How Large a Mortgage will you be Allowed to Carry?
When you go to a financial institution to apply for a mortgage they will have two main areas of concern:
● do you have the ability to pay the loan every month?
● will there be enough value in the property for them to recover their money should you default on the loan?
Two terms that will be used by financial people are GDS (Gross Debt Service Ratio) and TDS (Total Debt Service Ratio). These ratios are used by the financial institution to gauge both your ability to carry the mortgage and to make your payments consistently.
To determine if the property will have enough value to secure the mortgage, the financial lending institution will require an appraisal of the property. As long as the appraised value comes in at the purchase price or higher, there are no problems. However, if the appraisal comes in lower than the purchase price then you have to either:
● renegotiate the deal and/or the mortgage
● increase your down payment
Calculating your Gross Debt Service Ratio (GDS)
For most lenders the GDS must fall in the range of 28-30% of your Gross Family Income.
To calculate your Gross Family Income you can include:
● your gross pay (pay before deductions)
● your spouse's gross pay
● any investment income
For example if your gross family income is $50,000 annually, ($4166.66 per month) you could carry:
GDS x Gross Monthly Income = Maximum Allowable Principal, Interest & Taxes Monthly
30% x $4166.66 = $1250.00
Determine what the monthly taxes are on the property that you are interested in and subtract from the $1250.00. This will give you the maximum amount of principal and interest that you will be able to carry.
For our example, assume that the monthly taxes are $150.00. You would then be able to carry $1100.00 principal and interest.
By using the following amortization chart you can determine how much mortgage you can have:
Amortization Chart - Monthly Payment per $1000
(At 9% interest and a 25 year amortization)
$1100.00. 8.28 (from chart) = $132,850.24 (mortgage amount)
Calculating your Monthly Payment
Find the figure under the mortgage interest rate (%) that corresponds to the number of years you want to pay off the loan.
If your interest rate is 9% and the term of the mortgage is 25 years, then you need to pay $8.28 per month for each $1,000.00 of mortgage. Therefore, if your mortgage amount is $132,000.00 your monthly payment will be:
$8.28 X 132 = $1092.96
Calculating your Total Debt Service Ratio (TDS)
Most institutions require that your TDS Ratio be 35 - 37% of your Gross Family Income.
To determine the Total Debt Service, add ALL of your monthly debt expenses; credit cards, car loans, child support, other mortgages, etc.
For our example lets assume monthly payments of $250.00
TDS x Gross Monthly Income = Maximum Allowable PIT & Debt (principal/interest/taxes)
37% x $4166.66 = $1541.66
Your allowable monthly expenses would be $1541.66, with PIT of $1250.00 and a debt of $250.00 per month. You would still be able to carry the $132,000.00 mortgage.
If your TDS is too high you may have to pay off some of your debt, consolidate debts to give you lower monthly payments.
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