Qualifying Ratios

To buy or to rent? That is the question. One way mortgage lenders can help us answer it is by looking at something called qualifying ratios.

Qualifying ratios are measures lenders use to determine how much we can borrow to buy a house, and they do this by figuring how much we owe (our debt) versus how much bacon we bring home (our income). They’ll also check out our credit score and the state of the housing market in general.

Specific guidelines vary based on the lender, loan type, and property we’re looking to buy (i.e., is it our first home, or a vacation or rental property?), but generally speaking, a lender doesn’t want our debt-to-income ratio to be higher than about 36%, and they don’t want our housing cost ratio (how much it costs to own and operate the house compared to our income) to be higher than about 28%. If we don’t meet the lender’s guidelines, we’ll either find ourselves approved for a lower loan amount than we wanted…or we could find ourselves renting for a few more years until we get our qualifying ratios where they need to be.