What is the debt ratio and how is it calculated?

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Paying any debt involves many factors that we have to pay close attention to if we do not want it to have a negative impact on us. To calculate the amount we can borrow if we are going to apply for a mortgage, there are some formulas that we can use. The most common thing is to calculate it through the debt ratio. This is a concept from the financial field that if you don't know, we will explain everything about it below.

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What is the debt ratio?
The debt ratio is an index used in the business world to calculate how much Chinese Overseas America Number Data of a company's assets can be allocated to debt. If we translate this variable to the mortgage world, this concept corresponds to the amount of money that a person can allocate to pay a debt and is better known as debt capacity .

Experts recommend that this amount does not exceed 35% of monthly income, since otherwise you would not be able to pay the debt month after month. Therefore, it is important to remember that part of our income must also be used to save, since if we do not have savings our financial solvency may be affected.

In other words, debt capacity comes from subtracting our total income minus the fixed expenses we have monthly. The result we obtain cannot exceed 35% of the net money we have left for the month.

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How is it calculated?
As we said, the debt ratio in mortgage loans translates into a person's debt capacity and is calculated using this formula:




In this formula, the total income is the sum of the amounts that the mortgage applicant receives in full, such as payroll or amounts from other activities, and the fixed expenses , the sum of the amount that would be paid per month for the mortgage, the home supplies or other costs such as gym fees, school fees, etc.

Therefore, the amount for which a future mortgage holder can borrow would be the result of the previous subtraction. Thus, a person can only allocate 35% of the net income they receive per month to their mortgage. Although, if you want to be even more sure that the amount you are going to borrow is correct, you can replace the 0.35 in the formula with 0.30 . In this way, you will allocate, instead of 35% of your net income, 30% of these. Thus, the lower this factor is, the lower the amount to pay each month. Fact that will make us expand the debt through methods such as extending the mortgage .