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What are TDS, GDS, and LTV ratios?

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There are many different factors that you will take into consideration when considering purchasing a property, including its location, size, and affordability. The last of these, affordability, is obviously one of the biggest factors that the lender will consider when you decide to take the last step in the purchase of your property and apply for a mortgage. But the way a lender determines affordability and the way you determine affordability are probably very different.
 
To a lender, affordability translates into two things: Gross Debt Service Ratio (GDS) and Total Debt Service Ratio (TDS). GDS and TDS are two mortgage formulas that lenders use to determine exactly how much money they are willing to lend you. Fortunately, you can make these calculations for yourself before applying for your mortgage so there shouldn’t be any nasty surprises lurking in the numbers. Let’s explore what each of these ratios mean and what the exact mortgage calculation formula is.
 
Gross Debt Service (GDS)
 
A GDS ratio is the percentage of your income needed to pay all of your monthly housing costs, including principal, interest, taxes, and heat (PITH). You’ll also need to include 50 per cent of your condo fees, if applicable. The majority of lenders abide by a general standard of 35 per cent, so your GDS should be lower than that to qualify for a mortgage.
 
To calculate your GDS ratio, you’ll need to add all of your monthly housing-related costs and divide it by your gross monthly income. Then multiply that sum by 100 and you’ll have your GDS ratio.
 
Total Debt Service (TDS)
 
Your TDS ratio is the percentage of your income needed to cover all of your debts. The debt ratio formula calculation is the same as that of the GDS, except all of your monthly debts are taken into consideration. This includes car payments, credit cards, alimony, and any loans. The industry standard for a TDS ratio is 42 per cent.
 
To calculate your TDS ratio, add all of your monthly debts and divide that figure by your gross monthly income. Then multiply that sum by 100 and you’ll have your TDS ratio.
 
Alternatively for both GDS and TDS calculations, you could add up your monthly housing expenses/all of your monthly debts and multiply by 12 to get the total amount for the year, and then divide that number by your annual salary. Multiply that figure by 100 to get your GDS/TDS ratio.

Let’s look at some scenarios:

  1. Linda and Bill want to buy a house. Their combined annual salary is 82,000, which makes their gross monthly income $6,833. They estimate that their mortgage payment and property taxes will be $2,250, heat will be $75, and they’re making $250 in credit card payments a month, with $375 in car loans.

GDS: $2,325 / $6,833 = .34 x 100 = 34 per cent

 

TDS:  $2,950 / $6,833 = .43 x 100 = 43 per cent

  1. Ed wants to buy a condominium. With an annual salary of $65,000, his gross monthly income is $5,417. He estimates that the mortgage payment on his home will be $1,650, his monthly bill for his property taxes will be $125, heat is $35, and condo fees are $500. He also has a student loan payment of $550.

GDS: $2,060 / $5,417 = .38 x 100 = 38 per cent

 

TDS: $2,610 / $5,417 = .48 x 100 = 48 per cent

 

As you can see, Linda and Bill are below the GDS standard, but their TDS is a little bit higher than lenders like to see. Both of Ed’s ratios are too high according to industry standards.
 
What if my ratios are higher than the industry standard?
 
The first thing to remember is that these ratio percentages are simply industry guidelines and vary from lender to lender, both within the same category of lender as well as across different types of lenders (banks vs. non-depository lenders, B lenders and private lenders). Therefore, they are not set in stone. Some lenders will emphasize other factors when determining the validity of an applicant. For instance, the loan-to-value ratio (LTV) is much more important to B lenders, as they are lending based on equity and income can simply be stated to alter the TDS/GDS ratios. The LTV is a simpler calculation; it’s the ratio of the size of the loan to the value of the property.

 

In some cases, the loan may be high-ratio (which means that the down payment for that loan was less than 20 per cent), which requires it to be insured by the Canadian Mortgage and Housing Corporation (CMHC) or by private insurers Genworth or Canada Guaranty. In the case of insured loans, the GDS or TDS can be as high as 39 to 44 per cent with a credit score of at least 680.

