YOU NEED TO FIGURE OUT THREE THINGS:
- Your gross monthly income: the combined monthly salary and any other income—from investments, etc.—before taxes and deductions, of all people buying the property.
- Your monthly housing costs: mortgage principal, interest, property taxes and heating (and half your monthly condo fees, if any).
- Your total monthly debt costs: payments on credit cards, car loans, student loans, lines of credit. All of it.
Okay: time for math.
Multiply your gross monthly income by 0.32.This is your Gross Debt Service ratio: the maximum amount you can be paying for housing costs each month.If your monthly housing costs are greater than your GDS ratio, you won’t be considered for a mortgage.
Multiply your gross monthly income by 0.4.This is your Total Debt Service ratio: the maximum amount you can be paying toward total debt each month.Add your total monthly debt costs and your monthly housing costs together. If the number is greater than your TDS ratio, you’ll need to take some remedial steps before you apply for a mortgage. Pay off a loan. Close out a credit card.These numbers will help determine how much of your income can be used for housing costs, including your mortgage payment. These calculations are based on lenders’ standard guidelines.Don’t forget: the ratios may say you can afford a certain amount, but make sure you know just how much debt your household can manage comfortably. Don’t leave yourself house-poor. Structure your payments to give yourself some wiggle-room every month.