Definition of a TDS Ratio
TDS ratio stands for Total Debt Service Ratio.
A TDS Ratio is a percentage of your monthly gross income divided into your total monthly debt service.
TDS is calculated by dividing your gross monthly income into your monthly housing expenses plus all other debt service, including car payments, student loans and credit cards.
The figure is expressed either as a percentage or a ratio. Most lenders recommend a TDS of no more than .40, or 40% of your gross income, for mortgage lending. The ratio is used as a gauge to determine whether or not a borrower can afford a certain mortgage. It is also used as a requirement for obtaining mortgage insurance through the CMHC.
Mr. McGillicuddy has gross income of $6,000, and the following other expenses:
$1,300 Housing costs (mortgage principal and interests, taxes and heating costs)
$ 100 Credit card monthly payment
$ 300 Auto loan payment
$ 100 Student loan payment
This equals a total debt service of $1,800. Dividing the total debt service by gross income gives the borrower a TDS ratio of .3. With other factors being favorable, Mr. McGillicuddy should be able to qualify for a mortgage and if necessary, for private mortgage insurance through the CMHC.
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TDS and Mortgage Qualification
The TDS ratio is a useful tool to not only determine whether the borrower may qualify for a mortgage, but how much of a mortgage the borrower can obtain. To do so, the borrower can simply multiply their gross income by .4 and then deduct the non housing related debt. In the example above, the borrower’s target total debt service should be no more than $2400. ($6000 * .40) Since the borrower has $500 per month in other debt service, the borrower should seek a mortgage with housing costs not exceeding $1900 per month.
Though a limit of 42% for payment of all debt service may seem a low ratio to some, borrowers should remember that budget items such as food, clothing, phone, transportation and income taxes are not including in figuring the TDS ratio. The ratio for both the TDS and GDS are used by lenders and the CMHC based on statistical data of loan defaults and establishes a lower risk than higher ratios.
At FirstFoundation.ca. we desire to place our customers into a mortgage they can afford, and will present customers with mortgage options falling in line with the customer’s TDS ratio. Mortgages are a long term commitment, and we want our customers to be in their homes for a long time.
If you are interested in learning more about TDS ratio, please feel free to contact us today!