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Definition: Qualification Ratio
Qualification Ratios are the ratios set by lenders before approving for providing housing loans to the borrowers. It is a ratio of debt to income and housing expense to income used by lenders for determining the credit worthiness of the loan seeker for the amount required by him. A housing loan to income ratio, which includes the insurance, taxes, fees, etc of the house owner is to be kept below 28% whereas many lenders use housing expense plus debt to income ratio, which includes housing expense and long term debt, of less than 36%.
Some lenders may also use a ratio that considers the amount of down payment made by the loan seeker.
Qualification Ratio is the percentage of a person’s income that is spent on his/her debt obligations. It is used by the lenders in determining the risk on lending money to that borrower. There are many mortgage programs that help those borrowers who have a qualification ratio mare than the required standards. These borrowers are provided with the loans but it increases their credit default risk thus causing an increase in the interest rates.