Credit Policy 6: LTV, GDS, TDS: Where Policy Meets Practical Judgment

If you’ve ever sat in a credit committee meeting and heard someone say, “Well, it fits the ratios…” you know where this is going. Ratios are helpful but only when they’re grounded in real-world context. Without that, they become a checkbox, not a tool.

LTV. GDS. TDS. These acronyms live at the heart of every lending decision. But in the private and non-bank space, they can’t be applied blindly. That’s why your credit policy needs to go beyond limits—and explain how and why those limits are used. I’ve considered this in other Posts if you’re interested.

LTV: Loan-to-Value

We talk about LTV all the time. But LTV isn’t a magic number. It’s a risk signal—and one of the most misunderstood ones in our toolkit.

Things to define in your policy:

• Max LTV by product type (e.g. 75% for firsts, 85% for seconds, 50% for construction draws)

• Property-type adjustments (e.g. lower limits for land, cottages, or specialty assets)

• When LTV caps can be exceeded—and by how much

It’s not just about how much equity is in the deal. It’s about how much realizable equity is available in the event of default.

I’ve seen second mortgages at 80% LTV approved because the deal “looked good” only for the first mortgagee to initiate foreclosure, wipe out the second, and leave the lender holding an empty shell.

GDS and TDS: Understanding Affordability in a Non-Bank Context

In institutional lending, gross and total debt service ratios are gospel. But in our world, where borrowers may be self-employed, unbanked, or recently restructured, we need a smarter lens.

Your policy should guide underwriters on:

• When to use GDS/TDS and when to focus on cash flow

  (A salaried borrower with strong income? Use ratios. A commission-only file? Cash flow review.)

• What counts as “acceptable income”

  (Net income from business? Room rental income? Foreign pension?)

• TDS thresholds by borrower type

  (You might allow up to 60% for self-employed with strong equity, but cap salaried borrowers at 45%)

Most importantly, your credit policy should empower underwriters to assess repayment feasibility, not just mathematical eligibility.

Beyond the Ratios: Compensating Factors and Real Judgment

Sometimes a borrower is over the ratio limit but has:

• Significant liquid assets

• A co-borrower with unreported income

• A strong collateral buffer

• A clear and documented exit strategy

Your policy should leave room for this kind of judgment, but with boundaries. Otherwise, “exceptions” become the rule.

Use Ratios as Tools—Not Shields

I’ve seen lenders approve risky deals because “the ratios work.” I’ve also seen good borrowers declined because “the ratios don’t.” Neither approach is helpful.

In private lending, we’re in the business of underwriting stories—not just stats. Ratios help test the story, not tell it.