Debt Service Ratio FAQs: What You Need to Know
Are you planning to apply for a loan or mortgage? If so, you need to understand your Debt Service Ratio (DSR). We know that financial terms can seem tricky, so we’ve put together this simple guide to help you understand what DSR is, why it’s important, and how to improve your DSR. We also have a link to help you calculate your personal DSR so that you can understand exactly where you stand.
What is DSR?
DSR measures your ability to repay debt by comparing your monthly commitments to your income. It’s commonly used by banks and financial institutions to determine whether you can afford a loan or not.
What Are Your Monthly Commitments?
Monthly commitments refer to any debt you repay on a regular basis, such as your mortgage, car loan, or credit card debt.
What Is Your Income?
Income includes your salary, bonuses, rental income, and any other sources of funds.
Why is Your DSR Important?
Lenders use DSR to determine how much risk is involved in lending you money. A low DSR suggests that you have strong financial health since there is a good balance between income and debt. This means you can easily repay a loan, making you a more attractive borrower.
A high DSR, on the other hand, could indicate financial strain. It may be risky to lend you money because you already have so much debt that you may struggle to repay another loan. Depending on how high your DSR is, lenders may impose higher interest rates or even reject your loan application.
How is Your DSR Calculated?
Your DSR is calculated with this formula: (Total monthly commitments / Total monthly income) x 100. For example, let’s say you earn $10,000 a month and your total monthly commitments add up to $3,500. Your DSR would be (3,500 / 10,000) x 100 = 35%.
What is the Ideal DSR Range?
Banks usually prefer a DSR below 40% for personal loans. Mortgage lenders may accept a DSR of up to 50%.
How Do I Calculate My DSR?
You can use our DSR Calculator. It’s easy to use and it will give you this important info right away.
