How Lenders Determine Your Affordability and What You Can Do
January 22, 2025 | Posted by: Sherry Corbitt
In the mortgage world, there is often talk about the debt to income ratio. It is essential that it can make or break your chances of getting a mortgage with an A or B lender. Qualifying for a loan depends solely on your debt to income ratio.
Lenders are interested in your financial status. For example, even though you successfully paid off loans five or ten years ago, lenders put more weight into whether you can now pay off the mortgage loan. To get an idea of your ability to pay them back, they look at your debt to income ratio, the amount of debt you owe relative to your income. There are two ways they look at it: Total Debt Services (TDS) and Gross Debt Services (GDS).
The GDS is calculated by taking the total monthly payments and dividing it by the total gross income.
GDS Formula: Principal + Interest + Property Taxes + Heat
Gross Annual Income
The TDS considers the gross income that is already spent on housing-related items (property tax, heat, etc.) and other similar payments. It also considers credit card balances, student loans, child support, and other monthly debt obligations.
TDS Formula: Principal + Interest + Property Taxes + Heat + Other Debt Obligations
Gross Annual Income
Those with higher GDS/TDS ratios are more likely to struggle to meet their debt obligations than borrowers with lower ratios. Because of this, most lenders do not loan to those with ratios exceeding 35% (GDS) and 43% (TDS). One thing to remember, however, is that different lenders will have different ratio percentages. There will almost always be a way to get a mortgage, whether with an A-type lender (i.e., banks), B, or private lender.
However, if you have a high GDS and TDS, the sooner you can improve those ratios, the better and easier it will be for you to get the best rates.
So how can you improve a high GDS and TDS? There are two main ways:
1. Debt Consolidation
The first and easiest way is through debt consolidation. It doesn’t make the debt go away or provide an easy way out. Instead, it allows you to take the same debt, pool it all together, and spread it out over a more extended repayment period with lower interest rates. This can help lower your overall monthly payments.
2. Pay off debts
This is more difficult, especially if you don’t have another source of income coming in to help you pay it off. This is where budgeting will help. First, you will need to write down all your debts and jot down the total payments along with total debt. Next, you will need to rank the indebtedness by the highest interest rate to the lowest. You would then start paying off the debt with the highest interest rate.
These are actionable steps that everyone can take. By taking the initiative to improve your GDS and TDS, you will make yourself more attractive to lenders when your mortgage comes up for renewal.
Do you have any other questions regarding lenders? Please feel free to contact me!
Sherry Corbitt, Mortgage Broker
