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Your Debt to Income Ratio In order to discover if you are in a good financial position, you must determine how much you spend each month to pay off your debts and other financial commitments. Your debt-to-income ratio is one of the best ways to gauge whether you are in a good financial position to borrow money or if you are spending too much on debt. It is the percentage of your income you owe in debt or debt payments. The lower your ratio, the better chance you will have of repaying your debt, hence the better chance of being approved for a loan or mortgage. As well, lenders will take into consideration your record in repaying previous debts and how long you’ve been at your current job. Gross Debt Service ratio (GDSR) and Total Debt Service ratio (TDSR) are two standard formulas used to analyze your ability to afford to take on additional debt. Their definitions are: Gross Debt Service ratio (GDSR): The rule is monthly housing costs, usually defined as mortgage payments (combined principal and interest) plus property taxes, secondary financing, heating and 50% of condominium fees, if applicable, should not exceed 32 per cent of monthly household income before taxes. Total Debt Service ratio (TDSR): this calculation compares monthly income to housing costs (same as GDSR) plus payments on lines of credit, car loans, credit cards and other debt. Housing costs plus debt payments should not exceed 40 per cent of income. Understanding your debt-to-income ratio less than 35%: Ideal amount of debt for most people to carry. 36%-41%: Start reducing spending now before you dig yourself further into debt. 42%-49%: Financial distress is imminent unless you act quickly to prevent it. 50% or more: Obtain professional assistance to severely reduce your debt. GDSR Example: Mortgage Principal + Interest: $ 1,000.00 Heat: $ 120.00 Taxes: $ 105.00 ================================= Total for Debt Service: $ 1,225.00 Gross Monthly Income: $ 3,850.00 ================================= GDSR (Gross Debt Service Ratio): 0.31812 or 31.81% TDSR Example: Mortgage Principal + Interest: $ 1,000.00 Heat: $ 120.00 Taxes: $ 105.00 Car Loan: $ 200.00 Credit Card Payments: $ 175.00 ================================= Total for Debt Service: $ 1,600.00 Gross Monthly Income: $ 3,850.00 ================================= TDSR (Total Debt Service Ratio): 0.4156 or 41.56% Contact your PROrealty Professionals NOW to learn how we can help you realize all of your Real Estate Transactions. [email protected] 780.886.9210