What are guideline ratios?

Guideline ratios are specific metrics used by lenders to assess a borrower's ability to qualify for a mortgage. These ratios typically include the debt-to-income ratio and the loan-to-value ratio. The debt-to-income ratio measures the proportion of a borrower's monthly income that goes toward paying debts, including the mortgage. The loan-to-value ratio assesses the amount of the loan relative to the appraised value of the property being purchased. Lenders use these guidelines to gauge the risk associated with approving a mortgage application, ensuring that borrowers can comfortably manage their payments.

Other options, while they describe ratios or metrics in various contexts related to finance and real estate, do not accurately capture the purpose and application of guideline ratios in mortgage qualification.