What Are Front End And Back End Ratios For Mortgages?

It is not difficult to be confused by the strange new terms that you are exposed to when you apply for a mortgage. When you come across a term you don’t understand, it is a good idea to do some research on it. Loan officers and lenders can also explain these terms to you; you just have to ask them. Front end and back end ratios are examples of terms that, when you are talking about money, seem to be odd.

The portion of the money you make that you will be using to make your mortgage payment each month is called the front end ratio. This ratio generally includes the PITI (principal, interest, taxes, and insurance)that must be paid each month. Divide the amount of money you make over the course of the year by the number of months that are in the year (twelve) to get your monthly income. Now you will divide your house payment for the month by your income for that month. The answer is going to be a percentage.

The front end ratio of your mortgage is this same percentage. Suppose over the course of a year you have made $60,000; your monthly income would be $5,000, since you divide the annual income by the number of months. If you already know that you are paying 31% as your front end ratio, you would multiply your monthly income ($5,000) by the percentage (31%) to come up with a mortgage payment of $1,550 each month. While it ultimately depends on the lender, most would prefer that your front end ratio be 28% or less.

Now, the total amount you pay each month for debt, called your debt-to-income ratio, is your back end ratio. Credit cards, child support, car payments, other loan payments, and your mortgage payments are all included in this back end ratio. You can normally figure out your back end ratio without too much trouble. Total the amount you pay each month towards debt; now divide that number by your monthly income. You will get your back end ratio by the percentage you get when you multiply that number by 100. Let’s give an example of this formula using numbers instead of words.

According to our example above you have a monthly income of $5000; now let us suppose, for the sake of simplicity, that every month you pay $2000 towards your debts. What we do is divide the monthly payment of $2,000 by the monthly income of $5,000 to get 0.40; multiply this by 100 and you get 40%. It again depends on the individual lender, but in general most lenders would prefer that your back end ratio be 36% or less. Where you live in the country and the cost of living in that particular area will have an effect on this preferred ratio.

Because they want you to make all of your loan payments on time and in full, lenders tend to take a very strong interest in your front end and back end ratios. They know that you are more likely to be able to make your payments without too much trouble if your ratios are below 28% and 36%. Talk to your loan officer if you have any reason to fear that your ratio, front end or back end, may end up being too high.

You may need to finish paying off a credit card or some other debt, hopefully over the course of only a couple of months, to get that ratio down to the level you need. Just remember that when you go through the process of figuring out these ratios you have to keep a positive attitude.

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