The gross debt service ratio, also known as the GDS ratio, is a debt service metric that financial lender uses to determine amount of a borrower's income going toward the payment of housing debt. The gross debt service ratio is one of the metrics used when deciding whether or not a borrower is qualified for a mortgage loan and how much of the principle they will be granted. In addition to being known as the housing cost and front-end ratios, gross debt service ratio is another name. As a general rule, Borrowers should aim for a gross debt service ratio lower than or equal to 28%.

The GDS Ratio and Its Functions

In most cases, the whole amount of a borrower's monthly housing costs are reflected in gross debt service ratio as a complete indicator. In addition, it is possible to compute it every year. The principal expenditure incurred by the borrower is the current monthly payment toward the mortgage. Monthly payments of property taxes, homeowners insurance, and monthly energy bills are all additional costs. To determine the ratio, one takes the entire monthly costs and divides that number by the total monthly revenue. Lenders often need a gross debt service ratio no higher than 28% to qualify for financing. Lenders also look at the GDS ratio when determining how much money a borrower can afford to take out in loans.

Formula and Method for Calculating Gross Debt Service Ratio

Any money spent on your electric, water, or natural gas service may be considered payment toward your utilities. Suppose you are interested in purchasing real estate. In that case, you should get in touch with the electric, water, and gas companies to get information about the typical prices of the property's utilities. You may also research online to find out information about the property taxes levied in your area to get an idea of how much they could cost you.

Example

Consider, for the sake of illustration, a couple of married law students who make a monthly mortgage payment of $1,000, pay yearly property taxes of $3,000, and whose family has a gross income of $45,000. This would lead to a GDS ratio of 33% if it happened. According to the standard of 28%, this couple looks to be carrying an unreasonable level of debt, and given their current circumstances; it is very unlikely that they would be accepted for a mortgage loan.

What Is the Function of the GDS Ratio?

Lenders use the GDS ratio to analyze whether or not a prospective borrower can afford a mortgage. Because increasing the amount of a mortgage loan includes a certain degree of risk for the lender, they want confirmation that you'll likely pay back what you borrow before they agree to increase the loan amount. The GDS ratio quantifies your capacity to pay based on expected housing prices and your family income. This ratio is used to determine whether or not you will be approved for housing.

A few choices are available to you if a lender deems that your GDS is more than the permissible limitations. The initial step is to investigate several methods through which your revenue might be raised. You may be able to do this, for instance, by requesting a pay rise at your place of employment, agreeing to work more hours, beginning a second job, or beginning a side hustle. You may be able to improve your chances of being approved for a mortgage by increasing the size of the down payment you want to make, particularly if you intend to finance a lesser overall loan amount.

Special Considerations

In the process of underwriting a loan, the GDS ratio is only one of several considered components. The overall debt service ratio of a borrower, as well as their credit record, are both essential components as well. A hard inquiry will result in obtaining a borrower's credit report, which will then provide the lender with the borrower's credit score and credit history. When applying for a loan, many financial institutions demand that prospective borrowers achieve certain minimum standards regarding their credit scores.

The ratio of a borrower's total debt to the amount that can be serviced each month is another consideration in the approval process. It considers the whole of a borrower's debt rather than concentrating just on housing-related obligations. To calculate a ratio, the total debt service ratio adds up all of the borrower's monthly debt and then divides that amount by the borrower's monthly income. In certain circles, this concept is sometimes called the "bottom ratio."