Alternate names: front-end ratio, housing-expense ratioAcronym: GDS ratio
Your lender determines your GDS ratio by dividing your total housing costs by your gross monthly income. If your GDS ratio exceeds 28% of your income, this could indicate that you’re spending too much on housing costs. For example, let’s say your gross monthly income is $6,000 and you spend $2,000 on monthly housing costs. Your GDS ratio is 33%, which is higher than most lenders like to see. That doesn’t necessarily mean you’ll be denied a loan, but it will factor into your lender’s decision.
How Does a GDS Ratio Work?
Before a lender approves you for a loan or mortgage, they want to ensure you’ll be able to make your monthly payments. That’s why your GDS ratio is one of the calculations potential lenders will consider. To determine your GDS ratio, your lender will divide your monthly housing costs by your gross monthly income. Your monthly rent or mortgage payments will be the primary consideration, but housing costs can also include:
Property taxesUtility feesCondo payments
For instance, if you want to buy a home in the next year, you’ll start by getting preapproved for a mortgage. Your lender will want to see that the principal, interest, taxes, and insurance are less than or equal to 28%. The lower your GDS ratio, the more likely you are to get approved for a mortgage.
Gross Debt Service Ratio vs. Total Debt Service (TDS)
In addition to calculating your GDS ratio, your lender will also consider your total debt servicing ratio (TDS), which is also called debt-to-income ratio. While the GDS ratio looks at your housing costs, the TDS ratio looks at how much you’re spending on all your debt payments each month. For example, let’s say your monthly income is $6,000 and you have a $300 car payment, a $250 student loan payment, and a $1,200 mortgage payment. Your total payments are $1,750, which means you have a TDS ratio of 29%. Want to read more content like this? Sign up for The Balance’s newsletter for daily insights, analysis, and financial tips, all delivered straight to your inbox every morning!
