A qualifying ratio in a credit loan file is an expression of the relationship between a borrower’s gross monthly income and the amount required to service that borrower’s debt. In plain English, it’s the percentage that your income is eaten up by your monthly payments.
In the case where a monthly gross income is $3,000 per month, and the borrower’s monthly mortgage and credit card payments equal $1000, that means the borrower’s qualifying ratio is 33.33%.
Alternately, this term could also refer to a lender’s limit for the aforementioned debt ratio in relation to a specific loan product. For example, one mortgage loan product offered by a lender may have a qualifying ratio of 40%, whereas another product could have a much more conservative qualifying ratio of 28%.
Our hypothetical borrower with the 33.33% debt-to-income ratio would qualify for the first loan product but not the second, due to the lower qualifying ratio of that second product.
Click for the full glossary of credit card terms.