Gross debt service ratio and total debt service ratio are two essential figures considered by a lender to decide whether he should grant you a loan or not. It is also necessary for the potential borrower to calculate GDS and TDS ratios to know how much they can afford on homeownership.
Gross Debt Service Ratio (GDS)
The gross debt service ratio is the percentage of annual income of the borrower required to pay all kinds of monthly payments associated with the housing. These payments usually include mortgage principal, interest, property taxes and if you are buying a condominium, lenders will consist of 50% of condo fees in your GDS ratio.
To calculate your GDS ratio, the lender will consider your annual mortgage payments, property taxes, heating costs and 50% of your condo fees (if applicable). All these costs will be added, and the result will be divided by your gross annual income to obtain the gross debt service ratio. As per the industry standards, your GDS ratio must be less than 32 percent to qualify for a loan.Total Debt Service Ratio (TDS)
Total debt service ratio is the percentage of gross annual income required to cover payments related to housing as well as all other debts and obligations including loans or the minimum payments on any credit card debt.
To calculate TDS ratio, a lender will add all your mortgage payments, property taxes, heating costs, 50% of your condo fees and debts and then will divide the total by your gross annual income. As per industry standards, your TDS should be less than 40 percent to qualify for the loan by the lender.
However, it is not a hard and fast rule, and you may get qualified for a loan even if your GDS and TDS are slightly higher than industry standards. In such a case, the lender will consider your credit history or some valuable assets to grant a loan.
Your credit score is used by the lender to know your financial health and to decide whether they should lend you money or not. In Canada, credit score range from 300 to 900 points. As per TransUnion, a Canadian credit report agency, 650 is the magic middle number - a score above 650 will likely qualify a lender for a standard loan, while a score below it may make it difficult for the borrower to receive a new credit. In general, practice, if your credit score is more than 700, it demonstrates to the lender that you can use credit responsibly, and he should feel comfortable in lending you money. On the other hand, the lower credit score demonstrates that you have mismanaged your credit.
Lenders generally use credit score to set your interest rate and credit limit. If you have a high credit score, you may be able to get loans at lower interest rate and similarly, you might have to pay higher interest on loan, if your credit score is poor.
It is important to note that credit score is a vital factor, but it is not the only factor considered by the lender for lending you a loan. Lenders often consider other factors along with credit score such as your income, job or any assets you own to make a decision for granting loan.
How Credit Score is Built?
Credit score is built on the basis of credit report prepared by credit reporting agencies in Canada. These are the private agencies engaged in collecting, storing and sharing information about how you use credit. A credit report agency is also known as credit bureau or just a bureau. In Canada, there are two main credit reporting agencies: Equifax Canada and TransUnion Canada.
You can request both agencies to get one free copy of your credit report each year. You can also look up to your credit score on paying a fraction of amount as fee to the credit report agency. It is a sound practice to check your credit report annually to make sure there are no repercussions in it.
Your Credit Score and Mortgage
Your credit score affects the decision of lender to lend you a loan. It also helps you to know from where you can borrow. Lender also uses it to decide your interest rate on mortgage. A poor credit score may mean you will pay higher interest, offered a smaller credit limit or your loan application simply rejected outright.
If your credit score varies from 600 to 900 points, you may get a loan from prime lenders like major banks. If your credit score is 600 or less, you may still get loan from private lenders but rates will be higher than normal interest rate.
Tips to Boost your Credit Score
- The best way to boost a good your credit score is to repay that credit on time all the time. One should set up automated payments for monthly credit card, utility, rent, mortgage and other bills.
- One must pay bill on time as delinquent payments and collections have a negative impact on a credit score.
- One should keep balances of credit cards low and apply for new accounts only as needed.
- A missed mortgage payment has huge impact on your credit rating. Some lenders can be very slow in informing credit agencies when debt has been repaid. One should check for credit report carefully to make sure that it is accurate and up to date.