What are Front End and Back End Ratios for Mortgages?

When applying for mortgages, there seem to be so many different terms that it is easy to get lost in the lingo. It is always recommended to do your own research when it comes to these new words. But, also remember that you can talk to your lender or loan officer to get help on defining strange words. A few of these new and strange words are front end and back end ratios.

Front end ratios are ratios that can show you what portion of your income will be put towards your monthly mortgage payments. They include the principal, interest, taxes and insurance which you many also hear called the PITI. This is easily calculated finding your monthly income by dividing your annual income by twelve. You would then take your monthly mortgage payments and divide that number by your monthly income. By multiplying that number by 100, you will get a percentage. This percentage is your front end mortgage.

For example, if your annual income is $75,000 we would divide that by twelve to get your monthly income of $6250. If we know that your front end ratio is 31% we can then multiply the two numbers to find that your monthly mortgage payments would be roughly $1938. Most lenders would like this ratio to be 28% or lower but it does depend on the lender.

Back end ratios have to do with your total monthly debt payments. It can also be called your debt-to-income ratio. These include your mortgage payments, car payments, credit card debt, child support and any other loan payments. You can find the back end ratio with a quick formula also. After adding up your entire monthly debt payments you can then divide the sum by your monthly income. By multiplying that number by 100, it gives you a percentage which is your back end ratio. Now let's try that with a few real numbers. If we use that same monthly income of $6250 and say that your monthly debt payments is $2000 then it won't be hard to find your back end ratio. We would divide $2000 by $6250 and then multiply the answer by 100. That would give us a back end ratio of 32%. Remember that most lenders do not want this ration to exceed 36% but it does depend many different factors. A lot of if has to do with what part of the United States you live in and the different options available in that area.

So why are the lenders so interested in looking at these two ratios? Because they want to make sure that you can make your payments and still pay for everything else. If you do not exceed the 28% or 36%, you should have no problems with managing all your debt and mortgage payments. If you have any concerns about having a front end or back end ratio being too high, good communication with your loan officer will help. Just make sure you have an open attitude when it comes to determining these ratios.