# What’s an Ideal Debt-To-Income (DTI) Ratio for a Mortgage?

Written by
| Aug 1, 2024
Reviewed by
| Aug 1, 2024
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When applying for a mortgage, you will undergo a financial assessment to determine what you can comfortably afford when purchasing a home. Part of this assessment will be determining your debt-to-income (DTI) ratios. These ratios consider your projected household expenses and current debts against your income to determine if you have the financial means to carry a mortgage.

#### Key Takeaways

• Debt-to-income ratios are a metric that lenders use to evaluate your ability to manage mortgage payments along with your existing debts.
• Lower DTI ratios improve your chances of being approved for a mortgage.
• DTI consists of two ratios: Gross Debt Service (GDS) and Total Debt Service (TDS).

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## What’s a Debt-To-Income Ratio?

Debt-to-income ratios, or debt service ratios, are expressed as a percentage and compare your debts to gross income. The lower your debt-to-income ratios, the less debt you have compared to your income, while the higher your ratios, the more debt you have compared to your income.

Lenders use these ratios to assess your ability to repay a loan and manage debt. Debt-to-income ratios have two components: gross debt service (GDS) and total debt service (TDS).

GDS calculates the expected monthly household debts against your pre-tax income. This includes stress-tested mortgage payments, property taxes, heating, and, if applicable, 50% of condo (strata) fees.

TDS calculates the expected monthly household costs plus your current monthly debt payments against your pre-tax income. This includes payments made to monthly credit cards, lines of credit, personal loans, car loans and leases, child and spousal support, and student loans.

## Calculating Debt-To-Income Ratio

Calculating your DTI ratios requires you first to add up your expected monthly household debts against your income to determine your GDS ratio. For example, if you have a combined household income of \$150,000 and are considering purchasing a \$500,000 condo with a 20% downpayment at an interest rate of 5.09%, your monthly mortgage payments would be approximately \$2,347 over a 25-year amortization.

However, as you’ll need to be stress tested to qualify, your qualifying mortgage payment will be 2,823.92 based on your qualifying rate of 7.09%. Annual property taxes are estimated at 1%, heating costs are estimated at \$100 a month, and condo fees are \$500.

GDS = (Monthly Mortgage Payment + Monthly Property Taxes + Monthly Heat + 50% Condo Fees) / Monthly Income

Monthly Mortgage Payment – \$2,824

Monthly Property Taxes – (\$500,000 x 0.01) / 12 = \$416.67

Monthly Heat – \$100

Condo Fees – \$500 / 2 = \$250

Monthly Income – \$150,000 / 12 = \$12,500

GDS = (\$2,824 + \$416.67 + \$100 + \$250) / \$12,500

GDS = \$3,591 / \$12,500

GDS = 0.287 x 100 = 28.70%

Knowing your GDS, you can calculate the TDS more easily. In addition to the expected household expenses, you have a line of credit with a \$200 monthly payment, a car loan with a \$300 monthly payment and a student loan with a \$200 monthly payment. Although your qualifying mortgage payment is higher, that’s not the amount you’ll pay when your mortgage funds.

TDS = (GDS Debts + Current Debts) / Monthly Income

GDS Debts – \$3,591

Current Debts – \$200 + \$300 + \$200 = \$700

Monthly Income – \$12,500

TDS = (\$3,591 + \$700) / \$12,500

TDS = \$4,291 / \$12,500

TDS = 0.343 x 100 = 34.30%

## Ideal Debt-To-Income Ratio for Mortgages

Ideally, the lower your debt-to-income, the more likely you will be approved for a mortgage. Since these ratios indicate your ability to repay debt, you may not qualify for a mortgage if they are too high.

### Maximum Debt-To-Income Ratio for Mortgages

Maximum limits vary depending on the lender and whether your mortgage is default-insured. Typically, for gross debt service ratios, lenders will accept a maximum of 32% for an uninsured mortgage and 39% for an insured mortgage. For total debt service ratios, lenders typically accept a maximum of 40% for uninsured and 44% for insured mortgages.

