CREDIT REPORTS: GDS AND TDS (WE SWEAR IT’S NOT ALPHABET SOUP)
What does it mean to be “qualified”?
The word “qualified” gets tossed around a lot when people talk about financing, but what exactly does it mean to be qualified in a financial sense, and 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 yearly income you will be devoting to paying (or “servicing”) your debts, including the one you’re applying for. These are actually very useful and surprisingly simple budgeting tools that you can use for yourself to 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, though if you have recorded credit trouble on your credit report (for example, if your score is below 680), they may look for the numbers to be below 35% GDS and 42% TDS.
In order to determine these numbers the lender needs more information, and this is where the credit check comes in. The score is only one component, as 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, but also have a line of credit, car loan, and large credit card balance that pushes his or her 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.
We could go into a lot more detail about how credit scores are generated and what all the information on the report means, but what this goes to show is that it is important 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.
If you’re interested in more information about credit scoring, have a look at Credit Report, Credit Score and Credit Rating on the Government of Canada’s Office of Consumer Affairs website, or check out our own post that explains credit in even more detail.
