What is debt ratio? How do you calculate debt ratio?
Sometimes referred to as debt to income ratio, or income to debt ratio,
the Debt Ratio is a number used to compare the amount of monthly debt
you carry to the amount of monthly income you have. This ratio is a key
component to qualify for many mortgages.
To calculate the debt ratio, you compare your house payment to your
total monthly gross income and your total monthly payments to your total
monthly gross income.
Example: Alpha Bank looks for a debt ratio of 29/35 to qualify for a new
mortgage. This means that your house payment can not exceed 29% of
your total monthly gross income and your total monthly payments
(house payment, car loans, credit cards, loans, etc) added to your
house payment can not exceed 35% of your total gross monthly income.
If your total monthly gross income is $3,000 before taxes, your house
payment (PITI) can not exceed 29% of $3000, or $870.
In addition to this, your total monthly minimum payments on house
payment and other debts (credit card, loans, etc) can not exceed 35%
of $3000, or $1050.
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