Your debt-to-income ratio is the comparison between what you owe and what you earn (every month), and it's a key number lenders use to determine your capacity to borrow additional funds. It's usually a principal component in determining whether a loan application is approved.

How much is too much? Figure your debt-to-income ratio

Your debt-to-income ratio is one way to get a snapshot of your fiscal health. The formula is easy:

Divide
your monthly minimum debt payments
(including mortgage or rent)
by
your monthly gross income

Example: You earn $5,000 each month in gross income, and a yearly bonus nets you $500 a month. Your total monthly income is $5,500.

You pay $200 a month in student loans, $500 in rent, $150 on a car payment, and $150 on your credit cards and other expenses. Your total monthly debt payments are $1,000.

$1,000 (debt) divided by $5,500 (income) = a ratio of 18.2%.

What's an acceptable ratio?

Acceptable ratios vary from lender to lender.

Knowing your debt-to-income ratio is a good way to gauge your financial fitness.

Housing ratios: the 28/36 rule

What about rent and mortgage expenses?

If you are in the market to buy a home (or soon will be), there are two ratios that lenders use to qualify you for approvals that include your proposed housing payment. You're permitted a higher ratio than that shown above since your housing costs are incorporated into the mix.

• Your housing payments should not exceed 28% of your income.
• Your total debt, including your house payments, should not exceed 36% of your gross income.