How do lenders determine how much house I can afford?

Lenders' affordability calculations can vary, but for the most part, they use two percentages based on your monthly income — your Gross Debt Service (GDS) and Total Debt Service (TDS).

Gross Debt Service (GDS) is the percentage of your monthly household income that covers your housing costs and should be about 39% or less of your monthly household income. Add up your mortgage payments (principal plus interest), taxes and heating expenses (and half of the monthly condominium fees, if applicable), then divide by your gross monthly household income.

Gross Debt Service Ratio Formula:
(Principal + Interest + Taxes + Heat) / Gross Annual Income

Total Debt Service (TDS) is the percentage of your monthly household income that covers your housing costs and any other debts and shouldn't exceed 44% of your monthly household income.

Total Debt Service Ratio Formula:
(Principal + Interest + Taxes + Heat + Other Debt Obligations) / Gross Annual Incom

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