Mortgage qualifying math for new home purchases

First of all, if any of this gets overwhelming, we have an affordability calculator that figures all this stuff out for you, and is quite accurate.

We'll start with a typical new home purchase with under 20% down.

Ok here's the minimum we need to know about the borrower (you) to do the qualification:

  • Your annual gross income (meaning your annual income before taxes).
  • Your down payment amount.
  • Your amount of "revolving" debt, which generally means how much debt you're holding on your credit cards.
  • Your amount of "installment" debt, which means your monthly payments on any outstanding loan amounts (car loans, student loans, etc).
  • Whether your credit is damaged or not. If it's damaged, unfortunately you will not be able to get a mortgage in any form with less than 20% down.

And here's the minimum we need to know about the property you're trying to buy:

  • The purchase price.
  • The square footage (to estimate the monthly heating costs).
  • The condo fees (which come into play in debt-servicing calculations).

Alright, now let's get onto the math.

Some initial guidelines:

  • GDS/TDS limits will be GDS 39% and TDS 44%. This is standard for mortgages with less than 20% down, and doesn't vary lender to lender.
  • Amortization will be 25 years. This is again standard for mortgages with less than 20% down, and doesn't vary lender to lender.
  • Please note cell phone bills/internet bills are not included for qualifying calculations.

Calculating GDS:

GDS stands for Gross Debt Service. It calculates what percent of your income is going towards paying housing related expenses.

GDS is calculated as follows:

Add up all of these...

  • The monthly mortgage payment at the stress test interest rate (the easiest way to figure this out is to use our mortgage payment calculator and enter 4.79% for the interest rate. The calculator rolls in the cost of the mortgage insurance premium as well).
  • The monthly property tax payment (take annual property tax and divide by 12)
  • The monthly heating cost estimate (take the property's square footage and divide by 12)
  • The property's monthly condo fees divided in half (if the property has any)

and divide that number by...

  • Your monthly gross income (your gross annual income divided by 12)

Your GDS must be under 39% to qualify for a mortgage.

Calculating TDS:

TDS stands for Total Debt Service. It calculates what percent of your income is going towards paying housing related expenses AND non-housing related debt obligations.

TDS is calculated as follows:

Add up all of these...

  • The monthly mortgage payment at the stress test interest rate (the easiest way to figure this out is to use our mortgage payment calculator and enter 4.79% for the interest rate. The calculator rolls in the cost of the mortgage insurance premium as well).
  • The monthly property tax payment (take annual property tax and divide by 12)
  • The monthly heating cost estimate (take the property's square footage and divide by 12)
  • The property's monthly condo fees divided in half (if the property has any)
  • Your outstanding revolving debt (credit card debt) * 0.03 (3% is used as a pseudo minimum monthly payment)
  • Your monthly instalment debt payments (your student loan payment, auto loan payments, etc)

and divide that number by...

  • Your monthly gross income (your gross annual income divided by 12)

Your TDS must be under 44% to qualify.

So if your GDS is under 39% and your TDS is under 44%, you would qualify for a mortgage!

And that's pretty much the very basics - wasn't that fun!? If you have any questions feel free to contact us and let us know!

Now that you know you can afford a mortgage, why not get a mortgage? 😉

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Alex Wilkinson the CEO of Houski