In today’s expensive housing market, getting a mortgage loan that fits your income is important.
The higher the amount you qualify for, the more buying power you have and the better your chances of outbidding others for your desired property.
However, qualifying for a high mortgage is not as simple as asking for more money.
Lenders adhere to strict guidelines determining the portion of your income usable for mortgage expenses.
This is influenced by your credit score, lender and loan type, income nature, and intended property use.
We’ve provided a guide below to help you estimate what you can afford and which lender to choose.
Income Percent for Mortgage Rules
The maximum percentage of your income that can be used for mortgage qualification depends on several factors.
These include your credit score, income type, how the property is used, the type of loan program, and the lender you select.
The primary measures used to determine the maximum percentage of your income for a mortgage are the Gross Debt Service and the Total Debt Service ratios.
These ratios both measure the proportion of your gross income covering your debts.
Gross Debt Service (GDS) Ratio Explanation:
The GDS ratio calculates the portion of your gross income required to manage housing costs.
This includes mortgage principal and interest payments, property taxes, heating costs, and condo fees (if relevant).
The limit on the proportion of your income that can be used for these costs can be 35%, 39%, or 45%, depending on factors like your credit score, income type, the lender, and the mortgage program you’re using.
Generally, a higher permissible limit can make qualifying for a larger mortgage amount easier.
Total Debt Service (TDS) Ratio Explanation:
The TDS ratio calculates the proportion of your gross income required to manage all your debts.
These debts include housing costs, car loans, student loans, credit cards, and other obligations.
Depending on variables such as your credit score, income type, lender, and the chosen mortgage program, the maximum percentage of your income allocated to these debts could be limited to 42%, 44%, or 50%.
Impacts Mortgage Income Ratio Limits on Your Mortgage Amount:
The lower the percentage of your income applied in your mortgage evaluation, the less likely you are to secure a high mortgage.
Given equal conditions, using 39% of your income for a mortgage will likely result in a higher loan amount than using 35%.
Similarly, a 45% income ratio can potentially qualify you for a larger loan than a 39% ratio.
Mortgages using over 50% of your income are also possible.
These are typically distinctive mortgage programs offered by private lenders. If you’re interested in exploring these options, consult with a mortgage broker.
Example of Mortgage Income Percentage Rules
Let’s walk through an example to better understand these income percentage rules. Imagine your annual gross income is $90,000.
That amount translates to a monthly gross (pre-tax) income of $7,500.
Now, let’s see how much of this monthly pre-tax income could be used to qualify for a mortgage.
The 35%/42% – GDS/TDS Rule:
This rule states that you should not allocate more than 35% of your gross income toward housing expenses (mortgage payment, property taxes, heating, and condo fees, if applicable).
Furthermore, no more than 42% of your gross income should go towards all your debts, including housing expenses, car loans, credit card payments, student loans, and other debts.
Let’s break down these percentages using your monthly gross income of $7,500:
- Gross Debt Service (GDS): At 35%, this equates to $2,625 (35% of $7,500), which should be your maximum spend on housing expenses.
- Total Debt Service (TDS): At 42%, this equates to $3,150 (42% of $7,500), which should be your maximum spend on all your debts, including housing.
| Income Rules | Income Rules | Calculations |
| GDS | 35% | 35% x $7500 = $2,625 |
| TDS | 42% | 42% x $7500 = $3,150 |
The 39%/44% – GDS/TDS Rule:
This rule proposes that no more than 39% of your gross income should be dedicated to housing expenses (including the mortgage payment, property taxes, heating, and condo fees if relevant).
And no more than 44% of your gross income should be used to cover all your debts. These debts encompass housing costs, car loans, credit card payments, student loans, and other obligations.
Let’s illustrate these ratios using your monthly gross income of $7,500:
- Gross Debt Service (GDS): According to a 39% limit, the maximum amount allocated for housing expenses should be $2,925 (39% of $7,500).
- Total Debt Service (TDS): Following a 44% cap, the total debt expenses, including housing, should not exceed $3,300 (44% of $7,500).
| Income Rules | Income Rules | Calculations |
| GDS | 39% | 39% x $7500 = $2,925 |
| TDS | 44% | 44% x $7500 = $3,300 |
The 45%/50% – GDS/TDS Rule:
You should not allocate more than 45% of your gross income to housing expenses, which include mortgage payments, property taxes, heating, and condo fees, if applicable.
The rule also recommends that no more than 50% of your gross income be used to service all your debts.
These debts include housing costs, auto loans, credit card payments, student loans, and other financial obligations.
