While using a mortgage calculator will help you to determine the monthly mortgage payment for a particular home price, it is also important to understand how banks and lenders calculate the maximum loan amount they will give you for a home purchase.
When you apply for a mortgage, the lenders will use two calculations as a guideline to determine the maximum amount they’ll loan you. These calculations are called the Gross Debt Service (GDS) and Total Debt Service (TDS) ratios.
The GDS is the percentage of your monthly household income that covers your housing costs (mortgage payments, property taxes, heating costs & 50% of your condominium fees if applicable). If exact figures are not available for heating costs, estimates will be used. Once your annual housing costs are added up, the lender will divide this number by your gross annual income. It should be at or under 35%
TDS, similar to the GDS calculation is the percentage of your monthly household income that covers your housing costs (mortgage payments, property taxes, heating costs & 50% of your condominium fees) plus any other debt obligations (minimum payments on credit cards, car payments, loans, etc). It should be at or under 42%.
If your GDS & TDS ratios are slightly above the industry standards, you may still qualify for a mortgage based on your personal credit, personal assets or income reliability.
Make sure to speak to your financial professional!