Loan Qualification Math
Definition
Loan qualification math involves calculating the debt-to-income ratios that lenders use to determine whether a borrower qualifies for a mortgage. The two primary ratios are the front-end (housing expense) ratio and the back-end (total debt) ratio.
Example
A borrower earns $6,000/month gross. PITI is $1,500 and other debts are $300/month. Front-end ratio = $1,500 / $6,000 = 25%. Back-end ratio = ($1,500 + $300) / $6,000 = 30%. Under conventional guidelines (28%/36%), this borrower qualifies.
Exam Tip
Memorize the conventional thresholds: 28% front-end and 36% back-end. Know what is included in each ratio—PITI for the front-end, and PITI plus all recurring debts for the back-end. Always use gross (pre-tax) income, never net income.
Related Math Terms
Capitalization Rate (Cap Rate)
The capitalization rate (Cap Rate) is the rate of return on a real estate investment based on its expected income.
Property Value (based on Cap Rate)
In real estate, property value can be estimated by dividing the Net Operating Income (NOI) by the Capitalization Rate (Cap Rate).
Percentage to Decimal Conversion
Converting a percentage to a decimal involves dividing the percentage value by 100.
Monthly Interest Calculation
Monthly interest is the portion of the total annual interest that is paid or accrued each month.
Annual Interest Calculation
Annual interest is the total amount of interest charged on a loan or investment over a year.
Calculating Daily Rate
Daily rate calculation involves determining the cost or income per day by dividing the total amount by the number of days in the period (usually a year or a month). This is a fundamental step in proration.
Frequently Asked Questions
Test Your Math Knowledge
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