# Definition of gross debt service ratio (GDS)

By Mark Holland / last week

## What is the gross debt service ratio?

The Gross Debt Service Ratio (GDS) is a measure of debt service that financial lenders use to assess the ratio of home debt a borrower pays against their income. The gross debt service ratio is one of several metrics used to qualify borrowers for a home loan and determine the amount of equity offered.

The gross debt service ratio may also be called the housing expense ratio or initial ratio. Borrowers generally should strive for a gross debt service ratio of 28% or less.

## How the GDS relationship works

The gross debt service ratio is usually a comprehensive measure of all a borrower’s monthly housing expenses. It can also be calculated on an annual basis. The borrower’s current monthly mortgage payment is the main expense. Other expenses can also include monthly property tax payments, monthly home insurance payments, and utility bills.

### Lenders generally require a total debt service ratio of about 36% or less for loan approval.

The total monthly expenses are divided by the total monthly income to calculate the ratio. As a general rule of thumb, lenders typically require a gross debt service ratio of 28% or less. Lenders also use the GDS index to determine how much the borrower can afford to borrow.

Lenders generally extend home credit with mortgage payments that result in a GDS of approximately 28% to the borrower.

### Key takeaways

• The Gross Debt Service Ratio (GDS), Total Debt Service Ratio, and a borrower’s credit score are the key components analyzed in the mortgage loan underwriting process.
• GDS can also be used in other personal loan calculations, but it is more common with home loans.
• Many lenders require that the borrower meet specific credit rating requirements in order to consider the loan.

## Gross debt service ratio example

As an example, consider two married law students who have a monthly mortgage payment of \$ 1,000 and pay annual property taxes of \$ 3,000 with a gross household income of \$ 45,000. This would give a GDS ratio of 33%. Based on the 28% benchmark, this couple appears to have unacceptable debt and is unlikely to be approved for a home loan given their current situation.

## Special Considerations

The GDS index is just one component involved in the loan underwriting process. The total debt service ratio and a borrower’s credit report are also important components.

A borrower’s credit report is obtained from a thorough investigation and provides the lender with the borrower’s credit score and credit history. Many lenders require that the borrower meet specific credit rating requirements in order to consider the loan.

A borrower’s total debt service ratio is also a factor in the approval qualification process. The total debt service ratio is similar to the gross debt service ratio, however, it includes all of the borrower’s debt and is not just focused on housing. The total debt service ratio sums up all of a borrower’s monthly debt and divides it by their monthly income to calculate an index.

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