Gross Debt Service Ratio

Housing costs versus gross income: Typically, your monthly housing expense, including monthly payments for taxes and insurance, should not exceed about 28 percent of your gross monthly income. This can be expressed in the formula below:

HC < or = I x .28

where:

I = gross monthly Income

HC = monthly Housing Cost including tax and insurance

If you don't know what your tax and insurance expense will be, you can estimate that about 15 percent of your payment will go toward this expense. The remainder can be used for principal and interest repayment.

Housing and debt costs versus gross income: This is sometimes referred to as Gross Debt Service Ratio or GDSR. In addition to having housing costs be no more than a certain percent of your gross income, your proposed monthly housing expense and your total monthly debt service combined cannot exceed about 36 percent of your gross monthly income. If it does, your application may exceed the lender's underwriting guidelines and your loan may not be approved. This can be expressed in the formula below:

HC + D < or = I x .36

where:

I = gross monthly Income

HC = monthly Housing Cost including tax and insurance

D = gross monthly Debt

Example Calculations

The percentage amounts used below are given for example only.Note that actual percentage amounts will depend on several factors such as a FICO score as well as each lenders suggested GDSR for the type of mortgage.

Calculating maximum monthly allowable housing cost: for a monthly income I = $4000, housing costs should not exceed $1120

I x .28 > or = HC

$4000 x .28 = $1120

Calculating maximum monthly allowable housing and debt load: for a monthly income = $4000, monthly housing costs + monthly debt load should not exceed $1440

I x .36 > or = HC + D

$4000 x .36 = $1440

Calculating maximum monthly allowable housing cost based on income and debt load: for a monthly income = $4000 and a monthly debt of $400, monthly housing costs should not exceed $1040

In the example above, we calculated above that the maximum monthly housing and debt load should not exceed $1440

now we subtract the known monthly debt

$1440- $400 = $1040

This is how much Housing Cost (Tax + Mortgage + Maintenance + Insurance + Hydro) you can afford per month.