What Is the Total Debt Service (TDS) Ratio?

Total Debt Service (TDS) Ratio Explained in Less Than 4 Minutes

Young couple sits at table talking with female real estate agent about buying a house

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The total debt service (TDS) ratio measures how much of your gross income is being used to cover your housing costs and other debt payments. This ratio is one factor mortgage lenders use to evaluate your loan application. 

To get approved for a loan, your TDS ratio shouldn’t exceed 40% of your income. If you’re married, your lender will usually look at your combined income as a couple. 

From a mortgage lender’s perspective, a high TDS ratio indicates that you may have trouble paying your bills and making your monthly loan payments. 

Understanding what your TDS ratio is and how to calculate it can help you determine the type of home and monthly mortgage payments you can afford. 

Definition and Examples of TDS Ratio

The TDS ratio is the percentage of your gross income needed to make your monthly housing and other debt payments. It is one factor that mortgage lenders use to decide whether to approve you for a loan.

Your TDS ratio is calculated by dividing your monthly housing and debt payments by your monthly income before paying taxes. Here is the formula your lender will use:

TDS Ratio = (Monthly housing costs + debt payments x 100) / Gross monthly income

  • Alternate definition: A metric that looks at how much of a borrower’s income is spent on housing and other debt payments. 
  • Alternate name: Total debt payments 
  • Acronym: TDS ratio

For instance, when your lender looks at your housing costs, they will consider your monthly mortgage payments, principal, interest, utilities, and how much you pay in property taxes. In addition, your debt payments include those for credit card payments, lines of credit, and other loan payments. 

In comparison, your debt-to-income (DTI) ratio only looks at the percentage of your income that you’re paying toward debt. It divides all your payments by your gross monthly income. Like your TDS, it helps a lender decide whether you can afford a monthly mortgage payment. 

How Does the TDS Ratio Work?

When you apply for a mortgage, your lender looks closely at your finances and evaluates many different criteria. One of the things it considers is your TDS ratio. 

To calculate your TDS ratio, your lender adds up your monthly housing payments and outstanding debt payments. From there, it will divide this figure by your gross monthly income. 

For instance, say you have a gross monthly income of $7,000 and you’re looking to buy a home. Your prospective monthly mortgage payments and other housing expenses equal $1,500, and you also owe $500 per month on outstanding student loan debt. 

Your total debt and housing payments would come to $2,000 per month in this example. Here is how your TDS ratio would be calculated:

($1,500 + $500 x 100) / $7,000 = 28.6%

Because your TDS ratio is below 40%, your odds of getting approved for a mortgage are pretty good. Of course, your lender will consider other factors as well, including something called your gross debt service (GDS) ratio.  

Total Debt Service (TDS) Ratio vs. Gross Debt Service (GDS) Ratio

The gross debt service (GDS) ratio is similar to the TDS ratio, but it only looks at how much of your income is spent on housing. Such housing expenses include mortgage principal and interest, property taxes, utility costs, and maintenance fees. The GDS ratio should be lower than 30% of your income to satisfy most lenders.

This ratio also can help lenders evaluate how much you can afford to borrow by looking at the maximum shelter costs you can afford each month. Here is the formula you’ll use to calculate your GDS ratio:

GDS ratio = (Monthly housing costs x 100) / Gross monthly income

Total Debt Service (TDS) Ratio Gross Debt Service (GDS) Ratio
Percentage of your gross income spent on housing and debt payments Percentage of your gross income spent on housing costs 
Should be lower than 40% of your income Should be lower than 30% of your income

For example, perhaps you have a gross monthly income of $5,000, and your monthly housing costs come to $1,700. Using the formula above, your GDS ratio comes to 34%, which could indicate to your lender that you’re overextended financially. 

Key Takeaways

  • Your total debt service ratio calculates the percentage of your gross income that goes toward housing and debt payments.
  • Mortgage lenders use your TDS as one way to determine whether to approve you for a loan. 
  • Your TDS ratio should be less than 40% of your income.
  • Your mortgage lender will also consider your gross debt service (GDS) ratio, which is the percentage of your income spent on housing costs. It should be less than 30% of your income.
  • If your TDS ratio is too high, you can either focus on paying down debt, or you can look for a more affordably priced home.