Definition and Examples of TDS Ratio
The Total Debt Service (TDS) ratio measures the amount of your gross income that is used to cover housing costs and other debt payments. This ratio is a factor used by mortgage lenders to evaluate your loan application. To get approved for a loan, your TDS ratio should not exceed 40% of your income. If you are married, the lender will typically consider your combined income as a couple.
How Does the TDS Ratio Work?
When you apply for a mortgage loan, the lender carefully examines your financial situation and assesses various different criteria. One of the factors considered is your TDS ratio. To calculate your TDS ratio, the lender adds up your monthly housing payments and any outstanding debt payments. From here, they will divide that total by your gross monthly income.
Total Debt Service (TDS) Ratio vs. Gross Debt Service (GDS) Ratio
The Gross Debt Service (GDS) ratio is similar to the TDS ratio but only looks at the portion of your income that is spent on housing. These housing costs include mortgage principal and interest, property taxes, utility costs, and maintenance fees. Your GDS ratio should be less than 30% of your income to meet most lender requirements. This ratio can also help lenders evaluate how much you can afford by looking at the maximum housing costs you can manage monthly.
Key Takeaways
Your Total Debt Service ratio calculates the percentage of your gross income that goes toward covering housing costs and debts. Mortgage lenders use your TDS as one way to determine whether they will approve a loan for you. Your TDS ratio should be less than 40% of your income. The mortgage lender will also look at your Gross Debt Service (GDS) ratio, which is the percentage of your income spent on housing costs. This should be less than 30% of your income. If your TDS ratio is too high, you may want to focus on paying down debt or looking for a more affordable home.
Source: https://www.thebalancemoney.com/what-is-total-debt-service-tds-ratio-5190972
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