Qualification Ratio

Posted in Finance, Accounting and Economics Terms, Total Reads: 843

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.


Hence, this concludes the definition of Qualification Ratio along with its overview.

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