subject: Managing Your Debt Service Ratios [print this page] Debt service ratios are the proportion of specific monthly payment balanced against your gross income. Debt service ratios are a calculation used by banks when considering loan, credit card and mortgage application.
Your gross debt service ratio is the cost of your monthly housing payment (mortgage or rent), plus your property tax payment, plus the cost of heat, divided into your gross monthly income. Your total debt service ratio is your monthly housing payment (mortgage or rent), plus your property tax payment, plus the cost of heat, plus the cost of monthly payments to creditors (loans and credit cards).
Most banks will require that an applicant's gross debt service ratio does not exceed 30% and that their total debt service ratio does not exceed 40%.
If you have calculated your debt service ratios and they are high you should now look at why. You could have no debt but still have a total debt service ratio that exceeds the allowable percentage. This would occur if you had large housing payments in proportion to your income.
Alternately you could have a low gross debt service ratio but high total debt service ratio because of large payments to credit. This often happens when individuals cosign car loans and big ticket financing for friends or family members.
How to manage your debt service ratio.
1. Look at your housing costs. If they are excessive, consider downsizing.
2. If you have cosigned accounts, see if you can be removed.
3. Try to pay down any credit that have large monthly payments.
You can have the best credit in the world but if your debt service ratios are high, lenders will think that you do not have the capacity to pay them and may approve you for credit. For more information about building a strong financial profile visit www.trueassess.com
