How Do Front-End Ratios Differ From Back-End Ratios? | Mortgage ...

In calculating the financial state and capabilities of the potential buyer of a property, lenders use both front-end ratios and back-end ratios. Lenders use both these methods to determine whether or not your mortgage will be approved and if so, at what amount. A potential buyer cannot always expect results as planned as the outcome of the calculation may render different interest rates or monthly payment amounts.

The most important things should be handled first. If you research a mortgage at the beginning of the process and learn it is not within your means, save time, trouble and problems by not applying for it. The amount you can afford to pay on a monthly mortgage is really all you need to know to determine if a mortgage is within your means. Finding the right house value for your particular income and needs can be easily ascertained with the any one of the following tools: a mortgage refinance calculator, mortgage payoff calculator or a BankRate mortgage calculator. Being realistic about your finances will decrease your disappointment and increase your chances for mortgage approval.

Although a front-end ratio is simpler than a back-end ratio, both of them are effective when determining mortgage eligibility. Referring to the maximum amount the borrower can afford, a front-end ratio calculates the maximum amount the borrower can afford in terms of a percentage of gross monthly income. The average percentage for front-end ratios with conventional loans is 33%. If your total monthly payment is under $1,550, that indicates that your mortgage was approved on the basis of earnings of $5,000 per month.

By using the borrower?s monthly housing expenses divided by his/her monthly gross income, the front-end ratio can be calculated and expressed as a percentage. When it comes to approving mortgages, lenders almost always use both the front-end and back-end ratios.

There are complexities involved in establishing back-end ratios. Determining the back-end ratio involves calculating the percentage of income that is used to pay debts. Credit card payments, child support and any other loan payments collectively comprise the ?debt-to-income? ratio. The standard for a back-end ratio is usually no greater than 36%, but allowances sometimes occur when a borrower demonstrates an excellent credit rating.

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