CREDIT REPORTS: GDS AND TDS – What does it mean to be “qualified”?

The word “qualified” gets tossed around a lot when people talk about financing. What exactly does it mean to be qualified in a financial sense? How do lenders make that
determination?

The primary calculations that lenders use are Gross Debt Service Ratio (GDS) and Total Debt Service Ratio (TDS).

These are calculations that determine what percentage of your annual income you will be devoting to paying (or “servicing”) your debts. This includes the debt you’re applying for. These are useful and surprisingly simple budgeting tools that you can use for yourself. They will help keep your financial obligations at a reasonable level.

The calculations look like this:

GDSR = Annual mortgage payments + property taxes + heat / gross family income

TDSR = Annual mortgage payments + property taxes + heat + other debt payments /
gross family income

Most lenders will allow these ratios to go up to 39% GDS and 44% TDS. If you have recorded credit trouble on your credit report (for example, if your score is below 680), they may look for lower percentages, ie 5% GDS and 42% TDS.

In order to determine these numbers the lender needs more information. This is where the credit check comes in. The score is only one component. What also matters are the other payments you are obligated to make each month. A person can have income that results in a reasonable GDS. If there is also a line of credit, car loan, and large credit card balance this could push the TDS way out of line.

Another factor that lenders look at on a credit report is your repayment history.

Most credit sources are “revolving,” meaning the balance can increase or decrease with use.

On the credit report these appear with an R next to them and a number from 1-9 indicating the repayment history. 1 is the best rating, while 9 refers to a debt that’s gone to a collection agency.

Unless your account has been sent to collection, things like cell phone or cable bills will not show up on your credit report and so will not be included in the debt servicing calculation.

It is possible to go into a lot more detail about how credit scores are generated and what all the information on the report means. This is not intended to go into more detail. It is to show how important it is for you and your broker to have a look at your credit even at the pre-approval stage. The information is essential to the process of qualifying you for a purchase since it’s used to calculate your debt servicing ratios.

You will find more information about credit scoring on the Government of Canada’s Office of Consumer Affairs website.

Janice can help put you in touch with a reliable, experienced mortgage broker or you can contact your current financial institution or advisor.