What Is a Debt Ratio and how can I reduce my percentage?

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What Is a Debt Ratio


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Your debt ratio is simply the amount of money you earn relative to the debt you have. Mortgage lenders use this ratio to figure out how big a mortgage you can afford.

There are two types of debt ratio. The first is called your housing ratio, which measures your income relative to your proposed monthly mortgage payment. If you make $4,000 per month and your mortgage payment is $1,000, your housing ratio would be 25. The housing ratio does not include any debt other than your mortgage and uses your gross salary.

The “back end” ratio is more detailed. It still uses your gross salary but includes all the debt listed on your credit report in addition to the monthly mortgage payment. The back end ratio gives a more complete picture of what you can afford.

If you do not have many bills, the housing ratio will give you a pretty good idea of how much house you can afford. But, if you have a lot of debt, it makes sense to figure out roughly what your back end ratio is before talking to a mortgage lender.