GDS (Gross Debt Service Ratio)

What can I afford in a mortgage?

Important Note:
Let me say that you will need about $1500 or higher to close the deal. This will be for land transfer taxes and legal fees as well as other soft costs when closing.


Once you have decided how much money you have on hand and use that as a 5% to 25% (or more) down payment, then it is easy to figure out what will be 100% of the Purchase Price. A word of caution here. Remember that institutions have mortgage officers who are people like yourself. Some are warm and understanding and play in a human world. They will look at you as a person who is genuinely serious about buying and paying for a home. Then you run into the mortgage officer who does everything by the book. There is no room for a human element and therefore if the numbers aren't there, there is no way on God's green earth that you will get a mortgage from this person, or else they will make it very hard for you to get that little extra for the right home. If you see this in the person at your bank, call me and I will give you the names of several people who are more human and understanding.

Let's figure out how much of a mortgage you can afford to carry.

Calculation of GDS - Let us start with a hypothetical number and work through it from there:

Income
Principal + Interest + Taxes
= 30% = GDS
This is sometimes done in reverse by many institutions.

This gives you what in the marketplace is known as your Gross Debt Service amount for mortgage workup (GDS ratio is almost always 30%). This is used by almost all financial institutions. Some institutions say this is the law and others are a little more flexible and can stretch this a little to as much as 32%. This figure will be the total amount of money that the institution will allow you to use yearly towards a home.

  • Take your total gross income (this includes spouse or friends if they are involved),
    e.g.. $70,000 and then take 30% of that figure: $70,000X 30%(.3)* = $21,000
    Multiplying by 30% gives you the amount per year towards principal, interest and taxes.
  • From this point you divide by 12 months; $21,000 / 12 =$1,750/month.
  • Taxes are for this hypothetical property example are $2,400 per year. This means that they are about $200 per month. $1,750 - $200 = $1,550 per month for Principal and interest payments.
    Taxes vary according to the property and the municipality.
  • This translates into a mortgage of about $221,000.
    How I got this figure is not a secret, but it is hard to show here. I have a calculator for this purpose.
  • If you have 25% down, you will be able to buy a home valued at about $300,000.

For your convenience, I have a calculator that will give you a quick idea of what your GDS amount will be. All you need to do is substitute your own figures for the above and you should be able to come up with a value for your situation. There are an infinite number of variables here that you may not be taking into consideration. Those you will need to discuss with either your agent, mortgage officer or call me and I can quickly give you some more ideas.

A few notes before you begin.

The final figure the calculator returns is not exact, it seems to be out by about $10 per month, when I get a better and more sophisticated one, I will install it.)
So go to the Calculator page and do the calculation for yourself.
Once done, you can carry on to some more ideas.

I've calculated my GDS now what?

Now you need to talk to an agent to decide on whether there is anything that you can buy

This is important to me as an agent because you can do the next step once you have talked to an agent. The agent will assess your financial position relative to the marketplace and give you some ideas as to what you can buy for the money that you have at your disposal. Once the agent has done his/her preliminary work, that agent, (if they are any good), will send you back to your financial institution for what is known as preapproval.

This is a written commitment by the institution that they will approve your purchasing a property up to a certain price at a certain mortgage rate under certain terms for usually 60 to 90 days**. Armed with this written commitment you will now be able to pursue the task of purchasing a home with the confidence of knowing that you can afford what you are trying to buy.

Some institutions will put some restrictions on your purchase, so review these with your agent so that there will be no last minute hitches when it comes down to the crunch of buying and ultimately closing the deal.

Now you are ready to go looking at properties. Look at a lot of properties. The first few times that you go out with and agent decide that you are just looking to gain a better prospective, NOT to buy the first thing that you see. If the agent asks you to put in an offer, run away and look another day. If it is the best bargain in the city, too bad. Real Estate Agents have a reputation of being able to convince people that what they should buy is the best bargain in the world. Most agents are reputable, and most will go along with your desires. If you are not comfortable, tell your agent. If your agent is becoming too pushy, tell him/her to back off. Most will get the picture.

There are as many reasons for buying as there are buyers.

The first thing to decide is:

Do you want a "fixer upper " or do you want something you do not have to do anything to except move in??