Debt Service Ratio – How to Calculate This Value

In order to calculate and find the value of Debt Service Ratio, you can use couple of methods. You can use your gross monthly income to find this value. It is very important to determine ratio of debt service because it is a mandatory requirement of mortgage approval process. Most of the banks carefully determine this ratio to decide whether to offer loan to a person or not. If the value of this ratio is lower than 45%, banks will not take risk to release mortgage. Hence, in order to acquire mortgage, you should have GMI more than 45%. The easiest ways to determine the service ratio are discussed below.

1.    Input your gross monthly income
Gross monthly income means the value of money you earn in one month. In order to find this value, you can have a look on your recent salary slip. You just need to remove the deductions and taxes and find complete salary. You can consider the final balance in your pay stub as GMI. Do not try to use the net monthly income because it represents the total amount after the deductions and taxes. Hence, GMI does not include any tax or deduction.

2.    How GMI does relate to amount of mortgage?
In order to find out the value of monthly payment you could get financed for, you can follow simple steps. First of all find the value of your ratio of debt service and subtract the ratio from 45%. Once you find this value, you can multiply it by your GMI. The resulting amount or balance is the payment that most of financial firms will be willing to finance for you. You can easily calculate this value or amount. In case of some trouble, you can get assistance and help from bank staff.

3.    Find the total monthly debt payments
In order to calculate this prime value, you just need to add up all your monthly expenses that are paying off debt. It will include student loan, credit card payment and car loan. The sum of all payments will represent the average amount of debt. You can easily pay off this amount in one month. Try to reduce your monthly expenses to increase the loan approval chances. In case of huge monthly expenses, it will be hard for you to acquire loan.

4.    Divide monthly debt payments into GMI
This is the final step and you need to take the sum of monthly debt payments and divide it into your GMI. The resulting amount will represent your debt ratio. If this ratio is 0.3%, it will represent as 30%. This value should be lower than 45% to acquire bank loan.

It is very critical to determine and calculate the debt ratio because determines the debtor capacity to pay off loan. The maximum limit of this value for banks is 45%. In case of more value, banks will not offer loan. Banks use certain techniques to determine this value carefully prior to release mortgage.