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CandleFocus Glossary Editor
The Total Debt Service Ratio (TDS) is an important metric used by mortgage lenders to assess a borrower’s capacity to take on a loan. It is different from the Gross Debt Service (GDS) ratio because it factors in all of the borrower’s debts and obligation, both housing and non-housing related. The TDS ratio measures the amount of gross annual income that is dedicated to paying off debt.
For example, if a borrower’s gross annual income is $50,000 and they have monthly payments of $1,000 towards housing costs, $200 towards a car loan, and $200 towards credit cards, the TDS ratio would be calculated by adding the monthly payments together ($1400) and dividing it by the gross income ($50,000) for a final ratio of 28%.
In order for a borrower to be approved for a mortgage, their TDS ratio must typically be below 43%. However, most lenders have a more strict benchmark, requiring ratios to be closer to 36%. The lower a borrower’s TDS ratio is, the better chance they have of being approved for a loan.
This is because a lower TDS ratio is an indicator that a borrower is financially responsible, and not overextended with debt. By having a lower TDS, lenders are able to ensure borrowers can handle the added financial obligation of a mortgage. A high TDS ratio may be seen as a red flag to lenders, indicating that the borrower may be at risk of defaulting on the loan.
In addition to the TDS ratio, lenders will also consider a borrower’s overall credit score, the loan-to-value ratio on the property, and the borrower’s debt-to-income ratio. Between all of these factors, lenders are able to get an accurate picture of a borrower’s financial health and determine whether or not it is wise for them to approve the loan.
The Total Debt Service Ratio is an incredibly important metric and must be taken into account when considering a loan application. It is important for borrowers to be aware of what their TDS Ratio is and how it can affect their chances of being approved for a loan. With responsible financial management and a lower TDS ratio, borrowers can increase their chances of having a successful loan application.
For example, if a borrower’s gross annual income is $50,000 and they have monthly payments of $1,000 towards housing costs, $200 towards a car loan, and $200 towards credit cards, the TDS ratio would be calculated by adding the monthly payments together ($1400) and dividing it by the gross income ($50,000) for a final ratio of 28%.
In order for a borrower to be approved for a mortgage, their TDS ratio must typically be below 43%. However, most lenders have a more strict benchmark, requiring ratios to be closer to 36%. The lower a borrower’s TDS ratio is, the better chance they have of being approved for a loan.
This is because a lower TDS ratio is an indicator that a borrower is financially responsible, and not overextended with debt. By having a lower TDS, lenders are able to ensure borrowers can handle the added financial obligation of a mortgage. A high TDS ratio may be seen as a red flag to lenders, indicating that the borrower may be at risk of defaulting on the loan.
In addition to the TDS ratio, lenders will also consider a borrower’s overall credit score, the loan-to-value ratio on the property, and the borrower’s debt-to-income ratio. Between all of these factors, lenders are able to get an accurate picture of a borrower’s financial health and determine whether or not it is wise for them to approve the loan.
The Total Debt Service Ratio is an incredibly important metric and must be taken into account when considering a loan application. It is important for borrowers to be aware of what their TDS Ratio is and how it can affect their chances of being approved for a loan. With responsible financial management and a lower TDS ratio, borrowers can increase their chances of having a successful loan application.