What Is the Total Debt Service (TDS) Ratio?

The term total debt service (TDS) ratio refers to a debt service measurement that financial lenders use when determining the proportion of gross income that is already spent on housing-related and other similar payments. Lenders consider each potential borrower’s property taxes, credit card balances, and other monthly debt obligations to calculate the ratio of income to debt, and then compare that number to the lender’s benchmark for deciding whether or not to extend credit.

How the Total Debt Service (TDS) Ratio Works

A total debt service (TDS) ratio helps lenders determine whether a borrower can manage monthly payments and repay the money they borrow. When applying for a mortgage—or any other type of loan—lenders look at what percentage of a borrower's income would be spent on the mortgage payment, real estate taxes, homeowners insurance, association dues, and other obligations.

Lenders also determine what portion of an applicant's income is already used for paying credit card balances, student loans, alimony and child support, auto loans, and other debts that appear 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.

 TDS = AMP + Property Taxes + ODP Gross Family Income where: TDS = Total debt service ratio AMP = Annual Mortgage Payments ODP = Other Debt Payments \begin{aligned} &\text{TDS} = \frac{ \text{AMP} + \text{Property Taxes} + \text{ODP} }{ \text{Gross Family Income} }\\ &\textbf{where:}\\ &\text{TDS} = \text{Total debt service ratio} \\ &\text{AMP} = \text{Annual Mortgage Payments} \\ &\text{ODP} = \text{Other Debt Payments} \\ \end{aligned} TDS=Gross Family IncomeAMP+Property Taxes+ODPwhere:TDS=Total debt service ratioAMP=Annual Mortgage PaymentsODP=Other Debt Payments

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 that exceed 43%. They increasingly prefer a ratio of 36% or less for loan approval instead.

Key Takeaways

  • The total debt service ratio is a lending metric used by mortgage lenders to assess a borrower's capacity to take on a loan.
  • The total debt service ratio, unlike the gross debt service ratio, includes housing and non-housing-related debts and obligations.
  • A TDS ratio below 43% is typically necessary to obtain a mortgage, with many lenders adopting more strict levels.

Special Considerations

Remember, there are other factors that lenders take into consideration when determining whether to advance credit to certain borrowers. For instance, a small lender that holds less than $2 billion in assets in the previous year and provides 500 or fewer mortgages in the past 12 months may offer a qualified mortgage to a borrower with a TDS ratio exceeding 43%.

Lenders typically prefer borrowers who have a total debt service ratio of 36%.

Credit histories and credit scores are among those factors. People with higher credit scores tend to manage their debts more responsibly by holding a reasonable amount of debt, making payments on time, and keeping account balances low.

In addition to higher credit scores, larger lenders may provide mortgages to borrowers who have larger savings and down payment amounts if those factors demonstrate the borrower can reasonably repay the loan on time. Lenders may also consider granting additional credit to borrowers with whom they have long-standing relationships.

Total Debt Service (TDS) Ratio vs. Gross Debt Service Ratio

Although the TDS ratio is very similar to the gross debt service (GDS) ratio, an applicant's GDS does not account for non-housing related payments such as credit card debts or car loans. As such, the gross debt service ratio may also be referred to as the housing expense ratio. Borrowers should generally strive for a gross debt service ratio of 28% or less. You may also hear GDS and TDS referred to as Housing 1 and Housing 2 ratios respectively.

In practice, the gross debt service ratio, total debt service ratio, and a borrower’s credit score are the key components analyzed in the underwriting process for a mortgage loan. GDS may be used in other personal loan calculations as well, but it is most commonly used in the mortgage lending process.

Example of Total Debt Service (TDS) Ratio

Determining a TDS ratio involves adding up monthly debt obligations and dividing them by gross monthly income. Here's a hypothetical example to show how it works. Let's assume an individual with a gross monthly income of $11,000 also has monthly payments that are:

  • $2,225 for a mortgage
  • $1,000 for a student loan
  • $350 for a motorcycle loan
  • $650 for a credit card balance

The total is $4,225:

 $ 2 , 2 2 5 + $ 1 , 0 0 0 + $ 3 5 0 + $ 6 5 0 = $ 4 , 2 2 5 \begin{aligned} &\$2,225 + \$1,000 + \$350 + \$650 = \$4,225 \\ \end{aligned} $2,225+$1,000+$350+$650=$4,225

Therefore, the TDS ratio is approximately 38%:

 ( $ 4 , 2 2 5 $ 1 1 , 0 0 0 ) × 1 0 0 = 3 8 . 4 \begin{aligned} &\left ( \frac{ \$4,225 }{ \$11,000 } \right ) \times 100 = 38.4 \\ \end{aligned} ($11,000$4,225)×100=38.4

Because the ratio is below 43% and not much higher than 36%, the individual would most likely qualify for a mortgage.