What Is the Total Debt Service (TDS) Ratio?

The total debt service (TDS) ratio—total debt obligation divided by gross income—is a financial metric that lenders use to determine whether or not to extend credit, primarily in the mortgage industry. To calculate the percentage of a prospective borrower's gross income already committed to debt obligations, lenders consider all required payments for both housing and non-housing bills.

The housing factor in the TDS calculation includes everything paid for the home, from mortgage payment, real estate taxes, and homeowners insurance to association dues and utilities. The non-housing factor includes everything else, from auto loans, student loans, and credit card payments to child support and alimony.

How Total Debt Service (TDS) Ratio Works

When applying for a mortgage or any other type of loan, all borrowers should be aware that the total debt service (TDS) ratio is a key factor driving approval or rejection—and it is just as important as a stable income, timely bill payment, and a strong credit score.

Remember, the lower your TDS ratio, the better your chances of approval. Borrowers with higher TDS ratios are more likely to struggle to meet their debt obligations than borrowers with lower ratios.

All lenders will compare your TDS to their benchmark TDS range—usually from 36% to no more than 43%—before they decide whether you can manage an additional monthly payment on top of all other bills. Many lenders prefer a ratio of 36% or less for loan approval; most do not give mortgages to borrowers with TDS ratios that exceed 43%.

Example of the Total Debt Service (TDS) Ratio

To see how your TDS ratio will be determined, just add up monthly debt obligations and divide them by gross monthly income. Here's a hypothetical example: an individual with a gross monthly income of $11,000 and monthly debt obligations of $4,225 ($2,225 for a mortgage; $1,000 for a student loan; $350 for a motorcycle loan; $650 for a credit card balance).

Divide the total debt obligation of $4,225 by income of $11,000 (in the percentage formula below) to get a TDS ratio of 38.4%, which is not much higher than the low benchmark (36%) and well below the max (43%). This individual would most likely get a mortgage.

How to Calculate Total Debt Service (TDS) Ratio in Excel

The total debt service (TDS) ratio can also be calculated in Excel:

• Excel formula to calculate TDS ratio: =SUM(debt/income)*100
• In the example above (gross income of $11,000 and debt obligations of $4,225), the Excel formula would be: =SUM(4225/11000)*100 (which equals 38.4%).

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

The total debt service (TDS) ratio is very similar to another debt-to-income ratio used by lenders—the gross debt service (GDS) ratio. The difference between TDS and GDS is that GDS does not factor any non-housing payments—such as credit card debts or car loans—into the equation.

Because it reflects housing expenses only, the GDS ratio is also referred to as the housing expense ratio. GDS may be used in other personal loan calculations, but it is most commonly used in the mortgage lending process. (You may also hear GDS referred to as Housing 1 ratio and TDS as Housing 2 ratio.)

In practice, the TDS ratio, the GDS ratio, and a borrower’s credit score are the key components analyzed in the underwriting process for a mortgage loan. (Borrowers should generally strive for a GDS ratio of 28% or less.)

Special Considerations

Remember, there are several other factors in addition to the total debt service (TDS) and gross debt service (TDS) ratios that lenders take into consideration when determining whether to advance credit to certain borrowers.

For instance, a small lender—one with less than $2 billion in assets and 500 or fewer mortgages in the past 12 months—may offer a qualified mortgage to a borrower with a TDS ratio exceeding 43%.

Of course, all lenders consider credit histories and credit scores. People with high credit scores tend to manage their debts more responsibly; they hold a reasonable amount of debt, make payments on time, and keep account balances low.

Larger lenders may also be more likely to approve mortgages for borrowers with large savings accounts, especially if they can make larger down payments. Lenders may also consider granting additional credit to borrowers with whom they have long-standing relationships.