DEFINITION of 'Qualification Ratio'

Ratio of debt to income and housing expense to income that is used by mortgage lenders to determine a borrower's credit-worthiness for certain loan amounts. Generally, a borrower's debt-to-income ratio, which includes housing expenses plus long-term debt, cannot exceed 36% of the person's monthly gross income. Housing expenses alone, which include home owner's insurance, taxes, condominium fees, homeowner's fees, etc. cannot exceed 28% of a borrower's monthly gross income.

BREAKING DOWN 'Qualification Ratio'

Mortgage programs are available for borrowers who do not meet the standard qualifying ratios, but the added risk of default by the borrower means that such mortgages generally carry higher interest rates than mortgages where the standard qualifying ratios are met.

RELATED TERMS
  1. No-Ratio Mortgage

    A mortgage program in which a borrower's income isn't used or ...
  2. Housing Expense Ratio

    A ratio comparing housing expenses to before-tax income that ...
  3. Total Housing Expense

    The sum of a homeowner's monthly mortgage principal and interest ...
  4. Back-End Ratio

    A ratio that indicates what portion of a person's monthly income ...
  5. Total Debt Service Ratio - TDS

    A debt service measure that financial lenders use as a rule of ...
  6. Reverse Mortgage Financial Assessment

    A review of the borrower’s credit history, employment history, ...
Related Articles
  1. Personal Finance

    What’s Considered To Be A Good Debt-To-Income (DTI) Ratio?

    The debt-to-income ratio measures the amount of debt a person has compared to overall income.
  2. Personal Finance

    Too Much Debt For a Mortgage?

    Just because a lender is willing to offer you a loan doesn't mean you should take it.
  3. Personal Finance

    How Much Mortgage Can You Afford?

    Here's how to determine what you should be borrowing to finance your home.
  4. Personal Finance

    Mortgages: How Much Can You Afford?

    Answering this means number-crunching as well as factoring in other considerations and expenses.
  5. Personal Finance

    Finding the Best Mortgage Rates in 2017

    As home-buying technology has progressed, the process of finding the best mortgages rates can all be done online. Here's how:
  6. Investing

    Financing Basics For First-time Homebuyers

    If you're looking to get your first mortgage, there are many financing options available.
  7. Personal Finance

    How to Use a Mortgage Calculator to Save Time and Money

    Calculate your monthly mortgage payment using the Investopedia's free calculator.
  8. Investing

    Explaining Debt

    Debt is any amount a borrower owes a lender.
  9. Personal Finance

    Top 6 Mortgage Mistakes

    These common errors could end in foreclosure.
RELATED FAQS
  1. What's considered to be a good debt-to-income (DTI) ratio?

    Your debt-to-income ratio helps lenders determine your credit worthiness. Find out how to calculate your score and whether ... Read Answer >>
  2. How does my debt-to-income (DTI) ratio affect my ability to get a mortgage?

    Find out how much your debt-to-income ratio affects your ability to get a good mortgage rate when buying a home. Read Answer >>
  3. What is the debt ratio for an FHA loan?

    Borrowing through the Federal Housing Administration requires individuals to provide proof of income as well as information ... Read Answer >>
  4. How do I lower my debt-to-income (DTI) ratio?

    A debt-to-income ratio is a personal finance measure that compares the amount of debt you have to your overall income. Lenders ... Read Answer >>
  5. Why does the loan-to-value ratio matter?

    Learn how the loan-to-value (LTV) ratio is calculated, and why this metric is important to lenders when evaluating a home ... Read Answer >>
Trading Center