:max_bytes(150000):strip_icc()/shapecharge-b59515ba4a7f4309a9c4e525813162fa.jpg)
Adam Hayes, Ph.D., CFA, is a financial writer with 15+ years Wall Street experience as a derivatives trader. Besides his extensive derivative trading expertise, Adam is an expert in economics and behavioral finance. Adam received his master's in economics from The New School for Social Research and his Ph.D. from the University of Wisconsin-Madison in sociology. He is a CFA charterholder as well as holding FINRA Series 7, 55 & 63 licenses. He currently researches and teaches economic sociology and the social studies of finance at the Hebrew University in Jerusalem.
Updated May 20, 2022 Reviewed by Reviewed by Thomas J. CatalanoThomas J Catalano is a CFP and Registered Investment Adviser with the state of South Carolina, where he launched his own financial advisory firm in 2018. Thomas' experience gives him expertise in a variety of areas including investments, retirement, insurance, and financial planning.
The total debt service (TDS) ratio—total debt obligation divided by gross income—is a financial metric that lenders use to determine whether or not to extend credit, primarily in the mortgage industry. To calculate the percentage of a prospective borrower's gross income already committed to debt obligations, lenders consider all required payments for both housing and non-housing bills.
The housing factor in the TDS calculation includes everything paid for the home, from mortgage payment, real estate taxes, and homeowners insurance to association dues and utilities. The non-housing factor includes everything else, from auto loans, student loans, and credit card payments to child support and alimony.
When applying for a mortgage or any other type of loan, all borrowers should be aware that the total debt service (TDS) ratio is a key factor driving approval or rejection—and it is just as important as a stable income, timely bill payment, and a strong credit score.
Remember, the lower your TDS ratio, the better your chances of approval. Borrowers with higher TDS ratios are more likely to struggle to meet their debt obligations than borrowers with lower ratios.
All lenders will compare your TDS to their benchmark TDS range—usually from 36% to no more than 43%—before they decide whether you can manage an additional monthly payment on top of all other bills. Many lenders prefer a ratio of 36% or less for loan approval; most do not give mortgages to borrowers with TDS ratios that exceed 43%.
Lenders prefer borrowers with total debt service (TDS) ratios of 36% or less; borrowers with TDS ratios that exceed 43% are rarely approved for mortgages.
To see how your TDS ratio will be determined, just add up monthly debt obligations and divide them by gross monthly income. Here's a hypothetical example: an individual with a gross monthly income of $11,000 and monthly debt obligations of $4,225 ($2,225 for a mortgage; $1,000 for a student loan; $350 for a motorcycle loan; $650 for a credit card balance).
Divide the total debt obligation of $4,225 by income of $11,000 (in the percentage formula below) to get a TDS ratio of 38.4%, which is not much higher than the low benchmark (36%) and well below the max (43%). This individual would most likely get a mortgage.
The total debt service (TDS) ratio can also be calculated in Excel:
The total debt service (TDS) ratio is very similar to another debt-to-income ratio used by lenders—the gross debt service (GDS) ratio. The difference between TDS and GDS is that GDS does not factor any non-housing payments—such as credit card debts or car loans—into the equation.
Because it reflects housing expenses only, the GDS ratio is also referred to as the housing expense ratio. GDS may be used in other personal loan calculations, but it is most commonly used in the mortgage lending process. (You may also hear GDS referred to as Housing 1 ratio and TDS as Housing 2 ratio.)
In practice, the TDS ratio, the GDS ratio, and a borrower’s credit score are the key components analyzed in the underwriting process for a mortgage loan. (Borrowers should generally strive for a GDS ratio of 28% or less.)
Remember, there are several other factors in addition to the total debt service (TDS) and gross debt service (TDS) ratios that lenders take into consideration when determining whether to advance credit to certain borrowers.
For instance, a small lender—one with less than $2 billion in assets and 500 or fewer mortgages in the past 12 months—may offer a qualified mortgage to a borrower with a TDS ratio exceeding 43%.
Of course, all lenders consider credit histories and credit scores. People with high credit scores tend to manage their debts more responsibly; they hold a reasonable amount of debt, make payments on time, and keep account balances low.
Larger lenders may also be more likely to approve mortgages for borrowers with large savings accounts, especially if they can make larger down payments. Lenders may also consider granting additional credit to borrowers with whom they have long-standing relationships.
To calculate TDS: first, add up all monthly debt obligations; then, divide that total by gross monthly income in this percentage formula: (DEBT divided by INCOME) multiplied by 100. If you prefer to calculate in Excel, the formula looks like this: =SUM(debt/income)*100.
To be approved for a mortgage, you should have a TDS ratio of no more than 43% (the maximum most lenders allow)—but ideally, your TDS should be as close as possible to 36% (the low end of the benchmark range that lenders prefer).
TDS and GDS are similar ratios, but the difference is that GDS does not factor any non-housing payments—such as credit card debts or car loans—into the equation.
Article SourcesAn award letter is the FAFSA documentation sent from a college or university to the student that details how much financial support the student is eligible for.
Peer-to-peer (P2P) lending enables an individual to obtain a loan directly from another individual, cutting out the traditional bank as the middleman.
A payday loan is an expensive short-term loan based on your income.An income-share agreement (ISA) is a contract that allows a student to receive upfront money for college in exchange for a fixed percentage of their future income.
Tuition insurance covers the financial losses associated with a college student dropping out before completing their degree.
The Saving on a Valuable Education (SAVE) plan is an income-driven repayment (IDR) plan introduced by the Biden Administration that replaces the Revised Pay As You Earn (REPAYE) plan.
Related Articles
:max_bytes(150000):strip_icc()/GettyImages-1492289682-07e78fa285284afab4f172abb00d99c4.jpg)
:max_bytes(150000):strip_icc()/GettyImages-1461191307-504b0299210e4b77aa6fabdc435e0dbe.jpg)
:max_bytes(150000):strip_icc()/Best-auto-loan-rates-4846394_final-b7456e74b9574f56b09258598d31164e.png)
:max_bytes(150000):strip_icc()/GettyImages-1364922056-d0409a976cfd4c3fa33860c4dfd9c5a6.jpg)
:max_bytes(150000):strip_icc()/WhatPercentageOfGrossSalaryShouldBeAllocatedtoStudentLoanRepayment-dd0da0cba09345309c945e28833f7d97.jpg)
We and our 100 partners store and/or access information on a device, such as unique IDs in cookies to process personal data. You may accept or manage your choices by clicking below, including your right to object where legitimate interest is used, or at any time in the privacy policy page. These choices will be signaled to our partners and will not affect browsing data.
Store and/or access information on a device. Use limited data to select advertising. Create profiles for personalised advertising. Use profiles to select personalised advertising. Create profiles to personalise content. Use profiles to select personalised content. Measure advertising performance. Measure content performance. Understand audiences through statistics or combinations of data from different sources. Develop and improve services. Use limited data to select content. List of Partners (vendors)
