GDS Rule

Last week I posted a blog about the 5 C’s of Credit. I have had a couple of people ask me about the 32% GDS rule so that is this weeks topic.

The GDS (Gross Debt Service) ratio is a percentage that is arrived at by dividing your monthly shelter costs (principal, interest, property taxes, heating and half of condo fees, if you have them) by your gross monthly income and multiplying by 100.

This is used to measure the ability of a borrower (or borrowers) to make mortgage payments. Most lenders required that this ratio be no more than 32%.

The second ratio that comes into play in the TDS (Total Debt Service) ratio and is a percentage arrived at by dividing your monthly shelter costs (principal, interest, property taxes, heating and half of condo fees) PLUS all other monthly debt obligations by your gross monthly income and multiplying by 100.

This is used as the “upper limit” of what a borrower can borrow. Most lenders require that this ratio no more than 40%.

These ratio’s maybe more flexible if you have a good credit score, solid credit history and your debt load is not high you maybe able to go as high as 44%.

With that said, even if you can qualify with the higher ratio, you must make sure that you can afford the home, regardless of qualifying. There is no sense in purchasing a place and being mortgage poor. It is really important to look at your budget and work out the actual amount that you can afford each month.

If you want to know where you stand there are a couple of steps to the process and a mortgage broker can take you through each one of them.