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. Housing Expense Ratio

    A ratio comparing housing expenses to before-tax income that ...
  2. No-Ratio Mortgage

    A mortgage program in which a borrower's income isn't used or ...
  3. Total Debt Service Ratio - TDS

    A debt service measure that financial lenders use as a rule of ...
  4. Back-End Ratio

    A ratio that indicates what portion of a person's monthly income ...
  5. Reverse Mortgage Financial Assessment

    A review of the borrower’s credit history, employment history, ...
  6. Open-End Mortgage

    A type of mortgage that allows the borrower to increase the amount ...
Related Articles
  1. 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.
  2. Personal Finance

    How Much Mortgage Can You Afford?

    Here's how to determine what you should be borrowing to finance your home.
  3. Investing

    Financing Basics For First-time Homebuyers

    If you're looking to get your first mortgage, there are many financing options available.
  4. 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:
  5. Investing

    Explaining Debt

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

    5 Steps To Qualify For A Mortgage If You're Self-Employed

    Qualifying for a mortgage is a little more complicated for borrowers who are self-employed.
  7. Personal Finance

    Calculating Debt-To-Income Ratio (DTI)

    The debt-to-income ratio measures the percentage of a person’s debt when compared to his overall income.
  8. Retirement

    Additional Streams of Income for Seniors

    Find out how a reverse mortgage can work in your favor during retirement.
  9. Retirement

    How Does A Reverse Mortgage Work?

    A homeowner who’s at least 62 years old can use a reverse mortgage to tap into her home’s equity for money. The house serves as the loan’s collateral. The loan is repaid when the homeowner dies, ...
RELATED FAQS
  1. 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 >>
  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. 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 >>
  4. What counts as "debts" and "income" when calculating my debt-to-income (DTI) ratio?

    It's important to know your debt-to-income ratio because it's the figure lenders use to measure your ability to repay the ... Read Answer >>
Trading Center