To clarify, let’s apply these percentages to your monthly gross income of $7,500:
- Gross Debt Service (GDS): With a 45% limit, you should spend no more than $3,375 (45% of $7,500) on housing expenses.
- Total Debt Service (TDS): At a 50% cap, your total expenditure on all debts, including housing, should not exceed $3,750 (50% of $7,500).
| Income Rules | Income Rules | Calculations |
| GDS | 45% | 45% x $7500 = $3,375 |
| TDS | 50% | 50% x $7500 = $3,750 |
How Your Income Percentage for a Mortgage is Determined
Credit Score and Its Impact on Mortgage Qualification
Your credit profile consists of your credit score and credit history.
Your credit score, which ranges from 300 to 900, reflects your creditworthiness and changes over time based on factors like payment history, outstanding debts, and public records.
Credit history records your past credit behaviour over the last seven to ten years, which lenders can access through Equifax.
A higher credit score and a clean credit history improve your chances of qualifying for a mortgage.
Lenders reward good credit with lower interest rates and better terms, meaning a smaller portion of your income goes toward mortgage payments than someone with poor credit.
They segment borrowers into risk groups based on credit scores and apply income percentage rules accordingly.
This approach allows for consistent application of Gross Debt Service (GDS) and Total Debt Service (TDS) ratios, simplifying the evaluation of loan applications.
Credit Score Descriptions and Associated GDS/TDS Limits:
– Below 600 (Poor or Bad Credit): GDS is 45%, TDS is 50%. The 45/50 policy applies.
– 600 – 679 (Prime-Minus): GDS is 35%, TDS is 44%.
– 680 – 900 (Prime-Plus): GDS is 38%, TDS is 42%.
Although qualifying for a bad credit mortgage may be easier due to the higher permissible income ratio, these mortgages typically require a larger down payment, higher mortgage rate, and closing costs.
| Description | GDS | TDS | |
| Below 600 | Poor or Bad Credit | 45% | 50% 45/50 policy applies |
| 600 – 679 | Prime-Minus | 35% | 44% |
| 680 – 900 | Prime-Plus | 38% | 42% |
Gross Income:
This refers to your earnings before tax and other deductions.
Mortgage Lenders prefer applicants with stable income sources, typically favouring those with more than three years of steady full-time employment at a reputable organization.
Approval for a mortgage may be challenging if your income sources don’t meet these criteria.
For due diligence, lenders might request tax documents or even call your employer to verify your employment status verbally.
Income Types for Mortgage:
At approvU Mortgage, we categorize income into Fully-Verifiable and Non-Verifiable, based on the level of validation required.
Fully Verifiable incomes are from sources that can be confirmed through employment letters, pay stubs, and necessary tax documents.
This category typically includes full-time and part-time employees, pension recipients, and disabled individuals.
It also comprises small business owners who can authenticate their income with tax filings through the Canada Revenue Agency (CRA) and audited financial statements.
On the other hand, Non-Verifiable income applies mainly to self-employed individuals who are unable to validate their earnings with the requisite CRA documents and audited financial statements.
This kind of income is also known as ‘stated income.’
Mortgage Types:
We categorize mortgage programs into prime, alternative, and private classes.
Prime Mortgages:
This mortgage type is provided to borrowers with excellent credit histories, credit scores of over 600, and fully verifiable income sources.
Prime mortgage programs’ key features include low mortgage rates and modest down payment requirements.
Major lenders, such as the big six banks (TD, RBC, BMO, CIBC, BNS, and NBC) and monoline prime mortgage firms like Radius Financial, Equitable, B2B, Home Trust, MCAP, and others, offer this type of program.
The lenders offering prime mortgages adhere to strict income ratios and down payment guidelines.
Depending on your credit score, you’ll be assessed for a prime mortgage on either 35%/42% or 39%/44% GDS/TDS income rules.
Applying for prime mortgage programs with approvU is straightforward.
Alternative Mortgages:
These loan programs, offered by alternative lenders or ‘B-lenders,’ have a higher income-to-debt ratio requirement of 45%/50%.
The high income-to-debt ratios allow you to qualify for a higher mortgage amount compared to low ratios for prime mortgage programs.
Alternative mortgages are designed for borrowers who are unable to qualify for prime mortgages due to their credit score or income situation.
However, alternative mortgages typically require a sizable down payment of at least 20% of the loan amount and substantial closing costs of 1.5% to 3% of the loan amount.
You can also shop for alternative mortgages on approvU Mortgage.
Private Mortgages:
Private mortgages are a distinctive category within alternative mortgages.
These are primarily offered by non-institutional lenders, such as friends or family members with investment funds.
