Understanding GDS and TDS Ratios

Jan 5

GDS and TDS

Mortgage lenders look for your GDS and TDS ratios to be within a certain limit when considering your mortgage application. Whether you’re applying for a second mortgage, bad credit mortgage, or another mortgage type, these ratios are a large part of what determines if you’re approved or not.

What is a GDS Ratio?

GDS stands for gross debt service. It’s the percentage of your monthly income that goes toward your housing costs. This includes things like:

Heating costs
Property taxes
Principal
Interest
Condo fees (if applicable)

All of these expenses are then compared to your income, creating a ratio that estimates your ability to pay for housing costs.

GDS Ratio Calculation

GDS is a ratio and is represented as a percentage. It’s your total income versus your total housing expenses. The calculation is:

Heating Costs + Property Taxes + Principal + Interest / Gross Income

Essentially, it’s your total housing expenses divided by your income. Gross income means your income before taxes and other deductions. If you’re applying for a mortgage with someone, like a spouse, your incomes would be combined for this calculation. Housing costs would also include 50% of condo fees, if applicable.

What Is a Good GDS Ratio?

Generally, most mortgage lenders want your GDS ratio to be 39% or less. This is especially true for most traditional or mainstream mortgage lenders, like big banks. If you’re purchasing a home with less than a 20% downpayment, then your GDS ratio must be 39% or less to qualify. If your downpayment is 20% or more, some lenders may allow your GDS ratio to be slightly higher, but again, this is dependent on the lender. The lower the ratio, the better, as this means you have a better ability to cover your housing expenses.

What Is a TDS Ratio?

TDS stands for total debt service. It’s the percentage of your monthly income that goes toward your debt and your housing expenses. This includes things like:

Credit card debt
Car loans
Student loans
Lines of credit
Payment plans (cell phones, appliances, etc.)
Other loans*

Plus your housing expenses, which would be the same list that was included in your GDS ratio:

Heating costs
Property taxes
Principal
Interest
Condo fees (if applicable)

Your TDS ratio is basically your GDS ratio plus any debt you’re paying off. All of these expenses are then compared to your income, creating a ratio that estimates your ability to pay for housing costs and other payments you have to make, like loan payments.

*Other loans would include loans used towards your house's downpayment, even if they’re from a family member or friend. If someone is giving you money to help with your downpayment, you must be able to show that it doesn’t need to be paid back, often in the form of a gift letter. Otherwise, that is considered a loan you need to pay back and would be included in your TDS ratio.

TDS Ratio Calculation

Just like GDS, TDS is a ratio that is shown as a percentage. It’s your total income versus your total housing expenses and debt. The calculation is:

Utilities + Property Taxes + Principal + Interest + Debt Payments / Gross Income

Essentially, it’s your total housing expenses and debt payments divided by your income. Like with GDS, your gross income would include your income and the income of anyone else on the mortgage, like a spouse.

What Is a Good TDS Ratio?

Mortgage lenders want your TDS ratio to be 44% or less. If your TDS ratio is above 44%, you won’t be able to qualify for a mortgage. Like with GDS ratios, a lower number is better. If your TDS ratio is lower, it means you have less debt to pay off, which gives mortgage lenders more confidence you’ll be able to pay your mortgage.

How Can I Lower My GDS & TDS Ratios?

The 3 main ways you can lower your GDS and TDS ratios are by:

Increasing income
Paying off debt
Reducing housing expenses

Of course, this is easier said than done, but it’s important to know if you’re planning on buying a house. You won’t be able to do these things instantly, but knowing this can help you make informed financial decisions before you go house shopping. If you’re planning on buying a house in the near future, there are some ways you can help improve your GDS and TDS ratios over time, including:

Purchasing a house with someone, like a spouse, so your income is higher
Waiting for career advancement or switching jobs, so your income is higher
Paying off any loans or reducing loans, so your debt is lower
Putting off large loans, like car loans, until after you buy a house, so your debt is lower
Reducing loan amounts by doing things like choosing a cheaper vehicle, so your debt is lower
Reducing overall expenses to help pay off debt, so your debt is lower
Purchasing a house in a lower-cost area, so your housing expenses are lower
Purchasing a smaller home, attached home, or fixer-upper, so your housing expenses are lower

Can I Still Get a Mortgage if I Don’t Meet GDS & TDS Ratios?

Yes, you can get a mortgage if you don’t meet GDS and TDS ratios. You might just need to get your mortgage from specific mortgage lenders. The exception would be mortgages with less than a 20% downpayment.

If you don’t have a 20% down payment, you must have mortgage default insurance, which helps protect the lender if you can’t pay your mortgage. If you fall into this category, the GDS and TDS ratio limits are very strict and must be below 39% and 44%, respectively.

That said, if you have at least a 20% downpayment, you have a lot of options. This is especially true if you’re working with a mortgage broker and considering all mortgage lenders. Working with a mortgage broker connects you with banks, credit unions, and alternative lenders that allow GDS and TDS ratios outside the typical 39% and 44%.

Whether you meet GDS and TDS ratios or not, it’s never a bad idea to speak with a mortgage broker. To get a better idea of your ratios and what kind of mortgage you qualify for, contact us. We can help you explore all of your lending options, which is especially important if you’re worried about meeting GDS and TDS ratio limits. We can also give you tips and tricks to reduce your ratios and help you qualify for a mortgage.

Renee Huse