How to properly assess your debt ratio
March 30, 2020
As a tenant for several years, you are about to take the plunge by becoming the owner of your house or your apartment. Consequently, a small turn to the bank is essential in order to take out a mortgage application. An essential step, during which your advisor will assess your borrowing capacity in order to know if you can be creditworthy, because know that the acceptance of your file will largely depend on your debt ratio. What is its calculation method and what are its criteria? Here is the instructions.
What is the debt ratio?
To take into account your debt ratio, you will have to transmit to your banking organization all your charges and stable income. That is to say your last three pay slips, your account statements, your rent receipts, alimony and possible credit repayments in progress, current expenses (EDF, telephone, etc.), insurance, etc. .
Please note: do not take into account your uncertain or time-limited income, in order to obtain the most accurate assessment possible. With all these elements at your disposal, you will be able to know if you are able to stick to your budget by precisely assessing the amount that you will be able to save each month, and thus avoid situations of over-indebtedness.
How is it calculated?
To calculate this rate, the rule is simple. It corresponds to the total of your charges divided by all of your income, multiplied by 100. In general, the debt fixed by the lender does not exceed 33%, or one third of your income. In fact, if you exceed this threshold, it will be very difficult for you to meet your other current expenses (food, leisure, etc.), and even more so in the long term. This can lead to a banking ban or to the registration in the file of credit repayment incidents to individuals (FICP).
However, this rule does not apply to everyone. Indeed, the rate of 35% can be borne by households with high incomes while a rate of 30% can be very difficult to hold for households with low incomes. In this perspective, another approach is used by the banks: the “remainder to live”. As the name suggests, it is the amount you have left each month, after deducting from your income the repayment of your mortgage and your other expenses: it must guarantee you to ensure your daily expenses. Finally, all these elements will allow you to target the property corresponding to your real borrowing capacity.
And for you, how did it go with your bank? Do you think she calculated your debt ratio correctly? Tell us about your experience, the blog is there for that!