Debt Ratio

Financial Dictionary -> Debt -> Debt Ratio

The debt ratio is the ability to pay a property's monthly mortgage payments from cash profits made from rental properties. This is a ratio that is used as a guide by banks and other lenders to understand wither a property they might lend money on will generate enough profit that the borrower will have the finances to repay the amount of the loan that has been borrowed from the financial institution.

Debt ratio is done, by calculating the annual net operating income of the property, along with the net annual debt; this will include the principal borrowed and the interest on the principal. The ratio does not include the escrow payments when these amounts are divided.

This is also done for one dwelling home buyers at some lending institutions by using their personal debts, along with their income. Personal debts include all expenses; credit card debt, child support, student loans, home owners insurance, vehicle loans and other loans. The other things that can be figured in are groceries, utilities, business expenses and any other kind of reoccurring debts. These are then divided by the gross monthly income. The usual standard debt ratio to income that a lender looks for is no higher than approximately 36% of the monthly gross income. Certain home loans will allow up to 40% of debt to income ratio - these are usually federal types of home mortgages.