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Business Definition for: qualifying ratio
Dictionary of Banking Terms
qualifying ratio

ratio used by mortgage lenders in determining the maximum amount of mortgage to approve, for example . . . the borrower's total regular monthly debt as a percentage of gross monthly income. The qualifying ratio is the lender's rule of thumb fordetermining a borrower's ability to pay .

Dictionary of Real Estate Terms
qualifying ratio

the maximum percentage of a borrower's income a lender or agency (FNMA, FHA, FHLMC) will allow prospective debt payments to be and still approve the loan.

Example: Qualifying ratios provide a test of lender risk exposure by limiting the amount of debt service burden a borrower is allowed to undertake. Specific ratios vary by loan product, generally being higher for loans designed for first-time buyers.

See also front-end ratio , back-end ratio
Related Terms:
front-end ratio

the monthly payment for a loandivided by the loan applicant's qualifying monthly income. Used in the mortgage underwriting process as one measure of the risk that the applicant will default on the loan. Contrast with back-end ratio.

Example: The Jameses applied for a mortgage to buy a new home. The loan required a $500 monthly payment (including escrow payments). Mr. James earns $3,000 per month, and Mrs. James does not have an income. The lender calculated a front-end ratio of 16.7%, which is well within the maximum for this type of loan.

back-end ratio

one of several criteria used to qualify homebuyers or owners for mortgage loans. The back-end ratio takes into account existing long-term debt of the loan applicant. Contrast with front-end ratio.

Example: Many lenders apply a back-end ratio of 36% when originating conventional loans. This means an applicant's total monthly debt payments, including existing debt and the loan applied for, must be no more than 36% of the applicant's gross monthly income.

Referring Terms:
front-end ratio
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 Copyright © 2004, 2000, 1997, 1993, 1987, 1984 by Barron's Educational Series, Inc. Reprinted by arrangement with Publisher.
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