Question: What Is A Good Debt To Equity Ratio?

"When we were at the bank discussing a home loan, there was a lot of mention that our debt to equity ratio might not be sufficient for the type of house we want to purchase. What exactly is a good ratio?"

Your 'debt to equity' or 'debt to income' ratio is a major consideration for creditors anytime you apply for a new loan. Your debt to equity ratio is measured by taking your total monthly debt payments and your total monthly income, and comparing the two.

(Total Monthly Payments / Total Monthly Income) x 100 = Your Debt to Equity Ratio

For example; if between your rent, car payments and monthly credit card minimums you have a total of $1500 each month you're already obligated to pay, and your take-home pay is $3000 a month, your ratio would be:

($1500 / $3000) x 100 = 50)

That's a 50% debt to income ratio, which would be considered pretty bad to most lenders. Bear in mind that your monthly payments in this equation don't include other expenses like food, utilities, gas and other consumables, so unless you're making a fortune, a 50% ratio would indicate you won't have much of your income left at the end of the month.

A good debt to equity ratio would be considered by most lenders to be anything 30% or under. Anything over 40% is cause for concern, and anything that falls in the middle is generally acceptable, but will put you under more scrutiny. (The upper 30's may be unacceptable to more conservative lenders.)