The math behind the mortgage

Learn how lender's decide who qualifies

We at Blink believe the best way for you to qualify for a mortgage is to learn how the math behind mortgages is calculated, then using the newly obtained knowledge to pursue maximizing your qualifications. Buying a home is likely the largest purchase you will make in your entire life and we want to ensure that you are totally educated throughout the process.

If you are to interested in learning more about the differences between fixed and variable rate mortgages, we have a blog just for you right here!

How the calculations work:

Because a mortgage is a loan that takes into account the size of your down payment, income, credit score, and all outstanding debts, the main question that needs to be taken into account is:

How much new debt can be taken on while retaining the ability to service existing debt?

To answer this question, lenders use two important calculations known as affordability ratios:

Gross Debt Service (GDS): is an approximation of what your new total monthly house related expenses will be.

  • Your monthly housing related payments include:
  • New mortgage payments.
  • Heating costs.
  • Half of your monthly condo fees (if applicable).
  • And other housing related expenses.

Total Debt Service (TDS): An approximation of your monthly house related expenses (same as calculated in GDS) combined with total monthly debt related expenses.

  • Monthly debt obligations include:
  • 3% of your total amount of credit card or line of credit debt.
  • Monthly car payment.
  • Monthly student loan payment.

The rules to qualify for your mortgage state that GDS (Gross Debt Service) must be less than 39%, and your TDS (Total Debt Service) must be less than 44% of your income.

Student uses stick of chalk to point towards a blackboard reading E=MC^2

Example:

Let’s assume your monthly income is $5000

As your GDS must be less than 39%, your MAXIMUM allowable monthly payment is: $1950

Now let’s assume you make a monthly $500 car payment

TDS becomes important: take 44% of your monthly income ($5000) = $2200

Now subtract the $500 car payment from $2200 = $1700

The MAXIMUM monthly payment you could qualify for is 1700 because 1700<1950.

The reason the smaller value is chosen as your maximum allowable monthly payment is because a lender wants to take all debt obligations into consideration before approving mortgage payments, to ensure that the borrower can fulfill all their monthly payments.

What does this all mean?

Because the complete picture of your financial situation is taken into consideration when applying for your mortgage, it is important to understand how the calculations work and how you can work towards getting approved.

Understanding how outstanding debts like car payments and student loans drastically reduce your ability to borrow is important when trying to get pre-approved. Paying down these debts and/or increasing your monthly income, will allow you to increase how much house you can qualify for.

Want to learn more about the mortgage process and how digital mortgage brokers are the future of the industry? Check out more blogs here and learn more!

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