Gross Debt Service Ratio (GDS): Explaining the Mortgage Metric

What Is the Gross Debt Service Ratio?

The gross debt service (GDS) ratio is a debt service measure that financial lenders use to assess the proportion of housing debt that a borrower is paying in comparison to their income. The gross debt service ratio is one of several metrics used to qualify borrowers for a mortgage loan and determine the amount of principal offered.

The gross debt service ratio may also be referred to as the housing expense ratio or the front-end ratio. Generally, borrowers should strive for a gross debt service ratio of 28% or less.

How the GDS Ratio Works

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

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

Gross Debt Service Ratio Formula and Calculation

The formula that's used to calculate the gross debt service ratio is fairly straightforward. It looks like this:

Gross Debt Service Ratio = Principal + Interest + Taxes + Utilities / Gross Annual Income

Utilities can include any amounts paid toward electric, water, or natural gas service. If you're planning to purchase a property, you may be able to contact the electric company, water company, and gas company to get information about average utility costs. You can also look up information about local property taxes to estimate what you might pay for those.

Example of Gross Debt Service Ratio

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 family income of $45,000. This would result in a GDS ratio of 33%. Based on the benchmark of 28%, this couple appears to be carrying an unacceptable amount of debt and are not likely to be approved for a mortgage loan given their current situation.

How Is GDS Ratio Used?

The GDS ratio helps lenders determine whether a borrower can afford a mortgage. Extending a mortgage loan involves a certain amount of risk to the lender so they want reassurance beforehand that you'll be likely to pay back what you borrow. The GDS ratio is a way to measure your ability to pay, based on estimated housing costs and your household income.

If a lender determines that your GDS is above acceptable limits, you have some options. The first is finding ways to increase your income. For example, you may be able to do that by asking for a raise at work, taking on more hours, starting a second job, or starting a side hustle. Increasing the size of your down payment could also help you qualify for a mortgage if you're financing a smaller loan amount.

Special Considerations

The GDS ratio is only one component involved in the underwriting process for a loan. A borrower’s total debt service ratio and credit report are also important components as well.

A borrower’s credit report is obtained from a hard inquiry and provides the lender with the borrower’s credit score and credit history. Many lenders require a borrower to meet specific credit score requirements for loan consideration.

A borrower’s total debt service ratio is also a factor in the qualification process for approval. The total debt service ratio is similar to the gross debt service ratio; however, it includes all of a 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 a ratio. This may also be referred to as the "bottom ratio."

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