Definition
Qualifying ratios are benchmarks lenders use to assess whether a borrower can afford a loan. There are two main types: the front-end ratio (housing expenses divided by gross income) and the back-end ratio (total debt payments divided by gross income). Conventional lenders typically require front-end ratios below 28% and back-end ratios below 36%, though these limits can vary based on credit score, down payment, and other factors.
Formula
Housing expenses include principal, interest, taxes, and insurance (PITI). Total debt includes housing plus all other debt obligations.
Example
Mortgage Qualifying Example
With a $6,000 gross monthly income, a lender using 28%/36% ratios would allow up to $1,680 for housing expenses and $2,160 for total debt. If your mortgage payment is $1,500, you have $180 remaining in housing capacity. If you also have $500 in other debts, your total is $2,000, which is under the $2,160 back-end limit.