Debt Service Ratio – Definition and Overview
The debt service ratio is defined as the amount of your income that is going towards paying down your debt.
This lets a lender, such as a bank, determine whether or not you can afford to pay back a loan.
There are two types of ratios that lenders use.
These are the total debt service ratio (TDS) and gross debt service ratio (GDS).
These are some of the most important figures that a lender looks at when determining whether or not to grant an individual a mortgage.
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Calculating Your Gross Debt Service Ratio
To determine your GDS, the lender adds up your overall mortgage payments, and other expenses, including your property taxes, heating costs and condo fees (if you have any).
Then, they compare the total amount to your income.
To calculate your total debt service ratio they add in any other loans or credit card payments you might be making.
Getting a Loan
To qualify for a mortgage, you need a gross debt service ratio that is under 32%.
The magic number for total debt service ratio is 40%.
Essentially, the amount of money that you have to pay back every month should not exceed more than 40% of your gross monthly income.
If it does, a lender will be unlikely to extend credit to you.
This is also how a mortgage lender decides how large of a mortgage a given person will qualify for, as their monthly payments must not exceed 32% or 40% of their GDS and TDS respectively.