“Debt servicing” is your ability to meet all payments without exceeding the income received by you. There are two ratios that are examined by financial institutions to determine whether you can debt service a mortgage. The first one is called the “gross debt service” ratio and the second is called the “total debt service” ratio.
With the gross debt service ratio, a lender looks at your annual income in comparison to your proposed annual mortgage payments (including heat and property taxes). This ratio cannot exceed 35%. For those who have exceptional credit, the allowable GDS ratios can increase to as high as 39%.
Once you meet these criteria, the lender then examines your total debt service ratio. This ratio involves comparing your annual income to the total amount of debts you have (the proposed mortgage payment, credit cards, loans, personal lines of credit, support payments and all other financing obligations). Generally, this ratio cannot exceed 42%. For those who have exceptional credit then the allowable TDS ratios can increase as high as 44%.
For those whose ratios exceed these parameters and may not have these higher credit scores, there may be alternate financing sources available, or a creative solution to reduce the ratios.
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