The Educated Buyer: Gross Debt Service and Total Debt Service Ratios
Lenders determine a borrower’s affordability by determining their Gross Debt Service (GDS) and Total Debt Service (TDS) ratios. The GDS ratio is a comprehensive measure of a borrower’s monthly housing expenses. The TDS ratio is similar to the GDS ratio; however, it includes all of a borrower’s debt and is not just focused on housing expenses.
Gross Debt Service (GDS) Ratio
The GDS ratio represents the maximum percentage of a borrower’s gross income to be allocated to principal, interest, and property tax payments (PIT). The gross debt service ratio may or may not include heating costs (PITH). A borrower’s current monthly mortgage payment is the primary expense. Other expenses may include monthly property tax payments, home insurance payments, and utility bills. The total monthly expenses are divided by total gross monthly income to calculate the GDS ratio.
The maximum GDS ratios typically allowed by lenders vary between 27% and 35%, depending on your credit score and other factors.
Total Debt Service (TDS) Ratio
The TDS ratio includes everything in the GDS calculation plus all other debt obligations. In other words, the TDS ratio includes charges for principal, interest, and property taxes, plus other debts, including personal loans (such as auto loans and credit card debt) and should be clearly differentiated from the GDS ratio. The TDS ratio is calculated by adding all the borrower’s monthly debt and dividing it by their gross monthly income.
The maximum TDS ratios typically allowed by lenders vary between 37% and 42%, depending on your credit score and other factors.
The TDS ratio has become increasingly important with the rise in consumer borrowing. Lenders are concerned that financial commitments, over and above house related debts, may result in a future default of a borrower’s mortgage payments. Therefore, they seek added assurances by considering the applicant’s total financial picture.
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