 

In the two scenarios above, Bill and Linda can lower their TDS by eliminating their credit card debt, while Ed could benefit from choosing building with less expensive condo fees, which would lower both of his GDS and TDS ratios. But while Bill and Linda have lower GDS and TDS ratios, if they also have a lower credit score, then they still may not be viewed as favourably as their ratios suggest. Conversely, while both of Ed’s ratios are higher than the standard, other factors may consider him less of a risk.

 

According to the CMHC, it’s important to note that “debt service flexibilities are based on an assessment of the strength of the overall application. Satisfying the minimum credit score alone does not automatically entitle the borrower to debt service flexibilities.” The easiest and simplest ways to decrease your ratios are paying off some of your debt load, increasing your down payment, or adding rental income. If you will be living with a partner and don’t have them added to the application for some reason, then consider doing so if it will add income to the equation. Depending on the amount of debt that your partner is carrying, it may not be helpful, but it’s certainly worth doing the calculation to check. Another option (that many people don’t like to confront) is to buy a less expensive home, whether that means one with a lower sales price, lower operating/heating costs, or lower property taxes in a different area.

 

GDS and TDS ratios are just a small component when looking at your overall suitability as a borrower, but it gives lenders a way to figure out whether or not your income will cover the costs of your mortgage, and therefore be less of a risk to the lender. Still, if your GDS and TDS ratios are higher than the industry standard, it’s worth trying to tackle some of your debts before seeking out an alternative lender, since those lenders will often have higher interest rates as well as higher fees associated with the loans. Remember, the lenders aren’t looking at you personally and judging whether or not you deserve a home; they’re looking at you as a potential risk and calculating whether or not they’re going to be able to collect the money that you’ll owe them.

 

Your GDS and TDS figures don’t tell the whole story – they don’t take other basic expenses into account like transportation or food. So you want the ratios to be as low as possible to leave room for all of your other incidentals. Using an affordability calendar to figure out how much mortgage you can actually afford will help you keep an eye on the bigger picture.

Are you looking to invest in property? If you like, we can get one of our mortgage experts to tell you exactly how much you can afford to borrow, which is the best mortgage for you or how much they could save you right now if you have an existing mortgage. Click here to get help choosing the best mortgage rate

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‘Don’t give up’: Ottawa Valley realtors share statistics, tips for homebuyers in ‘extreme’ sellers market

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The real estate market in the Ottawa Valley can be summed up this way: people from far and wide are in a buying frenzy, but there’s hardly anything to buy at the “store,” and the limited inventory is overpriced.

This “stampede” — as one realtor described it — will affect rural towns as residents grapple with finding affordable housing and agonize over their inability to purchase homes in their price range.

“We are seeing a lack of inventory in all price ranges,” said Laura Keller, a real estate agent from Carleton Place. HomeYou’ve been selected.Only $1.49/week for your first 4 months.Special offer just for you. Unlimited access.

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10 Tips For First-Time Home Buyers

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Buying a home for the first time is exciting and a commitment to the future. It’s often challenging, too, and the process requires a lot of steps, many of which can be tricky to navigate as a first-time home buyer.

What are some things you should keep in mind as a first-time home buyer?

First-Time Home Buyer Tips

Here are 10 tips to keep in mind as you begin your journey toward homeownership.

1. Have Your Finances in Order

It’s wise to begin saving as early as possible once you’ve made the decision to purchase a house. You’ll need to consider the down payment, closing costs (which often range from 2% to 5% of the down payment), as well as move-in expenses.

You also need to understand the other costs of homeownership, such as mortgage insurance. property taxes, utilities, homeowner’s insurance, and more.

2. How Much Can You Afford?

Knowing how much you can realistically afford in a home is another important financial consideration. Look for the home of your dreams that fits your budget.

One way to avoid future financial stress is to set a price range for your home that fits your budget, and then staying within that range. Going through the preapproval process will help you understand what price range is realistic for your budget.

3. Make Sure Your Credit is Good

Another thing to keep in mind as a first-time home buyer is your credit score because it determines whether you qualify for a mortgage and affects the interest rate that lenders offer. 

You can check your credit score from the three credit bureaus – Experian, Equifax, and TransUnion.

This is another good reason for getting preapproved before you start your search. Learn more about the preapproval process and your credit score.

4. Choose The Right Real Estate Agent

A good real estate agent guides you through the process every step of the way. He or she will help you find a home that fits your needs, help you through the financial processes, and help ease any first-time buyer anxiety you may have.

