Total debt ratio is a formula that calculates what percentage of a person's income goes toward the payment of debt, including a mortgage payment. A mortgage payment should include interest, principal, taxes and insurance.
Significance
According to MSN's Money Central website, some mortgage lenders prefer that you have a total debt ratio of 36 percent or lower before they will approve you for a loan.
Formula
If your total monthly obligations are $1,700, and your monthly gross income is $5,500, your total debt ratio is 31 percent ($1,700/$5,500). Gross income is before any taxes are taken out.
Benefits
Paying down your credit card debt will help improve your debt ratio. Sometimes credit card debt can be consolidated with a lower rate of interest, which helps decrease your monthly payments.
Refinance
When a home is refinanced, the mortgage term may be stretched to a longer period, thereby lowering the mortgage payment. This also helps you receive a more favorable total debt ratio.
Prevention/Solution
If you are facing a hardship and cannot afford your mortgage payment while handling credit card debt, you may qualify for a loan modification. According to MakingHomeAffordable.gov, there is a federal program that helps you lower your interest rate, which results in a lower mortgage payment.
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