Real Estate Term of the Day: Back-End Ratio & Front-End Ratio

Real Estate Term of the Day: Back-End Ratio & Front-End Ratio (aka Debt to Income Ratios or DTI)

BACK-END RATIO – one of several criteria used to qualify homebuyers or owners for mortgage loans.  The back-end ratio takes into account existing long-term debt of the loan applicant (Barron’s Dictionary of Real Estate Terms)

Common debts considered in the back-end ratio are:

  • Credit card payments
  • Car loan payments
  • Student loan payments
  • Child support payments
  • Alimony payments
  • Legal judgments
  • Other mortgage payments

To calculate your back-end ratio, add all of your monthly debt expenses and divide by your monthly gross income.

  • For example, if you have $160 in monthly credit card payments, a $500 monthly car payment, and $300 in monthly student loan payments. Your total debt expenses would be $960/month.  If you make $3000 in gross income, your back-end ratio would be 32%
  • ($960 total monthly debt expenses / $3000 monthly gross income) = 32%

FRONT-END RATIO – the monthly payment for a loan divided by the loan applicant’s qualifying monthly income.  Used in the mortgage underwriting process as one measure of risk that the applicant will default on the loan (Barron’s Dictionary of Real Estate Terms)

Common items considered in the front-end ratio are:

  • Mortgage payment (principal + interest)
  • Real estate taxes
  • Hazard insurance payments
  • HOA payments

To calculate your front-end ratio, add your anticipated monthly housing expenses and divide by your monthly gross income.

  • For example, if you expect to spend $2000 in housing expenses per month and you make $7500 in gross income, your front-end ratio would be 27%
  • ($2000 total monthly housing expenses / $7500 monthly gross income) = 27%

According to Why Debt to Income Matters in Mortgages by Polyana da Costa, it is very important to know your DTI (debt -to-income) ratios when considering applying for a mortgage.  Lenders typically like to see the below ratios for both the back-end & front-end when applying for a mortgage:

  • Conventional Mortgages:
    • Front-end ratio – 28%
    • Back-end ratio – 36%
  • FHA Mortgages:
    • Front-end ratio – 28%
    • Back-end ratio – 36%

Knowing your DTI ratios is a great start before applying for a mortgage.  Contact me today if you would recommendations for lenders that can help determine if your ratios will allow you to qualify for a mortgage.  Or get recommendations on how to improve your DTI ratios so you qualify for a mortgage in the future.


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