What is a Qualifying Ratio?
A “qualifying ratio” is a formula used to determine your maximum PITI payment and mortgage amount and the purchase price of the home you can be approved to buy. It is important to remember that ratios may be stretched to a slightly higher amount depending upon your loan product and your other financial circumstances, referred to by some lenders as “compensating factors”. Each loan product has a different qualifying ratio. There are two parts to each ratio: the front and the back. Front Ratio: For example, the front qualifying ratio on a Federal Housing Administration (FHA) loan is 29%. (If only one number is listed, as with Department of Veteran Affairs (VA) loans only the back ratio is used to qualify.) This means that to qualify for an FHA loan, your total monthly housing payment (PITI) should not exceed 29% of your total gross (before taxes are taken out) monthly household income. Back Ratio: The back qualifying ratio on the FHA loan is 41%. This means that to qualify for an FHA loa
A calculation used by the lender to determine the largest mortgage amount that a home buyer can qualify for. The calculation is as follows: Calculate the monthly payment plus taxes and insurance (PITI) and divede it by your gross monthly income. This is referred to as the front ratio. (Example PITI 1000.00 divided by monthly income 3500.00=28%). Next calculate the monthly payment, taxes and insurance (PITI) add all your monthly debt (car loans, student loans, credit card debt) and then divide by your gross monthly income. This is referred to as the back ratio. (Example PITI 1000.00 + all other debts 500.00 = 1500.00 divide by monthly income 3500.00 = 42%.
A “qualifying ratio” is a formula used to determine your maximum PITI payment and mortgage amount and the purchase price of the home you can be approved to buy. It is important to remember that ratios may be stretched to a slightly higher amount depending upon your loan product and your other financial circumstances, referred to by some lenders as “compensating factors”. Each loan product has a different qualifying ratio. There are two parts to each ratio: the front and the back.
