What Is the Total Debt Service Ratio (TDS)?

The total debt service ratio (TDS) is a debt service measurement 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 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.

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.

The Formula for TDS Is

TDS=AMP+Property Taxes+ODPGross Family Incomewhere:TDS=Total debt service ratioAMP=Annual Mortgage PaymentsODP=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

What Does the Total Debt Service Ratio Tell You?

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.

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%, but increasingly prefer a ratio of 36% or less for loan approval.

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.

Example of How to Use the Total Debt Service Ratio

Determining a TDS ratio involves adding up monthly debt obligations and dividing them by gross monthly income. For example, 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 school loan
  • $350 for a motorcycle loan
  • $650 for a credit card balance

The total is $4,225:

$2,225+$1,000+$350+$650=$4,225\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%:

($4,225$11,000)×100=38.4\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.

The Difference Between Total Debt Service Ratio and Gross Debt Service Ratio

The TDS ratio is very similar to the gross debt service ratio (GDS), but the GDS does not account for non-housing related payments such as credit card debts or car loans. The gross debt service ratio may also be referred to as the housing expense ratio. Generally, borrowers should strive for a gross debt service ratio of 28% or less. You may also hear GDS and TDS referred to as the "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 common with mortgage loans.