What are 'Qualifying Ratios'

Qualifying ratios are ratios that are used by lenders in the underwriting approval process for loans. The two main qualifying ratios that a borrower should be aware of include debt-to-income and the housing expense ratio.

BREAKING DOWN 'Qualifying Ratios'

Qualifying ratio requirements can vary across lenders and loan programs. They are a consideration used in combination with a borrower’s credit score. Standard credit products will focus on a borrower’s debt-to-income ratio. Mortgage loans will use both a housing expense ratio and a debt-to-income ratio.

Personal Loans

Personal loans may have automated or conventional loan application procedures. Automated loan applications are used by online lenders and for credit cards. Conventional loan applications are typically submitted by a loan officer at a financial institution. Automated loan underwriting can be done in minutes while conventional loan processes may take longer.

In the underwriting process for all types of personal loans and credit cards the lender will focus on two factors, debt-to-income and a borrower’s credit score. Debt-to-income may be calculated monthly or annually. It is a ratio that considers a borrower’s debt payments as a percentage of their total income. High quality lenders will require a debt-to-income ratio of approximately 36% or less. Subprime and other alternative lenders may allow for debt-to-income ratios of up to approximately 43%.

A borrower’s debt-to-income ratio is just as important to a lender as a borrower’s credit score. Lenders analyze both debt-to-income and credit scores in loan underwriting with each lender having their own specified parameters for loan approval.

Mortgage Loans

Mortgage loan underwriting analyzes two types of ratios along with a borrower’s credit score. Mortgage lenders will look at a borrower’s housing expense ratio which may also be referred to as a front-end ratio. They will also consider a borrower’s debt-to-income ratio, also referred to as a back-end ratio.

Lenders have numerous expenses that they may require in the housing expense ratio. This ratio is generally a comparison of the borrower’s total housing expenses to their total income. Lenders usually focus on the mortgage expense however they may also require other expenses such as home insurance and utility bills. The housing expense ratio is typically required to be approximately 28% or less. Lenders also use this ratio in the underwriting process to determine how much principal a borrower is eligible for.

The back-end ratio or debt-to-income ratio is the same ratio used in personal loan products. It considers a borrower’s total debt to total income. Lenders generally also look for a debt-to-income ratio of 36% for mortgage loans as well. Some government sponsored loan programs may have looser standards for debt-to-income with Fannie Mae accepting debt-to-income ratios of approximately 45% and Federal Housing Administration loans accepting debt-to-income of approximately 50%.

  1. Housing Expense Ratio

    Housing expense ratio is a ratio comparing housing expenses to ...
  2. Lender

    A lender makes funds available with the expectation that the ...
  3. Back-End Ratio

    The back-end ratio indicates what portion of a person's monthly ...
  4. Gross Debt Service Ratio - GDS

    The gross debt service (GDS) ratio is a debt service measure ...
  5. Origination

    Origination is the process of creating a home loan or mortgage.
  6. Prime

    Prime is a classification of borrowers, rates or holdings in ...
Related Articles
  1. Personal Finance

    Too Much Debt for a Mortgage?

    Just because a lender is willing to offer you a loan, it doesn't mean you should take it. Study the numbers to make sure you can afford that mortgage.
  2. Personal Finance

    5 Ways to Up Your Chance of Getting a Mortgage

    Tips and ways to improve your chances of getting a mortgage.
  3. Personal Finance

    The Best Mortgage Lenders for Refinancing

    These six lenders did the best job on refinancing, according to six different raters.
  4. IPF - Mortgage

    What Are the Main Types of Mortgage Lenders?

    Shopping for a mortgage lender can feel confusing and a little intimidating. Understanding the differences among the main types of lenders can help you narrow down the field.
  5. Investing

    Financing Basics For First-time Homebuyers

    If you're buying your first home and getting a mortgage, you have many financing options to sort through.
  6. Personal Finance

    How To Apply For a Personal Loan

    Learn about different avenues for applying for a personal loan, and learn valuable tips to help you get your personal loan application approved.
  7. Personal Finance

    Top Mortgage Do’s and Don’ts

    Looking for a new mortgage? Here are a few tips to help you navigate your credit history and finances in the right direction.
  8. Personal Finance

    Conventional Mortgages and Loans

    A conventional mortgage is any type of homebuyer's load that is not offered or secured by a government entity but rather available through a private lender.
  9. IPF - Mortgage

    How to Choose the Best Mortgage

    Finding the right house is only half the battle. The other half is choosing the best type of mortgage. Learn how to pick a mortgage based on your needs.
  1. What's considered 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 how to ... Read Answer >>
  2. What is the 1003 mortgage application form?

    Learn about the 1003 mortgage application form, what information it requires and why this form is the industry standard for ... Read Answer >>
Trading Center