How is the TDS ratio calculated?

The Total Debt Service (TDS) ratio is an important metric used by lenders to assess a borrower's ability to manage monthly payments and repay debts. It measures the proportion of a borrower’s gross income that goes toward housing-related expenses and other debt obligations.

The correct calculation of the TDS ratio includes principal and interest payments on the mortgage, property taxes, heating costs (PITH), and any other debt payments, with consideration for condos and other relevant financial obligations. Specifically, the formula accounts for:

1. PITH, which represents the combined monthly costs of Principal, Interest, Taxes, and Heating.
2. Half of any condo fees, which may be ongoing monthly obligations for a condo owner.
3. All other debt payments the borrower may have, such as car loans, student loans, and credit card payments.

By incorporating these factors into the TDS ratio calculation, lenders get a comprehensive view of a borrower’s financial obligations relative to their total gross qualifying income. This approach allows for an accurate assessment of the borrower's financial health and their capacity to afford additional debt, helping to mitigate lending risk.

In contrast, other methods of calculating TDS may omit crucial elements that directly impact a borrower's financial situation, thus potentially resulting in misleading assessments.