Qualifying Ratios

Definition - What does Qualifying Ratios mean?

Qualifying ratios are financial calculations that lenders use to determine eligibility for a mortgage loan. Two ratios are typically prioritized. These two ratios are the total cost of the monthly house payment divided by the borrower's monthly income, and the total cost of the house payments plus other debts the borrower may have, divided by the borrower's monthly income.

Justipedia explains Qualifying Ratios

Lenders use these qualifying ratios to try to prevent themselves from lending to borrowers who represent a high risk of default. If the borrower defaults, then it can cost the lender money and time. So rather than invest in risky options, lenders tend to screen for eligible borrowers with these qualifying ratios.

Regarding the ratio, the concern for lenders is that if the ratio is too high, that the borrower will eventually run out of funds to pay back the loan. The exact qualifying ratio can vary from one lender to the next.

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