TDSR & GDSR Explained!
GDS and TDS are the ratios lenders use to decide what you can afford. Tisha Findlay walks through the 39% and 44% limits with a $6,000-a-month example.
TDSR and GDSR are common acronyms in the mortgage world. Lenders focus on the 5 Cs of credit when determining suitability, and TDSR and GDSR fall under capacity to pay, which is one of the five Cs. They are critical tools that lenders use to help in the decision making process of approving your mortgage. This article will explain what each of these means and will give you insight as to how affordability is calculated.
GDS: Gross Debt Service Ratio
Let's start with GDSR, or GDS for short. This stands for Gross Debt Service Ratio. It is a percentage determining how much of your gross income you can afford to pay towards housing costs. Housing costs for this purpose include your mortgage payment (principal and interest), property taxes and heat. Typically, the allowable percentage for GDS is 39% of your income. Let's say that your family's gross monthly income is $6,000. 39% of this is $2,340. This means that $2,340 is deemed an acceptable amount for your housing cost.
If you decide to calculate this yourself, please keep in mind that these percentages assume that your mortgage rate is higher than what it really is. This is called the stress test.
TDS: Total Debt Service Ratio
The next acronym is TDSR, or TDS for short. This stands for Total Debt Service Ratio. This percentage is used to calculate your housing cost plus all other debts that you have. Other debts include credit cards, auto loans, consolidation loans, lines of credit, student loans, other mortgages and so on. The allowable percentage for TDS should not exceed 44% of your gross income.
A worked example (all payments monthly)
GDS
- $1,510 approximate mortgage payment on $250,000 (using the stress test rate)
- $300 estimated property tax
- $125 estimated heating costs
- $1,935 total housing costs
$1,935 (housing cost) divided by $6,000 (income) = 32.25%, which falls well within the approval guidelines.
TDS
- $1,935 housing cost
- $200 credit card
- $100 student loan
- $300 auto loan
- $2,535 total debt
$2,535 (all debt including housing costs) divided by $6,000 (income) = 42.25%, which falls within the approval guidelines.
As you can see, the above scenario indicates affordability, which is a large factor in the underwriting process, but by no means the only one. There are many other points to consider when securing a mortgage. Lenders utilize the 5 Cs of credit and they are categorized as Capacity, Credit, Capital, Character and Collateral. Being well informed will better prepare you for the road ahead.
Originally published Mar 24, 2018. Rates, programs and rules mentioned reflect that time; for today's numbers see the rates page or ask Tisha.
