Prior to starting to seriously shop for a home it's crucial to determine what you can afford to spend on ownership of the home. Being able to just pay the mortgage is not enough to qualify you for home ownership, several other factors must be taken into account including: property taxes, insurance, utility costs and regular home maintenance costs.
Most lending institutions will determine if you qualify financially based on two "universal" formulas: Gross Debt Service Ratio (GDS ratio) and Total Debt Service Ratio (TDS Ratio). In most cases you will need to meet the minimum requirements for both.
Gross Debt Service Ratio (GDS)
Generally speaking, this formula will determine the percentage of your gross monthly income that you are spending on monthly housing costs. The purpose here is to ensure you are not spending more than 32% of your income on home ownership. The formula used is:
Monthly housing Costs (PITH) / Gross Monthly Income = 32% (or less)
(PITH) = the sum of your monthly mortgage Principal and Interest payment, Property Taxes and estimated Heating Costs.
For example, an individual with a projected gross PITH of $1600 would need to show a gross monthly income of at least $ 5000 ($1600 is 32% of $5000) to qualify under GDS.
Total Debt Service Ratio (TDS)
TDS takes GDS a step further and looks at your entire monthly debt load. This includes your PITH in addition to your other monthly expenses, including: load payments, car payments, credit card monthly payments. This formula now ensures all your regular payments and PITH do not exceed 40% of your Gross monthly income.
Entire Monthly Debt Load (PITH + other monthly payments) / Gross Monthly Income = 40% (or less )
For example, an individual with a บ้านมือสอง ราคาถูก projected Entire Monthly Debt Load of $2300 would now need to show a Gross Monthly Income of at least $ 5750 ($ 2300 is 40% of $5750) to qualify under TDS.
Once you have determined the approximate amount of financing, we can move on to the purchase price we can comfortably expect to afford. In its simplest form your purchase price ceiling is the sum of your down payment amount and the amount of financing you have been approved for. It is important you realize you cannot use all of your available cash for the down payment as you will need to reserve an amount for closing costs (lawyer's fees, land transfer tax) and incidentals.
This pre-approval process is crucial prior to beginning your home search. Most lenders will approve you for a loan amount and guarantee the "current rate" for a period of up to 90 or 120 days. This means even if interest rates have changed, before you find a property, you may be able to get the lesser of the two rates.
These formulas are used to determine what amount you are able to comfortably able to pay based on your current income and current expenses. If prior to the funds being loaned to you your income or expenses change this will affect the amount you qualify for. Always advise your lending institution of any changes.
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