Total debt service ratio (TDS) is a debt service measurement. That financial lenders deploy as a rule of thumb. In determining the proportion of gross income which is already spent. On housing-related and other similar payments.
Lenders study each potential borrower’s property taxes. Credit card balances, as well as other monthly debt obligations in calculating the ratio of income of debt, and then compare the said number to the lender’s benchmark. For determining whether or not to extend credit.
Formula for Calculating Total Debt Service
TDS = AMP + Property Taxes + ODP/ Gross Family Income
TDS = Total debt service ratio
AMP = Annual Mortgage Payments
ODP = Other Debt Payments.
Difference Between Total Debt Service Ratio and Gross Debt Service Ratio
The total debt service ratio. Is very much like the gross debt service ratio (GDS), even though the GDS does not account for non-business related payments. Like credit card debts or car loans. The gross debt ratio is also most times. Known as the housing expense ratio. Normally, borrowers are to aim for a gross debt service ratio of 28% or less. Most times also, you 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 as well as the borrower’s credit score are the key factors that are analyzed in the underwriting process for a mortgage loan. Gross debt service can be used in other personal loan calculations also, even though it is most common with mortgage loans.
What a Total Debt Service Ratio Depicts
A TDS ratio enables lenders to ascertain if a borrower can manage monthly payments and also repay borrowed money. While applying for a mortgage. Lenders access what percentage of a borrower’s income would be spent on the mortgage payment. Real estate taxes, homeowner’s insurance, association dues. As well as other obligations.
Lenders on the other hand factor in what portion of income. Is already used in paying for credit card balances, student loans. Child support, auto loans, and other debts popping up on a borrower’s credit report. A stable income, timely bill payment, and a strong credit score. Do not stand as the only factors in being extended a mortgage.
Now borrowers with higher TDS ratios are more likely to struggle. In meeting their debt obligations unlike borrowers with lower ratios. As a result of this, most lenders do not give qualified mortgages to borrowers. With TDS ratios which exceed 43%, although increasingly prefer a ratio of 36%. Or less for loan approval.