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Understanding mortgage eligibility, calculations, and key metrics lenders use to evaluate your applications.

 

When it comes mortgage products and the maximum amount you are able to obtain from lenders, it is useful to learn the key metrics lenders use to evaluate your eligibility and determine the amount of mortgage they can offer to you.

In addition to your credit score and credit history, mortgage lender often have requirements on three key metrics - Loan To Value Ratio (LTV), Gross Debt Service Ratio (GDS), and Total Debt Service Ratio (TDS).

Loan To Value (LTV) = Sum of all mortgage principal (new and existing) on the property / Property Value * 100

For example, for mortgage products that allow up to 85% loan to value (LTV) ratio, the maximum amount of mortgage you are able to obtain on a $1 million dollar property would be $850,000. This means you must provide at least $150,000 in down payment.

Prime mortgage lenders (e.g. Top 5 Big Banks in Canada) will typically have mortgage products with lower LTV threshold compared to sub-prime mortgage lenders (private lenders such as credit unions). Borrowers are typically able to obtain higher mortgage loans with sub-prime lenders at the cost of higher interest rates and lender commissions.

Gross Debt Service (GDS) = (Mortgage Principal + Mortgage Interest + Property Tax + Heating + 1/2 Condo Fees if applicable) / Income * 100 (where heating is assumed to be $100/mo if not specified.)

For example, if you plan to purchase a house (not condo) with $500/mo in property taxes and $150/mo in heating. And your monthly income is $3,000. For mortgage products that have a maximum GDS ratio of 60%, the maximum amount of mortgage payment (principal + interest) you can have is ($3,000 * 0.60) - $500 - $150 = $1,150

If you are married (assuming with the same income), your spouse's income is also calculated in, and the number will be higher at ($6,000 * 0.60) - $500 - $150 = $2,950

Let's take a break and consider both the LTV and GDS ratios described above. If you are single with a monthly income of $3,000, and you plan to purchase a $1 million dollar detached property with $500/mo in property taxes and $150/mo in heating, even if you have $150,000 in down payment to satisfy the LTV ratio on a $1 million dollar mortgage, you most likely won't be able to qualify for the $850,000 mortgage amount as the monthly mortgage payment (principal + interest) cannot exceed $1,150 to satisfy the GDS requirement.

Total Debt Service (TDS) is very similar to GDS with the difference that it also takes your other debt and obligations into calculation. Other debt and obligations are debts such as credit card payments, line of credit payments, personal loan payments, car loans…etc.

TDS = (Mortgage Principal + Mortgage Interest + Property Tax + Heating + 1/2 Condo Fees + Debt Payment) / Income * 100 (where heating is assumed to be $100/mo if not specified.)

For example, if you plan to purchase a condo with $300/mo in property taxes, $400/mo in condo fees, and $80/mo in heating. You are paying $150/mo in car loans and your monthly income is $3,000. For mortgage products that have a maximum TDS ratio of 70%, the maximum amount of mortgage payment (principal + interest) you can have is ($3,000 * 0.70) - $300 - $200 (50% condo fees) - $80 - $150 = $1,370. If you are married and your spouse has the same income, the maximum amount of mortgage payment would then be ($6,000 * 0.70) - $300 - $200 (50% condo fees) - $80 - $150 = $3,470.

Luckily, borrowers don't need to pull their hair out with all the LTV/GDS/TDS calculations. The lenders have the technology and software to perform these calculations. We hope the above explanations will give you a clear idea of how everything ties together, such as how your income and debts are considered in determining your mortgage amount and eligibility.