Table of Contents
- What Is the Total Debt Service (TDS) Ratio?
- Key Takeaways
- How Total Debt Service (TDS) Ratio Works
- Important Note
- Example of the Total Debt Service (TDS) Ratio
- How to Calculate Total Debt Service (TDS) Ratio in Excel
- Total Debt Service (TDS) Ratio vs. Gross Debt Service (GDS) Ratio
- Special Considerations
- How Do You Calculate Total Debt Service (TDS) Ratio?
- How Low Should My TDS Be for a Mortgage?
- What Is the Difference Between TDS (Total Debt Service) and GDS (Gross Debt Service)?
What Is the Total Debt Service (TDS) Ratio?
Let me explain the total debt service (TDS) ratio to you—it's total debt obligations divided by gross income, a financial metric lenders use to decide if they should extend credit, especially for mortgages. When lenders calculate this, they look at the percentage of your gross income that's already tied up in debt payments, covering both housing and non-housing bills.
For the housing part, include everything related to your home: mortgage payments, real estate taxes, homeowners insurance, association dues, and utilities. The non-housing side covers the rest, like auto loans, student loans, credit card payments, child support, and alimony.
Key Takeaways
You need to know that the TDS ratio is a lending tool mortgage providers use to check if you can handle a loan. It differs from the gross debt service (GDS) ratio because it accounts for both housing and non-housing debts. Generally, you'll need a TDS below 43% to get a mortgage, but many lenders stick to stricter limits around 36%.
How Total Debt Service (TDS) Ratio Works
When you're applying for a mortgage or any loan, understand that your TDS ratio is a major factor in whether you get approved or not—it's right up there with having a stable income, paying bills on time, and a solid credit score.
Keep in mind, the lower your TDS ratio, the better your odds of approval. If your ratio is high, you're seen as more likely to struggle with payments compared to someone with a lower one.
Lenders will stack your TDS against their benchmarks, usually 36% to 43%, to see if you can handle another monthly payment on top of everything else. Many want it at 36% or below for approval, and most won't go above 43%.
Important Note
Lenders favor borrowers with TDS ratios of 36% or less; if yours exceeds 43%, you're rarely going to get approved for a mortgage.
Example of the Total Debt Service (TDS) Ratio
To figure out how your TDS ratio gets calculated, add up your monthly debt obligations and divide by your gross monthly income. Take this hypothetical: someone with $11,000 gross monthly income and $4,225 in debts ($2,225 mortgage, $1,000 student loan, $350 motorcycle loan, $650 credit card).
Divide $4,225 by $11,000 and multiply by 100 to get 38.4%—that's above the 36% low end but under 43%, so this person would likely qualify for a mortgage.
How to Calculate Total Debt Service (TDS) Ratio in Excel
You can calculate the TDS ratio in Excel with this formula: =SUM(debt/income)*100. Using the example, it'd be =SUM(4225/11000)*100, which gives 38.4%.
Total Debt Service (TDS) Ratio vs. Gross Debt Service (GDS) Ratio
The TDS ratio is a lot like the gross debt service (GDS) ratio that lenders use, but GDS skips non-housing payments like credit cards or car loans.
GDS focuses only on housing costs, so it's often called the housing expense ratio. It's common in mortgage lending, sometimes referred to as Housing 1 ratio, with TDS as Housing 2.
In the underwriting process for mortgages, TDS, GDS, and your credit score are the main elements checked. Aim for a GDS of 28% or less.
Special Considerations
Beyond TDS and GDS ratios, lenders look at other factors when deciding to give credit. For example, a small lender with under $2 billion in assets and fewer than 500 mortgages in the last year might approve a qualified mortgage even if TDS is over 43%.
They always review credit histories and scores—high scores mean you manage debt well, pay on time, and keep balances low. Larger lenders might approve if you have big savings for a down payment or a long relationship with them.
How Do You Calculate Total Debt Service (TDS) Ratio?
To calculate TDS, add all your monthly debt obligations, then divide by gross monthly income and multiply by 100: (DEBT / INCOME) * 100. In Excel, it's =SUM(debt/income)*100.
How Low Should My TDS Be for a Mortgage?
For mortgage approval, keep your TDS at no more than 43%, but ideally aim for 36% or closer to match what lenders prefer.
What Is the Difference Between TDS (Total Debt Service) and GDS (Gross Debt Service)?
TDS and GDS are similar, but GDS doesn't include non-housing debts like credit cards or car loans in the calculation.
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