How to Calculate Debt Service Ratio

High debt service ratios can cause lenders to charge you higher interest rates.

High debt service ratios can cause lenders to charge you higher interest rates.

Staying afloat financially requires you have enough income to cover your debt payments. The debt service ratio measures the relationship between your disposable income and your required debt payments, such as your mortgage, student loans and other consumer debt. Banks also look at your debt service ratio when you're applying for a loan to see how likely you are to default. The higher your debt service ratio, the larger the portion of your income that goes to debt. According to the Federal Reserve Bank of San Francisco, disposable income refers to your income after taxes.

Calculate your disposable monthly income by subtracting any taxes from your gross pay. For example, if your salary is $3,500 per month, but you pay $800 in taxes, your disposable income is $2,700.

Calculate your monthly required debt payments by adding the minimum payments on each of your loans. For example, if you pay $1,000 on your mortgage and $300 on your student loans, your total debt payments are $1,300 per month.

Divide your debt payments by your disposable income to find your debt service ratio. In this example, divide $1,300 by $2,700 to get 0.4815, or 48.15 percent.

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About the Author

Mark Kennan is a writer based in the Kansas City area, specializing in personal finance and business topics. He has been writing since 2009 and has been published by "Quicken," "TurboTax," and "The Motley Fool."

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