total debt service ratio


The ratio of all your debt payments divided by your annual gross income.

The debts considered include mortgage loans, credit cards, car loans, and any other debt with a regular payment. The annual gross income is taken before taxes.

Lenders prefer that this ratio does not exceed 40%, and will generally not grant a mortgage loan that would result in a limit beyond 40%.

One wrinkle in the calculation is the way the lender calculates your credit card debts. Even if you have no balance on a card, the lender will calculate the minimum payment you would need to make if the card were maxed out, and include that payment in the ratio.

Therefore, when applying for a mortgage loan, you may want to cancel any unused cards to give yourself more room below the 40% limit.

Contrast with debt service ratio, which (confusingly) is another ratio used to calculate your maximum mortgage loan amount.

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