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Gross debt service ratio (GDS) is a key component lenders use to determine a borrower's ability to pay monthly mortgage payments. It indicates the percentage of a borrower's gross income that goes towards mortgage payments and other related expenses. Lenders use this ratio to ensure borrowers can afford their mortgage payments and other debts without overextending themselves.
A lender assesses a borrower's gross debt service ratio by dividing the total monthly housing payments (the mortgage principal and interest, property taxes, and home insurance) by their gross monthly income. A higher GDS ratio might indicate the borrower is spending more money on the housing payment than within the lender’s guidelines, which could lead to a higher risk of default.
The maximum GDS ratio a lender will accept depends on the individual borrower’s situation, but typically lenders will prefer a ratio of no more than 40% of gross monthly income. This means that a borrower’s mortgage payments, taxes, and insurance should not exceed 40% of their gross income. If the ratio is higher than 40% of gross monthly income, the chances for loan approval decrease.
Also, lenders want to see a total debt service (TDS) ratio of no more than 42%. The TDS ratio is calculated the same way as GDS, but includes all debt – not just mortgage payments – such as car loans, credit cards, and student loans.
In addition to GDS, lenders also consider a borrower’s credit score. A good credit score can go a long way in increasing a borrower’s chances of obtaining a mortgage loan.
The gross debt service ratio and total debt service ratio are just two of the major components lenders review when considering a loan application, but they have an important role in the underwriting process. By calculating GDS and TDS, lenders can gain a better understanding of a borrower’s financial situation and ensure they are not overextending themselves in regards to mortgage payments and other debts. A borrower should always review their credit score and debt-to-income ratios prior to applying for a loan. This will help them determine if they meet the necessary criteria for loan approval.
A lender assesses a borrower's gross debt service ratio by dividing the total monthly housing payments (the mortgage principal and interest, property taxes, and home insurance) by their gross monthly income. A higher GDS ratio might indicate the borrower is spending more money on the housing payment than within the lender’s guidelines, which could lead to a higher risk of default.
The maximum GDS ratio a lender will accept depends on the individual borrower’s situation, but typically lenders will prefer a ratio of no more than 40% of gross monthly income. This means that a borrower’s mortgage payments, taxes, and insurance should not exceed 40% of their gross income. If the ratio is higher than 40% of gross monthly income, the chances for loan approval decrease.
Also, lenders want to see a total debt service (TDS) ratio of no more than 42%. The TDS ratio is calculated the same way as GDS, but includes all debt – not just mortgage payments – such as car loans, credit cards, and student loans.
In addition to GDS, lenders also consider a borrower’s credit score. A good credit score can go a long way in increasing a borrower’s chances of obtaining a mortgage loan.
The gross debt service ratio and total debt service ratio are just two of the major components lenders review when considering a loan application, but they have an important role in the underwriting process. By calculating GDS and TDS, lenders can gain a better understanding of a borrower’s financial situation and ensure they are not overextending themselves in regards to mortgage payments and other debts. A borrower should always review their credit score and debt-to-income ratios prior to applying for a loan. This will help them determine if they meet the necessary criteria for loan approval.