Mortgage Mathematics and Qualification Analysis
The Numbers That Decide Files
Candidates must calculate monthly payments, gross debt service (GDS) and total debt service (TDS) ratios, loan-to-value, and the effect of rate changes on affordability. Know how to convert an annual rate to a monthly or semi-annual compounding basis, and how to apply a stress test or qualifying rate. Understand how amortization, prepayment, and penalty calculations interact.
Traps to Watch
Questions often test the difference between the contract rate and the qualifying rate, or between GDS and TDS. Another trap is forgetting to include property taxes, heating, and half of condo fees in GDS. Watch for distractors that use simple interest when the loan compounds semi-annually, or that compare a 25-year and 30-year amortization without adjusting the payment.
Rule of Thumb
Qualify at the higher of the contract rate or the stress-test rate, and include all housing costs in GDS. A file that passes at the contract rate may fail at the qualifying rate.
Worked Example
A borrower has $6,000 monthly gross income. Housing costs (mortgage payment, taxes, heating, half of condo fees) total $2,400, and other debt payments total $600. GDS = 2,400 / 6,000 = 40%. TDS = (2,400 + 600) / 6,000 = 50%. If the lender's limits are 39% GDS and 44% TDS, the file fails both. Reducing the mortgage payment or clearing the other debt is required.