Qualifying Ratios

What is ‘Qualifying Ratios’

A set of ratios that are used by lenders to approve borrowers for a mortgage. The borrower’s front-end ratio, which is the total housing expense compared to the borrower’s gross monthly income, is compared to the borrower’s back-end ratio, which comprises of the total housing expense and other consumer debt compared to the borrower’s gross monthly income. The front-end ratio is generally limited to a maximum of 28% and the back-end ratio is generally limited to 35%. However, both ratios change with market conditions and may be influenced by other risk factors (such as the loan-to-value ratio of the mortgage).

Explaining ‘Qualifying Ratios’

Qualifying ratios can vary from lender to lender, from loan program to loan program or from changing market conditions. If one or both of the qualifying ratios exceed the maximum, loan underwriters might look for “compensating factors” such as a high FICO score and/or a low loan-to-value ratio to offset the risk of high qualifying ratios in order to approve and underwrite a mortgage.

Further Reading

  • A financial ratio analysis of commercial bank performance in South Africa – www.ajol.info [PDF]
  • A Degree of Practical Wisdom: The Ratio of Educational Debt to Income as a Basic Measurement of Law School Graduates' Economic Viability – heinonline.org [PDF]
  • Qualifying for a Home Mortgage in Today's Mortgage Environment. – search.ebscohost.com [PDF]
  • Taxation and the optimal constraint on corporate debt finance: why a comprehensive business income tax is suboptimal – link.springer.com [PDF]
  • Prediction of Greek company takeovers via multivariate analysis of financial ratios – www.tandfonline.com [PDF]
  • Dividend policies and dividend announcement effects for real estate investment trusts – onlinelibrary.wiley.com [PDF]
  • How investors perceive financial ratios at different growth opportunities and financial leverages – search.proquest.com [PDF]
  • Does flexibility hinder financial regulation? The case of CRA enforcement in the USA – www.emerald.com [PDF]
  • Debt-servicing and economic growth in Kenya – erepository.uonbi.ac.ke [PDF]