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22 Feb

Mortgage Monday – TDS – Total Debt Service Ratio

Mortgage Tips

Posted by: Tyler Cowle

This weeks industry term which is used all the time, is the TDS or the Total Debt Service Ratio.  What is it and what does it mean for your mortgage?

The Total Debt Service Ratio is very similar to the GDS discussed in last week’s post; in fact, it adds to the GDS calculation.  The TDS is just as important as the GDS; sometimes even more since it takes into account other debts and responsibilities for not just the applicant; but, any co-applicants as well!  The TDS calculation can drastically change the pre-qualified amount that calculates using the GDS calculation; sometimes even rendering the application un-approvable using conventional lenders.

The current industry standard is a TDS ratio of 44%; which means that the base shelter costs (those that were included in the GDS calculations) plus, other liabilities and responsibilities must be less than 44% of the monthly income; before taxes in order to qualify for the mortgage.  There are exceptions to the rule (extended ratios); however, these are only available for un-insured mortgages (+20% down) and are specific to certain products and lenders.  It should be noted that the calculation includes the ‘qualifying’ mortgage payment; not necessarily the actual mortgage payment.  The qualifying mortgage payment is calculated using a higher interest rate (BOC Benchmark) and helps ensure that homeowners can afford higher mortgage payments should rates increase!  The calculation below uses monthly figures.

 

TDS = ((((Mortgage Payment (P&I) + Taxes (T) + Heat (H)) + 1/2 Condo fees) + Other liabilities) / Gross Income) x 100

Example – (((($1,500 (P&I) + $250 (T) + $120 (H) + $200 (1/2 CF) + $500) / $6,000 (GMI)) x 100

(($1,870 (PITH) + $200 + $500) / $6,000) x 100

($2,570 / $6,000) x 100

0.428 x 100 = 42.8% TDS or Total Debt Service

 

In the above scenario; the TDS would be acceptable to most lenders and insurers and would lead to an approval as long as all other aspects of the application were acceptable.  It should be noted that the above calculation used the same numbers from last weeks GDS calculation; which resulted in a GDS quite below the industry standard (34.5% vs 39%).  The addition of just $500 per month in other liabilities results in a TDS that is close to the threshold of 44%; $500 of other liabilities really is not a lot (car payment); if this applicant were to have just $71 more in other liabilities (credit card payment); the TDS would be over the threshold and the applicant likely would not be approved using conventional lending.  Also, the other liabilities that must be added are for all applicants on the file; even though we also add co-applicants income to help strengthen the file; we also have to account for their own responsibilities (their own shelter costs); which can sometimes hinder the file.

Even though a TDS of 44% is the industry standard; a low credit score or poor history may lead to the requirement of a lower TDS in order to be approved by some lenders and insurers.  As important as the TDS ratio is to the mortgage application; it must fall in line with all other parts of the client profile!

Check in next week for the next topic!

Published by Tyler Cowle