
Total Debt Service (TDS) Ratio
TDS \= AMP \+ Property Taxes \+ ODP Gross Family Income where: TDS \= Total debt service ratio AMP \= Annual Mortgage Payments ODP \= Other Debt Payments \\begin{aligned} &\\text{TDS} = \\frac{ \\text{AMP} + \\text{Property Taxes} + \\text{ODP} }{ \\text{Gross Family Income} }\\\\ &\\textbf{where:}\\\\ &\\text{TDS} = \\text{Total debt service ratio} \\\\ &\\text{AMP} = \\text{Annual Mortgage Payments} \\\\ &\\text{ODP} = \\text{Other Debt Payments} \\\\ \\end{aligned} TDS\=Gross Family IncomeAMP+Property Taxes+ODPwhere:TDS\=Total debt service ratioAMP\=Annual Mortgage PaymentsODP\=Other Debt Payments Borrowers with higher TDS ratios are more likely to struggle to meet their debt obligations than borrowers with lower ratios. In practice, the gross debt service ratio, total debt service ratio, and a borrower’s credit score are the key components analyzed in the underwriting process for a mortgage loan. Let's assume an individual with a gross monthly income of $11,000 also has monthly payments that are: $2,225 for a mortgage $1,000 for a student loan $350 for a motorcycle loan $650 for a credit card balance The total is $4,225: $ 2 , 2 2 5 \+ $ 1 , 0 0 0 \+ $ 3 5 0 \+ $ 6 5 0 \= $ 4 , 2 2 5 \\begin{aligned} &\\$2,225 + \\$1,000 + \\$350 + \\$650 = \\$4,225 \\\\ \\end{aligned} $2,225+$1,000+$350+$650\=$4,225 Therefore, the TDS ratio is approximately 38%: ( $ 4 , 2 2 5 $ 1 1 , 0 0 0 ) × 1 0 0 \= 3 8 . 4 \\begin{aligned} &\\left ( \\frac{ \\$4,225 }{ \\$11,000 } \\right ) \\times 100 = 38.4 \\\\ \\end{aligned} ($11,000$4,225)×100\=38.4 Because the ratio is below 43% and not much higher than 36%, the individual would most likely qualify for a mortgage. The term total debt service (TDS) ratio refers to a debt service measurement that financial lenders use when determining the proportion of gross income that is already spent on housing-related and other similar payments.

What Is the Total Debt Service (TDS) Ratio?
The term total debt service (TDS) ratio refers to a debt service measurement that financial lenders use when determining the proportion of gross income that is already spent on housing-related and other similar payments. Lenders consider each potential borrower’s property taxes, credit card balances, and other monthly debt obligations to calculate the ratio of income to debt, and then compare that number to the lender’s benchmark for deciding whether or not to extend credit.



How the Total Debt Service (TDS) Ratio Works
A total debt service (TDS) ratio helps lenders determine whether a borrower can manage monthly payments and repay the money they borrow. When applying for a mortgage — or any other type of loan — lenders look at what percentage of a borrower's income would be spent on the mortgage payment, real estate taxes, homeowners insurance, association dues, and other obligations.
Lenders also determine what portion of an applicant's income is already used for paying credit card balances, student loans, alimony and child support, auto loans, and other debts that appear on a borrower's credit report. A stable income, timely bill payment, and a strong credit score are not the only factors in being extended a mortgage.
TDS = AMP + Property Taxes + ODP Gross Family Income where: TDS = Total debt service ratio AMP = Annual Mortgage Payments ODP = Other Debt Payments \begin{aligned} &\text{TDS} = \frac{ \text{AMP} + \text{Property Taxes} + \text{ODP} }{ \text{Gross Family Income} }\\ &\textbf{where:}\\ &\text{TDS} = \text{Total debt service ratio} \\ &\text{AMP} = \text{Annual Mortgage Payments} \\ &\text{ODP} = \text{Other Debt Payments} \\ \end{aligned} TDS=Gross Family IncomeAMP+Property Taxes+ODPwhere:TDS=Total debt service ratioAMP=Annual Mortgage PaymentsODP=Other Debt Payments
Borrowers with higher TDS ratios are more likely to struggle to meet their debt obligations than borrowers with lower ratios. Because of this, most lenders do not give qualified mortgages to borrowers with TDS ratios that exceed 43%. They increasingly prefer a ratio of 36% or less for loan approval instead.
