1. What is the Debt Ratio?

The Debt Ratio measures the proportion of a company's assets that are financed by debt. It is a key financial metric used to assess a company's financial leverage and risk profile, particularly in mortgage applications.

2. How Does the Calculator Work?

The calculator uses the Debt Ratio formula:

Where:

• \( \text{Total Debt} \) — Sum of all outstanding debts and liabilities ($)
• \( \text{Total Assets} \) — Sum of all assets owned by the company ($)

Explanation: The ratio indicates what percentage of assets is funded by debt rather than equity. A higher ratio suggests greater financial risk.

3. Importance of Debt Ratio Calculation

Details: Lenders use this ratio to evaluate creditworthiness for mortgage applications. A lower debt ratio generally indicates better financial health and lower risk for lenders.

4. Using the Calculator

Tips: Enter total debt and total assets in dollars. Both values must be positive numbers, with total assets greater than zero for accurate calculation.

5. Frequently Asked Questions (FAQ)

Q1: What is a good debt ratio for mortgage approval?
A: Typically, lenders prefer a debt ratio below 36%, though this can vary by lender and loan type. Lower ratios generally improve approval chances.

Q2: How does debt ratio differ from debt-to-income ratio?
A: Debt ratio measures assets vs. debt, while debt-to-income ratio compares monthly debt payments to monthly income for individuals.

Q3: Should I include all assets in the calculation?
A: Yes, include all tangible and intangible assets - cash, investments, real estate, equipment, and accounts receivable for a comprehensive assessment.

Q4: What if my debt ratio is too high for mortgage approval?
A: Consider paying down debts, increasing assets, or exploring alternative lending options with different qualification criteria.

Q5: How often should I calculate my debt ratio?
A: Regularly monitor your debt ratio, especially before major financial decisions like applying for a mortgage or business expansion.