Qualification Ratio Definition

The qualification ratio is the ratio of housing expense and debt to income that is used by many mortgage lenders to establish a potential borrower’s credit worthiness for a specified loan amount. For most borrowers, the qualification ratio must be lower than 36% of the potential borrower’s gross monthly income while the housing expense alone (including insurance, taxes, and fees) must be lower then 28% of the potential borrower’s gross monthly income.

Some buyers may qualify for one of these figures but not for the other. For example, a potential buyer seeking a mortgage with a monthly payment of $1,800 with monthly debt obligations of $1,200 and a monthly income of $6,250 would have a qualification ratio of ($1,800 + $1,200) / $6,250, or 48%-and would be denied the loan. If the same potential buyer could lower the monthly debt obligations to $375, they would be given the loan.