TDSR and GDSR are common acronyms in the mortgage world. Lenders focus on the 5 C‘s of credit when determining suitability, TDSR/GDSR fall under Capacity to pay which is one of the five C‘s. They are critical tools that lenders use to help in the decision making process of approving your mortgage. This article will explain what each of these mean and will give you insight as to how affordability is calculated. Let’s start with GDSR, or GDS for short. This stands for Gross Debt Service Ratio. It is a percentage determining how much of your gross income you can afford to pay towards housing costs. Housing costs for this purpose include your mortgage payment (Principal & Interest), property taxes and heat. Typically, the allowable percentage for GDS is 39% of your income. Let’s say that your families gross monthly income is $6,000, 39% of this is $2,340. This means that $2,340 is deemed an acceptable amount for your housing cost. Remember, housing costs include mortgage payment (Principal & Interest), property taxes and heat. If you decide to calculate this yourself, please keep in mind that these percentages assume that your mortgage rate is 2% higher than what it really is. This is called the stress test, please click the link below to learn more. The next acronym in TDSR or TDS for short. This stands for Total Debt Service Ratio. This percentage is used to calculate your housing cost PLUS all other debts that you have. Other debts include credit cards, auto loans, consolidation loans, lines of credit, student loans, other mortgages etc…. The allowable percentage for TDS should not exceed 44% of your gross income. Using the same gross family income as mentioned above, I have provided a scenario explaining how both of these calculations work. Please note, all payments are monthly.
$1,510 Approximate Mortgage Payment on $250K (using stress test rate)
$ 300 Estimated Property Tax
$ 125 Estimated Heating Costs
$1,935 Total HOUSING costs to calculate GDS
$1,935(Housing Cost) / $6,000(Income) = 32.25% which falls well within the approval guidelines
$1,935 Housing Cost
$ 200 Credit Card
$ 100 Student Loan
$ 300 Auto Loan
$2,535 Total DEBT to calculate TDS
$2,535(All debt including Housing Costs) / $6,000(Income) = 42.25% which falls within the approval guidelines
As you can see, the above scenario indicates affordability which is a large factor in the underwriting process, but by no means, the only one. There are many other points to consider when securing a mortgage. Lenders utilize the 5 C’s of credit and they are categorized as Capacity, Credit, Capital, Character and Collateral. These will be discussed in the following weeks as I believe that being well informed will better prepare you for the road ahead.