What is the 'Total Debt Service Ratio - TDS'

A total debt service ratio (TDS) is a debt service measure that financial lenders use as a rule of thumb when determining the proportion of gross income that is already spent on housing-related and other similar payments. Lenders consider each borrower’s property taxes, credit card balances and other monthly debt obligations, calculate the ratio of income to debt and compare the number to the lender’s benchmark for deciding whether to extend credit. This ratio is very similar to the gross debt service ratio (GDS), but the GDS does not account for non-housing related payments.

Total Debt Service Ratio (TDS)

BREAKING DOWN 'Total Debt Service Ratio - TDS'

A TDS ratio helps lenders determine whether a borrower can manage monthly payments and repay borrowed money. When applying for a mortgage, lenders look at what percentage of a borrower's income would be spent on the mortgage payment, real estate taxes, homeowner's insurance, association dues and other obligations. Lenders also figure in what portion of income is already used for paying credit card balances, student loans, child support, auto loans and other debts showing up on a borrower's credit report. A stable income, timely bill payment and a strong credit score are not the only factors in being extended a mortgage.

Calculating Total Debt Service Ratio

Determining a TDS ratio involves adding up monthly debt obligations and dividing them by gross monthly income. For example, an individual’s monthly payments are $2,225 for a mortgage, $1,000 for a school loan, $350 for a motorcycle loan and $650 for a credit card balance, totaling $4,225. ($2,225 + $1,000 + $350 + $650 = $4,225.) The individual’s gross monthly income is $11,000. Therefore, the TDS ratio is approximately 38% ($4,225/$11,000 x 100 = 38.4.) Because the ratio is below 43%, the individual would most likely qualify for a mortgage.

Importance of Total Debt Service Ratio

Borrowers with higher TDS ratios are more likely to struggle to meet their debt obligations than borrowers with lower ratios. Because of this, most lenders do not give qualified mortgages to borrowers with TDS ratios exceeding 43%.

However, there may be exceptions for certain circumstances. For example, a smaller lender holding less than $2 billion in assets in the previous year and providing 500 or fewer mortgages in the past 12 months may offer a qualified mortgage to a borrower with a TDS ratio exceeding 43%. Also, a larger lender may provide a mortgage to a borrower with a higher credit score and larger savings and down payment amount if those factors demonstrate the borrower can reasonably repay the loan on time.

RELATED TERMS
  1. Qualifying Ratios

    A set of ratios that are used by lenders to approve borrowers ...
  2. Qualification Ratio

    Ratio of debt to income and housing expense to income that is ...
  3. Gross Debt Service Ratio - GDS

    A debt service measure that financial lenders use as a rule of ...
  4. Back-End Ratio

    A ratio that indicates what portion of a person's monthly income ...
  5. Total Housing Expense

    The sum of a homeowner's monthly mortgage principal and interest ...
  6. Debt Ratio

    A financial ratio that measures the extent of a company’s or ...
Related Articles
  1. Investing

    Explaining Debt

    Debt is any amount a borrower owes a lender.
  2. Personal Finance

    What’s Considered To Be A Good Debt-To-Income (DTI) Ratio?

    The debt-to-income ratio measures the amount of debt a person has compared to overall income.
  3. Investing

    Mortgages: How Much Can You Afford?

    The cost of a home is the single largest expense most people ever face. Prior to taking on such an enormous debt, it’s best to do the math.
  4. Investing

    Explaining Debt Service

    Debt service is a measure of a person or entity’s use of cash to pay interest and principal on debt obligations.
  5. Personal Finance

    Trended Credit Data Could Increase Interest Rates for Borrowers (FNMA, EFX)

    Mortgage lenders will soon be required to use trended credit data to qualify borrowers. As a result, many borrowers could have to take higher interest rates.
  6. Investing

    Debt Ratio

    The debt ratio divides a company’s total debt by its total assets to tell us how highly leveraged a company is—in other words, how much of its assets are financed by debt. The debt component ...
  7. Investing

    Understanding Leverage Ratios

    Large amounts of debt can cause businesses to become less competitive and, in some cases, lead to default. To lower their risk, investors use a variety of leverage ratios - including the debt, ...
  8. Personal Finance

    5 Steps To Scoring A Mortgage

    Find out what you can do to polish up some of the common flaws that put off lenders.
  9. Small Business

    Total Debt to Total Assets

    Total Debt to total assets, also called the debt ratio, is an accounting measurement that shows how much of a company’s assets are funded by borrowing. In business, borrowing is also called leverage.
RELATED FAQS
  1. What is the debt ratio for an FHA loan?

    Borrowing through the Federal Housing Administration requires individuals to provide proof of income as well as information ... Read Answer >>
  2. What is the difference between the debt ratio of a company and the debt ratio of ...

    Discover the different financial evaluation measures that are most commonly applied to individuals and corporations, respectively. Read Answer >>
  3. How does the loan-to-value ratio affect my mortgage payments?

    Understand what the loan to value ratio is, how the ratio is calculated and learn how it has an impact on your mortgage payments ... Read Answer >>
  4. What’s the difference between a mortgage lender and a mortgage servicer?

    Buying a home is an exciting and confusing process. Once the loan is secured, it's important to know who gets the payment: ... Read Answer >>
  5. Why does the loan-to-value ratio matter?

    Learn how the loan-to-value (LTV) ratio is calculated, and why this metric is important to lenders when evaluating a home ... Read Answer >>
Trading Center