How banks determine how much to lend you?
Financial Institutions make the lion-share of their income from lending you money and so it comes as no surprise that they have it down to a science. The science of lending relies heavily on the acronym TDSR.
TDSR, or the Total Debt Servicing Ratio, is a financial measure used to determine how much of a borrower's income is being used to service debt. It is used by lenders to assess a borrower's ability to repay a loan and is an important factor in determining whether to approve a loan application.
The TDSR is calculated by dividing the borrower's monthly debt obligations (including mortgage payments, credit card payments, and other debts) by the borrower's gross monthly income. For example, if a borrower has monthly debt obligations of $2,000 and a gross monthly income of $5,000, their TDSR would be 40%.
In general, lenders prefer to see a TDSR of 45% or lower, as this suggests that the borrower has a reasonable amount of disposable income available to meet their financial obligations.
However, the TDSR is just one factor that lenders consider when evaluating a loan application, and other factors, such as credit score and employment history, may also be taken into account.