of $1,600 a month towards servicing the above mentioned debt.

The TDS ratio takes into account all of your debts so for example if we use that same monthly income of $5000. and we multiply that by 40%, that would equate to $2000.00. So what that simply means is that the lender would not want to see you servicing any extra debts beyond $400 which is the difference between the two calculations.

This is why it’s very important not to have too many other debts because if you do, the maximum mortgage amount would be pushed down  so that you don’t over extend you earning and debt service capacity.

Tomorrow we’ll talk about how the way you earn your income affects the qualification process.

Make it a great day.

Walter Monteiro.

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