## ​How Do I Lower My Debt-To-Income Ratio?

There are some ways you can lower your debt-to-income ratios to make it easier to qualify for a mortgage.

• If you have savings, you could make a larger downpayment to lower monthly mortgage payments.
• Choose a lower-cost home to lower monthly mortgage payments.
• Pay down existing debt, especially high-interest credit cards and unsecured loans.
• Consolidate your debt into a lower-interest loan or line of credit with a single monthly payment.
• Increase monthly household income.
• Add a co-signer or guarantor to the mortgage to increase monthly income.

## DTI and Credit Score

Your credit score can impact the DTI ratios your lender will use when qualifying you for a mortgage. Generally, the lower your credit score, the lower your qualifying ratios will need to be to secure a mortgage. If you have good or excellent credit, your qualifying ratios can be higher as long as they don’t exceed the maximum allowable based on your lender’s requirements and type of mortgage (insured or uninsured).

Note: Consider how debt service ratios can differ on subprime mortgages to improve your chances of qualifying for a mortgage with higher DTI ratios. Gaining insight into these ratios can assist you in navigating the mortgage strategy that best meets your unique needs.

### What is the debt-to-income (DTI) ratio?

Debt-to-income ratios assess your capacity to manage and take on more debt. They’re measured by taking expected household debts, adding them to your current debt load, and comparing the result to your gross monthly income to determine if you can financially handle repaying a mortgage.

### Why is the DTI ratio important for getting a mortgage?

Your DTI ratios are important when assessing your capacity to take on a mortgage because they help lenders determine whether you can handle mortgage expenses in addition to your current debt load. The higher your DTI ratios, the more likely lenders will believe you can become overextended and struggle to make mortgage payments if your financial situation changes.

### How do I calculate my DTI ratio?

To calculate your DTI ratios, add the expected monthly household debts, including the qualifying (stress-tested) monthly mortgage payment, property taxes, heat, and, if applicable, 50% of condo fees against your monthly pre-tax income. This will give you your gross debt service (GDS) ratio and make it easier to calculate your total debt service (TDS) ratio.

To calculate total debt, you take the calculation from the GDS and add any other current debts, such as monthly credit card payments (3% of the outstanding balance), loans and lines of credit, car loans and leases, child and spousal support, and student loans, against your monthly pre-tax income.

Note: For lines of credit, lenders will calculate the qualifying monthly payment based on either 3% of the outstanding balance or a monthly payment calculated using the minimum qualifying rate (5.25%) over a 25-year amortization if the total balance owing exceeds \$50,000.

### What income sources are included in the DTI ratio calculation?

You may be able to include the following income sources in your DTI calculations: employment income, Sole proprietor or incorporated income, casual/contract/partnership income if there is a 2-year average that can be confirmed from T4s or NOAs, spousal/child support (with a separation agreement and confirmed from deposit statements), Canada Child Benefit (UCCB), Canada Pension Plan (CPP), Old Age Security (OAS), Employer Specified Pension Plan (SPP), and investment income (RIF, LIRA, LRSP, LIF).

### Does paying off debt improve my DTI ratio quickly?

Paying off debt can quickly improve your DTI ratios since reducing outstanding debt lowers your total monthly debt obligations. This will lower your debt-to-income ratios since they are calculated as a percentage of your debts compared to income.

## Final Thoughts

When applying for a mortgage, your debt-to-income (DTI) ratios are crucial in determining your ability to manage and take on more debt. These ratios measure how much of your income will be used to cover debt and mortgage payments, allowing lenders to better understand your financial situation.

Lenders use GDS and TDS ratios to assess your capacity to take on a mortgage and your likelihood of making timely repayments. If your DTI ratios are too high, you may only qualify for a mortgage if you work toward reducing your current debts.

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