• Transcript of Video Blog:

    Hi everyone, it’s Rowan Smith with the Mortgage Centre. I want to address one of the more common misunderstood elements of mortgage financing, and that’s debt servicing. And what percentage of your income is allowed to go towards mortgage payments, principal, interest, taxes, heat, or other debt payments. There’s two main ratios that we use in the mortgage industry gross debt service ratio, and the total debt service ratio. The gross debt service ratio looks at your gross income and says what percentage of your gross income is being used by your mortgage payments, your principal and interest, taxes, and heat.

    Now, the old rules used to be 32, but now there’s ways that we can get as high as 44 percent of your income gross income before taxes is allowed to be used towards debt servicing. Now you have to qualify for that with a very clean credit rating. If your credit has some problems on it, you might only be allowed to use 35 percent of your gross income.
    That’s where someone like me comes in who can look at your situation, and know the appropriate number, the appropriate amount of money that you’re allowed to have to qualify for mortgage payments each month. So that’s the first main ratio, gross debt servicing. And that’s looking at, again, principal, interest, taxes and heat.

    You’ll notice I made no other mention of credit cards. Well, that’s where the total debt service ratio, or TDS, comes in. Total debt service looks at what percentage of your income is being used for all debts, mortgage, principal, interest, taxes, heat, and car lease, car loan, alimony support payments, any ongoing obligation that a person has, credit cards, lines of credit, that type of thing.
    So the general rule there is no more than 44 percent. And you may say, “But Rowan, you’ve said 44 percent was the maximum that could be used for mortgage.” Well, typically the ratios that we use are 35 percent of your income towards housing so principal, interest, taxes and heat.

    And 44 percent on the other side as the upward threshold for all of that, plus your other debts. Now, if you’re at 44 percent debt servicing chances are you’re eating a lot of macaroni, and not able to afford a lot of lifestyle that you would otherwise like.

    But nonetheless, it’s important just to look at what income number are they’re using 44 percent of what number? Well, that’s typically 44 percent of your gross before tax earnings from all sources. So if you have two part time jobs, well then yes, you can use a total amount of that particular sum of all income.

    So if you have somebody that’s being told that they can’t qualify because they’re using too high of a ratio their debt servicing ratios are out of line perhaps I can take a look at it and see if there’s another lender who has more relaxed guidelines, or maybe their bank is being particularly conservative because of their credit score.

    Any of these ratios I’ve discussed in this are entirely dependent on your credit score, and how clean it is. That will enable you to stretch, in the bank’s eyes, to use more money for housing expenses and other debt payments. For the Mortgage Centre, I’m Rowan Smith.

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