Lenders use a number of factors to determine your ability to service your debt – and of course we are discussing ‘mortgage debt’ here. When referring to your mortgage debt service ratios, in particular, lenders often use the measures:
- Gross Debt Service, or GDS
- Total Debt Service, or TDS
You will find it very helpful to know where you stand relative to these key indicators.
Gross Debt Service (GDS) Calculation Example
GDS is the percentage of your gross income that is required in order to cover housing costs. A good rule of thumb is to keep GDS below 32%.
GDS factors in the following costs:
- mortgage payment amount
- property taxes
- heating expenses
- condo fees (but only 50%)
Let’s say you had a gross monthly income of $6000 and wanted to apply for a mortgage and let’s presume the relevant mortgage payment was going to be $1000, and you had $200 per month in property taxes and $150 heating costs.
Those payments total:
Now we take $1350 and divide that by the $6000 in monthly income to get 22.5%. That’s comfortably below the 32% maximum recommended GDS and indicates that you are quite likely to be able to afford your home purchase.
Next we must consider the TDS.
Total Debt Service (TDS) Calculation Example
TDS is the the percentage of your gross income that is required to cover housing costs AS WELL AS any other debt load you may have. It’s recommended that you keep your TDS below 40% of your total income.
So additional costs that are included in the TDS calculation but not in the GDS calculation are:
- credit card payments
- line of credit payments
- car loan payments
If we follow along with the example used for GDS and now add the following information for the TDS calculation:
$50 credit card payment
$100 line of credit payment
$300 car payment
Now we have $1350 + $450 = $1800
So we take $1800 and divide that by your $6000 in monthly income which yields 30%, comfortably below the recommended 40% maximum.
Remember that the lower these percentages are, the better off you are financially! Do NOT think of the maximum percentages as ideal targets. They are, in fact, the worst case that you would realistically want to have. Any more than that likely indicates that you are in a high risk situation.