Likewise the total cost of your mortgage and all other housing costs, plus All debt service payments (including minimums for credit cards, car payments, and student loans) should not exceed 40% of your gross income (before taxes). However, some lenders can go as high as 44%. This is known as the Total Debt Service Ratio (TDS).
If your total housing costs and debt service payments are within the 40% TDS guideline, your debt will not affect mortgage affordability. On the other hand, if your TDS is over 40%, you will lose a dollar of affordable housing for every dollar over the threshold you pay to service your debt.
What a mortgage affordability calculation in real numbers looks like
Here is an example to illustrate how credit card debt can affect a couple’s eligibility for a mortgage by using the GDS and TDS limits at two different interest rates.
If the annual household income is $ 100,000, then the maximum housing cost (including mortgage payments) should not exceed $ 32,000 per year ($ 2,667 per month, amortized over 25 years) as per the 32% GDS policy. Assuming property taxes, heat, and 50% of condominium fees are $ 5,000 per year, that leaves up to $ 27,000 per year ($ 2,250 per month) for mortgage transportation costs:
Mortgage cost of $ 27,000 + other housing cost of $ 5,000 = total cost of $ 32,000
GDS = $ 32,000 total housing cost / $ 100,000 gross income = 32%
Based on their income, this couple’s mortgage payments cannot exceed $ 27,000 per year ($ 2,250 per month, amortized over 25 years) even if they have no other debt. With 5 year fixed rates of 1.75% and 3%, the maximum mortgage loan would be around $ 545,000 and $ 475,000, respectively.
Now let’s look at the couple’s other debts. For example, let’s say you spend $ 4,200 annually on student loans and $ 3,600 annually on credit card minimum payments for $ 10,000 in credit. Your TDS rate is 39.8%:
$ 27,000 mortgage expenses + $ 5,000 other housing expenses + $ 7,800 debt servicing expenses = $ 39,800 total Debt burden
TDS = $ 39,800 total debt / $ 100,000 gross income = 39.8%