Can someone explain debt to income ratio to me?
Okay, two strikes and they are out. Amazing how much bad advice you can find. Your debt to income ratio (also called debt service ratio) is based on the idea that you should be paying out only part of your income to service your debt. Many banks etc will use a 30% debt service ratio. That means that if you earn (gross) $3000 per month, you will be ‘allowed’ only enough credit so that the payments do not exceed $900 per month. On housing, they will sometimes allow 40% housing debt ratio. For that, they will include all costs of housing, including heat, light, taxes, etc, and mortgage payments. So that’s how they decide how much mortgage you can ‘afford’. I put that last in quotes, because it’s been my experience that very few people can actually afford comfortably to pay 40% of their gross income for housing. But that’s another story.
