So, you’re in the middle of doing your research on how apply for a mortgage and you come across these new terms and acronyms – TDSR, GDSR and LTV. You start to think, “oh no, I have to learn all these new things too?”.
As your mortgage specialist it’s my job to save you the time and grief as well as making things easier for you by explaining their importance when applying for a mortgage.
Gross Debt Service Ratio (GDSR)
Lenders use this ratio to assess the amount of housing debt that a borrower is paying in relation to their income. These housing debt expenses include the monthly mortgage, property taxes, heating and 50% of condo fees (if necessary).
The formula determining the GDSR is Mortgage (interest & principal) + Taxes + Heat / Gross Annual Income. Based on the cmhc-schl.ca website, the maximum allowable GDSR is 39% with a credit score of 680+. ** As of April 2021 **
Total Debt Service Ratio (TDSR)
This ratio is the measurement that lenders use when determining how much of the borrowers’ gross income is spent on housing and other necessary payments. Essentially, it is adding to the expenses listed on the GDSR. These other necessary payments would include credit card balances, monthly loan payments, auto payments and insurance and other monthly obligations.
The formula to determining the TDSR is (All Housing Related Payments + Other Debt Obligations / Gross Annual Income). If the ratio is lower than 42% coupled with a credit score of 680+, then the lenders will continue to look at your application.
Loan To Value Ratio (LTV)
This ratio is essentially the amount the bank is willing to lend the borrower. For example, when the borrower is providing the minimum allowable down payment of 5% towards a home, the bank will lend 95% of the funds to purchase the home; this is called a High Ratio Mortgage.
Conversely, when a borrower is providing a 20% down payment, the bank will lend 80% of the funds necessary to purchase the home; this is called a Conventional Mortgage. These are both subject to an approval, of course.
Both high ratio and conventional mortgages have their own pros, cons and individual characteristics but let’s save that for a different conversation.
For more information, feel free to reach out to me, your trusted mortgage specialist
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