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.
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.