Gross Debt Service Ratio
A gross debt service (GDS) ratio refers to a calculated measure which financial lenders use as a basis in making an assessment as to whether or not a specific potential borrower has too much debt already. This ratio is also a determining factor in the approval or rejection of the loan application of a borrower. As a rule, a borrower is thought to be having a safe amount of debt if his gross debt service ratio is below 30 percent.
How is GDS ratio calculated?
Basically, GDS ratio is obtained by adding mortgage payments with taxes and then dividing the sum by the gross income. Here is an example to further understand the concept of this debt service ratio. A person has a monthly mortgage loan payment amounting to $1000 (which means that his annual payment is $12000), a property tax of $3500, and a gross income worth $42000. This results to a GDS of 36 percent. According to the 30 percent standard, the person appears to have too much debt.
However, it should be noted that there are other factors aside from this ratio which could cause the acceptance of a mortgage loan application. For example, a lender may still approve the application of a person if the former sees that the latter may have a future potential to earn sufficient funds to pay for the loan. This may happen even if the person has a GDS outside the standard 30 percent.
Lastly, there are tools to help an individual calculate his GDS ratio. One good example is a mortgage calculator. An individual can find a plethora of these tools on the Internet.