What Are Mortgage Qualifying Ratios?

By Stock Research Pro • June 13th, 2009

Qualifying ratios are a set of ratios used by lenders to compare a borrower’s income to their proposed monthly mortgage expense. Lenders use these guidelines to determine the credit-worthiness of potential home buyers, taking into consideration all monthly housing expenses including the mortgage principal, interest payments, homeowner’s insurance and property taxes. Depending on the property, other applicable fees may include homeowner, condominium or other expenses. By comparing the borrower’s housing and debt ratios, lenders are able to work within a rough guideline as they determine whether or not to grant mortgage approvals.

How the Numbers Work

In evaluating the borrower’s housing and debt ratios, the rule-of thumb many lenders adhere to is expressed as 28/36, where:

• The borrower’s housing expense should not be greater than 28% of their gross monthly income
• The borrower’s housing expense plus their long-term debt should not be greater than 36% of their gross monthly income

If the buyer’s credentials fall outside of these guidelines, they may still approval mortgage approval if other factors are strong, such as the size of the down payment, job stability, and savings.

It’s also worth noting that qualifying ratios can vary depending on the lender, the proposed loan program, and current market conditions.

Things to Consider as a Borrower

As a mortgage borrower, it can be a good idea to evaluate the ratios yourself to determine whether the house payment you are considering may present a financial risk. While the climate has changed considerably in recent months, lenders may still tempt you with programs that may not be in your best interest. As a buyer, it is important to know the risks associated with excessive mortgage debt and to choose wisely among lenders. You will definitely want to contact more than one lender in order to compare available programs and their associated rates and terms.

The above information is educational and should not be interpreted as financial advice. For advice that is specific to your circumstances, you should consult a financial or tax advisor.

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