Divide your total income amount by your total debt amount – and you have your

debt ratio

. Whenever you apply for a loan the bank wants to be sure you have enough income to pay the borrowed amount back. There is a number of tools that banks and other lenders use to estimate your credibility, and calculating your

debt ratio

is one of them. They have to make sure your total debt doesn’t exceed a certain required percentage of your income. The banks usually require this percentage as 36-42. This percentage is the

debt ratio

. Your

debt ratio

differs if you have debts or if you have no debts at all. Suppose you have $3000 income per month and no debt. Say, you pay some $1000 towards your insurance and taxes, and you can afford to pay approximately $1140 towards your mortgage payments each month, the

debt ratio

in this case is 38 percent. However, if you have the income of $4000 and $1000 of debt you have to pay out each month. You would probably think the

debt ratio

should be the same? Unfortunately, that is not how it works. The lender requires you have no more than 38 percent of

debt ratio

, which in this case equals to $1520 per month that is available for debt payouts ($4000 x 38%). And you already owe $1000 to your other lenders, so you can afford to pay out only $520 each month. Differs a lot, right? Of course, it is not just, but the banks calculate your

debt ratio

that way and there’s nothing we can do about it. The best thing to improve your

debt ratio

is to reduce your debts as much as you can before asking for a mortgage.