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
Percentage to Decimal Conversion
Converting a percentage to a decimal involves dividing the percentage value by 100.
IRV Formula
IRV stands for Income, Rate, and Value. It represents the relationship between Net Operating Income (I), Capitalization Rate (R), and Property Value (V).
Net Operating Income (NOI)
Net Operating Income (NOI) is the revenue a property generates after deducting all operating expenses.
Gross Rent Multiplier (GRM)
The gross rent multiplier (GRM) is a quick method for estimating the value of income-producing property by multiplying the property's gross rent by a factor derived from comparable sales. GRM = Sale Price / Gross Rent.
Capitalization Rate
The capitalization rate (cap rate) is the ratio of a property's net operating income to its sale price, expressed as a percentage. It is used to estimate value and compare profitability of investment properties. Cap Rate = NOI / Value.
Net Operating Income (NOI)
Net operating income (NOI) is the annual income generated by an income-producing property after deducting operating expenses, but before deducting mortgage payments, income taxes, and depreciation.
Frequently Asked Questions
Test Your Math Knowledge
Practice with exam-style questions to make sure you can apply Loan Qualification Math and other math concepts.