Special Considerations
Remember, there are other factors that lenders take into consideration when determining whether to advance credit to certain borrowers. For instance, a small lender that holds less than $2 billion in assets in the previous year and provides 500 or fewer mortgages in the past 12 months may offer a qualified mortgage to a borrower with a TDS ratio exceeding 43%.
Lenders typically prefer borrowers who have a total debt service ratio of 36%.
Credit histories and credit scores are among those factors. People with higher credit scores tend to manage their debts more responsibly by holding a reasonable amount of debt, making payments on time, and keeping account balances low.
In addition to higher credit scores, larger lenders may provide mortgages to borrowers who have larger savings and down payment amounts if those factors demonstrate the borrower can reasonably repay the loan on time. Lenders may also consider granting additional credit to borrowers with whom they have long-standing relationships.
Total Debt Service (TDS) Ratio vs. Gross Debt Service Ratio
Although the TDS ratio is very similar to the gross debt service (GDS) ratio, an applicant's GDS does not account for non-housing related payments such as credit card debts or car loans. As such, the gross debt service ratio may also be referred to as the housing expense ratio. Borrowers should generally strive for a gross debt service ratio of 28% or less. You may also hear GDS and TDS referred to as Housing 1 and Housing 2 ratios respectively.
In practice, the gross debt service ratio, total debt service ratio, and a borrower’s credit score are the key components analyzed in the underwriting process for a mortgage loan. GDS may be used in other personal loan calculations as well, but it is most commonly used in the mortgage lending process.
Example of Total Debt Service (TDS) Ratio
Determining a TDS ratio involves adding up monthly debt obligations and dividing them by gross monthly income. Here's a hypothetical example to show how it works. Let's assume an individual with a gross monthly income of $11,000 also has monthly payments that are:
The total is $4,225:
$ 2 , 2 2 5 + $ 1 , 0 0 0 + $ 3 5 0 + $ 6 5 0 = $ 4 , 2 2 5 \begin{aligned} &\$2,225 + \$1,000 + \$350 + \$650 = \$4,225 \\ \end{aligned} $2,225+$1,000+$350+$650=$4,225
Therefore, the TDS ratio is approximately 38%:
( $ 4 , 2 2 5 $ 1 1 , 0 0 0 ) × 1 0 0 = 3 8 . 4 \begin{aligned} &\left ( \frac{ \$4,225 }{ \$11,000 } \right ) \times 100 = 38.4 \\ \end{aligned} ($11,000$4,225)×100=38.4
Because the ratio is below 43% and not much higher than 36%, the individual would most likely qualify for a mortgage.
Related terms:
Ability to Repay
The ability to repay describes an individual's financial capacity to make good on a debt, potentially qualifying them for a mortgage or other loan. read more
Account Balance
An account balance is the amount of money in a financial repository, such as a savings or checking account, at any given moment. read more
Alimony Payment
An alimony payment is a periodic predetermined sum awarded to a spouse or former spouse following a separation or divorce. read more
Asset
An asset is a resource with economic value that an individual or corporation owns or controls with the expectation that it will provide a future benefit. read more
Benchmark
A benchmark is a standard against which the performance of a security, mutual fund or investment manager can be measured. read more
Credit
Credit is a contractual agreement in which a borrower receives something of value immediately and agrees to pay for it later, usually with interest. read more
Credit Score: , Factors, & Improving It
A credit score is a number between 300–850 that depicts a consumer's creditworthiness. The higher the score, the better a borrower looks to potential lenders. read more
Credit Card
Issued by a financial company giving the holder an option to borrow funds, credit cards charge interest and are primarily used for short-term financing. read more
Credit Report
A credit report is a detailed breakdown of an individual's credit history, provided by one of the three major credit bureaus. read more
Debt Ratio
The debt ratio is a fundamental analysis measure that looks at the extent of a company’s leverage. read more