Understanding Affordability Measures in Underwriting

Affordability measures are a cornerstone of responsible lending practices. In an environment where economic conditions fluctuate and borrowers face varied financial pressures, it’s crucial to establish benchmarks that balance opportunity with caution. As someone who has spent years in the credit and risk management field, I’ve seen how understanding affordability can make the difference between sustainable lending and financial stress.

One of the most widely used affordability metrics is the Total Debt Service (TDS) ratio. TDS measures the percentage of a borrower’s gross income that goes toward paying debts, including mortgage payments, property taxes, heating costs, and other obligations like credit card payments and loans. Generally, lenders look for a TDS ratio below 30–40%, although this can vary based on the borrower’s credit profile and the lending institution’s policies. A classic rule of thumb is to consider 33% about right .

Similarly, the Gross Debt Service (GDS) ratio focuses on housing-related expenses as a proportion of income. This ratio usually includes mortgage principal and interest, property taxes, and heating costs, with an acceptable threshold typically set below a lenders allowable TDS. GDS is particularly useful when evaluating the affordability of homeownership, especially for borrowers with limited non-housing debts.

An important consideration when using these ratios is how they align with different income levels. For instance, borrowers with higher incomes may afford larger TDS and GDS ratios, given their greater disposable income and financial stability. Conversely, low- to moderate-income borrowers may struggle with the same ratios, as a higher percentage of their income goes toward essentials.