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What is Debt Servicing?
What it essentially means is your ability to make payments on a particular amount of debt based on your provable and documentable income. So where debt servicing becomes important is if you are applying for a mortgage, and let's say you've been paying $850 a month in rent, and you've been paying it for 10 years. You want to apply for a mortgage. The bank may or may not believe you qualify for a $850 mortgage payment. Just making an $850 rent does not prove that you have the financial wherewithal, on paper at least, to make that payment from a qualification standpoint. The bank may say that the mortgage, and the deal itself "debt service."
So where do those numbers come from? What were they looking for?
Debt servicing is a calculation based on your gross taxable income. Now, every bank treats this differently. Every institution has their own quirks, own twists, own rules. If something is less than 20% down, you have to meet insurer guidelines: CMHC, Genworth, AIG. If something is more than 20% down, you still may have to meet those guidelines depending on which bank you go with. Although alternatively, those banks may have their own non-high-ratio or conventional mortgage guidelines that they follow.
So, what are the rules? How is it calculated?
It's a complicated formulate, so what I'm going to do a verbal of this whole blog post, but I'm also going to post the calculation so you can understand how I'm explaining it. There are two different numbers to be aware of: GDS (Gross Debt Service) and TDS (Total Debt Service).
Gross Debt Service is what percentage of your gross income is being used for housing expenses. So that is going to include the principle and interest on your mortgage, property taxes, some of the strata fees, and in some cases, depending on the lender, heat. So it's principle, interest, taxes, heat, and strata fees (if applicable). That is what will go into your gross debt service. What they are looking at is you add up all that stuff (and you only use 50% of strata fees - which is a rule that is often overlooked) and you find out what percentage of your monthly income those are going to make up.
Now, what income figure do you use? You don't get to use just last year's with big bonuses or something. It depends. Again, this is where it depends. You're going to hear me say this a lot. That is why guys like me are in business: because we know which banks, which lenders, look at income correctly (based on your situation).
If you are salaried, it's very straightforward. They're just going to look at your base salary. If you are commissioned, and you've been there a couple of years, they are probably going to look at your last 2 year's average of your line 150 income on your notices of assessment or T4. If you are self employed, they may use the same thing, or they may "gross up" your income because there are write-offs and what not. Certain lenders use "addbacks" where they will put back non-cash expenses into that notice of assessment figure. Things such as depreciation, vehicle expenses if you are a sole proprietor, and that kind of stuff.
So, knowing what income figure to use is very difficult. Generally a two year average will work (or be accepted) or your base salary. Those are the safest numbers to use.
So what percentage with that Gross Debt Servicing (GDS) are they going to allow? The typical rule, historically, used to be 32% but the industry has kind of changed and generally if you have got an ok to decent credit score it's going to be 35% of your gross income. On the flip side, if you got exceptional credit, you might be able to go as high as 44% of your gross overall income.
The second ratio is Total Debt Servicing (TDS). That is the second ratio they are looking at. So the bank wants to know two things:
1. Gross Debt Service - What percentage of your income is being consumed by housing expenses
2. Total Debt Service - What percentage of your income is being consumed by housing expenses, and all other monthly obligations that are on your credit bureau
TDS includes things such as: credit cards, lines of credit. Things they don't look at: cable bills, basic utilities and stuff. They assume that comes in the other 58 or 60 percent of your income.
So, Total Debt Service is everything that was in Gross Debt Service: principle, interest, taxes, heat, and 50% strata fees (if applicable), PLUS all debt payments: car loans, car leases, credit cards, alimony payments, or anything like that.
where is that number? Gross debt service, they didn't want to see it higher than 35% unless you had exceptional credit and it would be allowed of up to 44%. With Total Debt Service, all your debts, they don't want to see that any higher than 42% to 44% again depending on credit, and again dependent on bank to bank to bank.
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What is Your Debt Service Ratio? TDS - Qualifying for a Mortgageby MortgagesInVancouver822 views
Hello, There
I'm looking for the examples on how to calculate GDS/ TDS ratios. I just recently enrolled in OREA and i'm still finding it difficult to calculate any help would be more then appreciated.
BigCityCosa 2 years ago