TDS Ratio: Understanding, Examples, and Best Practices


The total debt service (TDS) ratio is a critical financial metric used by mortgage lenders to assess a borrower’s capacity for additional debt. This article delves into the intricacies of TDS, its calculation, and its significance in securing loans.

Understanding total debt service (TDS) ratio

When it comes to securing a mortgage or any substantial loan, understanding the total debt service (TDS) ratio is paramount. This financial metric, expressed as a percentage, gauges the proportion of a borrower’s gross income already allocated to debt obligations.

Calculation of TDS ratio

The TDS ratio is computed by dividing the total debt obligations, encompassing both housing and non-housing expenses, by the gross income. Housing costs include mortgage payments, property taxes, insurance, association fees, and utilities. Non-housing factors span auto loans, student loans, credit card payments, and more.

Example of TDS ratio calculation

For instance, consider an individual with a gross monthly income of $11,000 and monthly debt obligations of $4,225. The TDS ratio, calculated by dividing $4,225 by $11,000, yields 38.4%. This figure is crucial in determining loan approval, with lower ratios generally improving the chances of securing a mortgage.

Significance of TDS in loan approval

Lenders typically compare a borrower’s TDS ratio to a benchmark range, commonly between 36% and 43%. A lower TDS ratio signifies a healthier financial profile, making borrowers more likely to meet their debt obligations. However, lenders may have varying criteria, with some preferring ratios below 36% for loan approval.

Weigh the risks and benefits

Here is a list of the benefits and drawbacks to consider.

  • Accurate assessment of financial health
  • Helps lenders make informed lending decisions
  • Guides borrowers in managing debt responsibly
  • Stricter loan approval criteria for higher TDS ratios
  • Potential challenges for borrowers with high ratios
  • Varied lender criteria may lead to confusion

How to calculate TDS ratio

Calculating the TDS ratio can be done manually or using tools like Excel. The formula involves summing up all monthly debt obligations and dividing the total by gross monthly income, expressed as a percentage.

Manual calculation:

To manually calculate TDS, add up all monthly debt obligations and divide by gross monthly income. The formula is (Debt / Income) * 100.

Excel calculation:

For those using Excel, the formula would be =SUM(Debt/Income)*100. This provides a quick and accurate way to determine the TDS ratio.

TDS ratio vs. gross debt service (GDS) ratio

The TDS ratio is closely related to the gross debt service (GDS) ratio, another debt-to-income metric used by lenders. While TDS considers both housing and non-housing payments, GDS only factors in housing expenses, often referred to as the housing expense ratio.

Both ratios, along with a borrower’s credit score, play pivotal roles in the underwriting process for mortgage loans. Borrowers aiming for mortgage approval should strive for a GDS ratio of 28% or less.

Special considerations in TDS evaluation

Aside from TDS and GDS ratios, lenders consider various factors when deciding on loan approval. Small lenders, for instance, may offer mortgages to borrowers with TDS ratios exceeding 43%, depending on their specific criteria.

Credit histories and scores also weigh heavily in lending decisions. Individuals with high credit scores tend to manage debts responsibly, making timely payments and keeping balances low. Larger lenders may favor borrowers with substantial savings accounts and long-standing relationships.

Applications of TDS ratio beyond mortgages

While the total debt service (TDS) ratio is predominantly used in mortgage lending, its applications extend beyond home loans. Lenders and financial institutions may also utilize this metric when evaluating borrowers for other significant loans, such as auto loans or personal loans.

Understanding your TDS ratio becomes a valuable financial skill as it offers insights into your overall debt management capacity. Whether you’re considering a mortgage, car loan, or another substantial financial commitment, a lower TDS ratio strengthens your position as a responsible borrower.

Real-life scenario: TDS ratio and financial decision-making

Let’s delve into a real-life example to illustrate the impact of TDS on financial decision-making. Consider a prospective borrower with a gross monthly income of $8,000 and total debt obligations of $2,800.

By applying the TDS formula (total debt / gross income) * 100, we find that this individual has a TDS ratio of 35%. In this scenario, the borrower is well within the favorable range, making them an attractive candidate for loan approval.

This example underscores the practical importance of maintaining a TDS ratio within the preferred benchmarks. Lenders are more likely to approve loans for individuals with lower TDS ratios, emphasizing the significance of managing debt responsibly.


In conclusion, a clear understanding of the total debt service (TDS) ratio is pivotal for anyone seeking a mortgage or significant loan. By grasping the calculation, significance, and implications of TDS, borrowers can enhance their financial health, increasing their chances of securing loans on favorable terms.

Frequently asked questions

What other factors do lenders consider besides TDS ratio?

Lenders take various factors into account when evaluating loan applications. These may include credit history, credit scores, savings, and the borrower’s relationship with the lender.

Can a high credit score compensate for a higher TDS ratio?

While a high credit score is beneficial, it may not fully compensate for a significantly high TDS ratio. Lenders typically consider both factors to assess a borrower’s overall financial health.

Are there loans where TDS ratio is not the primary consideration?

Yes, certain loans, especially those offered by smaller lenders, may have more flexible criteria. In some cases, borrowers with TDS ratios exceeding 43% may still be eligible for loans, depending on the lender’s specific guidelines.

How often should I check my TDS ratio?

It’s advisable to regularly check your TDS ratio, especially when considering a significant financial commitment. Regular monitoring allows you to make informed decisions, manage debt responsibly, and adjust your financial strategy as needed.

Is there a universal benchmark for TDS ratios across different loans?

No, there isn’t a universal benchmark for TDS ratios across all loans. Different types of loans may have varying ideal TDS ratios. It’s essential to be aware of the specific criteria set by lenders for the type of loan you are applying for.

Key takeaways

  • The total debt service (TDS) ratio is crucial for loan approval, assessing a borrower’s capacity for additional debt.
  • Aim for a TDS ratio below 43% for mortgage approval, with many lenders preferring ratios closer to 36%.
  • Calculating TDS can be done manually or using Excel, aiding borrowers in understanding their financial health.
  • TDS and GDS ratios, along with credit scores, form the key components analyzed in the mortgage loan underwriting process.
View article sources
  1. Total debt service – Glossary | DataBank – World Bank DataBank
  2. BIS database for debt service ratios for the private non – Bank for International Settlements
  3. DEBT-TO-GNI RATIO | Economic development – United Nations