by Starla Ross

Created on: November 20, 2009   Last Updated: November 30, 2009

Why is it bankers like to take simple concepts and make them sound complicated? This confusion may truly be the main reason why so many people try to avoid looking at their finances. Take the debt ratio worksheet, for instance. It sounds like something an accountant falls asleep reading at 3:00 in the afternoon. In truth, it's a simple calculation that tells how much debt you have at any one time. It can be completed on one page, usually with just a few answers to a couple of quick questions.

Why would you need a debt ratio worksheet? Well first it will tell you how much debt you have and the overall financial health of your money situation. Secondly, and most commonly, it's a calculation used to tell bankers and mortgage loan officers how much debt you have and how much more debt you can afford when applying for a car loan or a new mortgage.

Your debt to income ratio is the amount of debt you currently have, divided by your total income. While you can figure your debt to income ratio annually, most banks like to use your monthly ratio.

To figure your debt/income ratio, you need to add up all the debt payments you pay each month. For instance, your debts may look like this:

Mortgage payment: $800
Car loan payment: $245
Visa Card payment: $40
Hospital bill: $25

In this case, your total monthly debt would be $1,110.

Next, you need to determine your monthly income. Some banks will ask you for your gross monthly income (the total amount you earn before taxes and other expenses are taken out of your pay). Still others will ask for your net monthly income (the amount you actually bring home after taxes and expenses). To get a true picture of your debt/income ratio, you should use your net income because this is the amount of money you actually have to spend each month.

Say you bring home $2400 per month.

To determine your debt/income ratio, you would then take $1,110 (your debt) and divide it by your $2400 (your income). In this case, your debt/income ratio would be .4625 or 46.25 percent.

What percentage of debt/income is desirable? Preferably, you would have zero debt for a zero debt/income ratio, but for most people that isn't feasible. So, the lower the number, the better. Banks assume the less debt you have, the better risk you will be. Most banks like to see debt/income ratios under 35 percent. Anything over 35 percent, and some banks begin to get nervous that you may not be able to take on more debt or may default on the debt you currently have.

If you apply for an auto or mortgage loan and your debt/income ratio is too high, a bank may ask you to pay down or consolidate your debt. They may deny your application for a loan simply because you have too much debt. It's one of those boring financial numbers you want to keep track on at least an annual basis.

You can easily make your own debt/income worksheet by using a spreadsheet program, such as Excel or even just a piece of paper. Some web sites provide free worksheets such as ConsumerCredit.com (http://www.consumercredit.com/docs/dtispreadsheet.p df) or About.com (http://financialplan.about.com/library/weekly/DebtT oIncomeWorksheet.htm).

These sites provide debt ratio worksheets for free, and you can simply print them out and fill in your numbers.

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