Interview several agents and request references.

5. Research Mortgage Options

A variety of mortgages are available, including conventional mortgages – which are guaranteed by the government – FHA loans, USDA loans, and VA loans (for veterans).

You’ll also have options regarding the mortgage term. A 30-year fixed-rate mortgage is popular among many homebuyers and has an interest rate that doesn’t change over the course of the loan. A 15-year loan usually has a lower interest rate but monthly payments are larger.

6. Talk to Multiple Lenders

It’s worth your time to talk to several lenders and banks before you accept a mortgage offer. The more you shop around, the better deal you’re liable to get – and it may save you thousands of dollars.

7. Get Preapproved First

Getting a mortgage preapproval (in the form of a letter) before you begin hunting for homes is something else to put on your checklist. A lender’s preapproval letter states exactly how much loan money you can get.

Learn more about the preapproval process and how preapproval provides you with a significant competitive advantage in our article How Preapproval Gives You Home Buying Power.

8. Pick the Right House and Neighborhood

Make sure to weigh the pros and cons of the different types of homes based on your budget, lifestyle, etc. Would a condominium or townhome fit your needs better than a house? What type of neighborhood appeals to you?

9. List Your Needs and Must-Haves

The home you purchase should have as many of the features you prefer as possible. List your needs in order of priority; some things may be non-negotiable to you personally.

10. Hire an Inspector

Hiring an inspector is another crucial step in the home buying process. An inspector will tell you about existing or potential problems with the home, and also what’s in good order. You can learn more about home inspections and how to find a home inspector through the American Society of Home Inspectors website.

Buying a home for the first time is a challenge, but it’s one you can handle with the right planning and preparation.

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A Simplified Guide for Toronto First-Time Home Buyers

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Toronto is the largest city in Canada, the fourth largest city in North America, which makes it an exciting place to live in.

But as with other major cities, finding the perfect place to move to can get tricky. If you’re planning on buying a home for the first time in this city, it is indeed a big decision and there are things you should know in advance.

Don’t worry, this guide will help explain the basics of what you as a buyer should know when you decide to buy a home. It will make you feel like a true expert during the buying process.

Decide what type of home you are looking for

There is no right answer to what makes a good home. It all depends on your preferences and needs as the resident. It is, therefore, a good idea to determine as early as possible which features of a home are important to you. If you are buying a home and moving in with someone, it can be a good idea for both of you to make a list and compare.

Toronto is a city that offers different styles of living accommodations and its neighborhoods are quite versatile and diverse, same as the people living there who come from all parts of the world.

The most common forms of housing and real estate opportunities in this city include bungalows, two-storey houses, split-level homes, and the very popular Toronto condos. Due to the high property values, the city boasts of construction of many condominiums as they are a more cost-efficient choice and provide a plethora of benefits.

When you decide on the type of home you want to buy, it is good to do some research and learn the biggest differences between them.

What to think of when choosing homes in Toronto

There are certain things you need to consider when choosing your home in this city. 

Being close to the things you need to visit every day makes life a lot easier. Pay attention to the proximity to shops, preschools, schools, and your job. In addition, access to good public transportation is crucial. Being able to move around the city easily and the opportunity to commute is important to many.

Know that having a balcony can significantly increase the value of your home and improve your well-being. Being able to move easily in the area is something that many people underestimate, but can be very convenient, and this is why you should see if there are good cycles and walking paths. 

And finally, make sure that the house is well designed which is a quality that does not disappear with the age of the house or with renovations. 

Set your budget

Before you start the search for your new home, you must know how expensive of a home you can buy. It is preferable to know in what price range to look for. The budget is usually decided based on your mortgage and how large are the monthly costs you can handle.

A mortgage is always about a balance between risk and income for the bank. The higher the risk for the bank to lend to a particular home, the more expensive the mortgage will be. When it comes to the bank’s reasoning when applying for a loan, it is in principle always a question of whether you as a borrower will be able to repay the mortgage.

The bank also takes into account your financial history. If you are a person who has managed your finances well, the chance increases that you will get your mortgage approved. If, on the other hand, you have a bad reputation with banks, it is weighed in as an aggravating circumstance.

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