Private mortgage loan programs often have relaxed income ratio requirements, making qualification easy. However, this type of mortgage is expensive.
Borrowers can expect high interest rates (over 7%) and substantial closing costs (3%- 6% of the mortgage loan).
These loans are also typically interest-only. A private loan can be secured through a mortgage broker.
Frequently Asked Questions on Income Percent for Mortgage
What Is the Best Mortgage-to-Salary Ratio?
As explained above, your mortgage-to-salary ratio determines your credit score, income type and lender.
If your credit score surpasses 679 and your income can be substantiated with employment letters, pay stubs, and required tax documents, your mortgage-to-salary ratio will be 39/44.
If your credit score ranges between 600 and 679 and your income can be verified using employment letters, pay stubs, and necessary tax documents, your mortgage-to-salary ratio would be 35/42.
However, suppose your credit score falls below 600, or your income is derived from unverifiable sources that can’t be confirmed with standard documents like employment letters, pay stubs, or income tax reports. In that case, your mortgage-to-salary ratio will be 45/50.
Note:
It may seem counterintuitive that you could qualify for a larger mortgage with a lower credit score.
However, the key differences lie in the mandatory down payment, mortgage terms, and interest rates.
Mortgages granted to individuals with good credit scores generally offer the most favourable terms and conditions and the lowest interest rates in the market compared to those with lower credit scores.
What Is the Affordability Rule?
The affordable rule for a mortgage is a guideline lenders use to determine how much you can afford to borrow for a mortgage.
It’s generally based on a percentage of your gross monthly income that can be used towards housing costs, including mortgage payments, property taxes, heating expenses, and, in some cases, condominium fees. This rule is the same income percent rule explained above.
The two main ratios are the Gross Debt Service (GDS) Ratio and the Total Debt Service (TDS) Ratio.
What Is the Debt-to-Income Ratio?
The debt-to-income ratio is the percentage of your total monthly debt payments related to your gross monthly income. Lenders use it to assess your ability to manage debts and make timely payments.
For prime mortgages, the debt-to-income ratio can reach up to 44%, while alternative mortgages can go as high as 50%. This implies that if you’re pursuing a low-rate mortgage with a minimal down payment, your total monthly debt payments ideally should not surpass 44% of your gross monthly income.
However, if your income or credit situation only qualifies you for an alternative mortgage, your monthly debt payments should not exceed 50% of your gross monthly income.
How Much Can I Borrow for a Mortgage Based on My Income?
The amount you can borrow for a mortgage based on your income depends on several factors, including your income level, debt obligations, credit history, and the specific lending criteria of the financial institution you approach.
In general, lenders use the above income-percent guidelines to determine the mortgage amount you may qualify for.
The Gross Debt Service (GDS) ratio assesses the proportion of your gross income that can be allocated toward housing costs (including mortgage payments, property taxes, and heating expenses). The GDS ratio typically should not exceed 35-45% of your gross income, although this can vary depending on the lender and other factors.
Another important factor lenders consider is the Total Debt Service (TDS) ratio, which considers your total monthly debt payments (including housing costs) in relation to your gross income. The TDS ratio generally should not exceed 42-50% % of your gross income, but this can vary based on lender requirements.
What Is a Debt-Service Ratio?
A debt-service ratio, also known as a debt-to-income ratio, is a financial metric used in mortgage lending to assess a borrower’s ability to manage their debt obligations. It compares the borrower’s total monthly debt payments to their gross monthly income.
There are two types of debt-service ratios commonly used in mortgage lending:
1. Gross Debt Service (GDS) Ratio: The GDS ratio measures the proportion of a borrower’s gross income required to cover their housing expenses. This includes mortgage principal and interest payments, property taxes, heating costs, and, if applicable, 50% of condo fees. Lenders typically have guidelines specifying the maximum GDS ratio they will accept.
2. Total Debt Service (TDS) Ratio: The TDS ratio considers not only housing expenses but also other recurring debts the borrower may have, such as credit card payments, car loans, and personal loans. In addition to housing expenses, the TDS ratio considers these other debts and calculates the percentage of the borrower’s gross income required to cover all debt obligations.
Both the GDS and TDS ratios are expressed as percentages. Lenders set specific limits for these ratios to ensure that borrowers are not overextended with their debt payments. The limits may vary depending on creditworthiness, loan type, and individual lender policies.
By evaluating a borrower’s debt-service ratio, lenders can assess their ability to manage their monthly debt payments with their income comfortably. This helps lenders make informed decisions about mortgage approvals and ensures that borrowers are not taking on more debt than they can handle.
