How Does a Lender Determine How Much You can Borrow 

Buying a home in Mississauga or any other real estate market in the GTA can be an expensive undertaking, requiring the vast majority of home buyers to apply for a mortgage to pay for the home. Many home buyers have questions as to how a lender determines how much money they can borrow, and this article will give a basic explanation as to how a lender decides.

Lenders use two formulas when determining the maximum amount of funds they are prepared to loan a home buyer. They are Gross Debt Service Ratio (GDS) and Total Debt Service Ratio (TDS).

Gross Debt Service Ratio (GDS)

This is a calculation that requires that your housing costs must not be more than a certain percentage of your before tax income. Lenders standards vary, but generally the GDS ratio will fall somewhere in the 32% range. What is included in the GDS is your mortgage payment (principal and interest), property taxes, heating costs, any other home financing and 50% of condominium fees (if applicable).

Total Debt Service Ratio (TDS)

In this ratio, the lender takes into account other debts such as car payments, credit card debts...ect. Generally speaking, no more than 40% of a home buyers gross income (before taxes) can be taken up by housing costs and other debt.

Once your lender looks at both ratios they will determine how much income you have available for housing and pre approve you up to the maximum amount you can borrow without going over.

This article is intended to give you some background on the mortgage approval process. For more information about mortgages, it is highly recommended that you contact your local bank or mortgage broker.