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Front and Back Ratios
 he front ratio is housing expense to income, the back ratio is all expenses to income. Lenders vary in their standard ratios, and even use different ratios for different loan programs. While you may not have heard of these criteria, they can be very important in qualifying for a loan.
These ratios are guidelines that lenders use to measure capacity and evaluate loan requests.
Front ratios
For single-family homes, the housing expense is usually represented by the PITI, which is the principal and interest of the mortgage, added to the real estate taxes and property insurance. For condominiums, cooperatives, and planned unit developments, housing expense also includes Home owner's or condo association fees and assessments.
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Back ratios
This is PITI and all the usual monthly expenses of living. So this includes credit card debt service, vehicle loans, all the payments you make every month to support the lifestyle to which you have become accustomed.
An example
So, you make $50,000/year and you want to buy a house for $150,000. You have a down payment of $15,000 and need to borrow 90% of the selling price.
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Front ratio
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Selling price |
$150,000 |
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Annual salary |
$50,000 |
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Down payment |
$15,000 |
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Borrowed amount |
$135,000 |
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Interest rate |
7.5% |
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Prequalify Now and see how much you can borrow based on standard lender ratios.
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his is a common situation: there are probably several buyers out there, right now, shopping this particular deal. Whether they will get the financing depends a lot on the front and back ratios that the banks use to evaluate the application.
So while the simple facts may be identical, when you look at the income ratios, the scene may be very different.
One home is on a piece of land that has been ravaged by hurricanes three of the last five years, so the hazard insurance is expensive, driving up the PITI costs.
Another is in a depressed area where the property taxes are quite low, reducing the PITI. One buyer has high unpaid student loans from his years of studying for his PhD, another pays out a big chunk of her monthly earnings in alimony and child support. The third buyer is a single man with almost no consumer debt and few monthly payments, his ratios will probably be the most attractive.
Example calculation
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| $943 |
monthly payment |
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187 |
monthly taxes |
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50 |
monthly insurance |
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| $1,180 |
PITI |
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| 4,166 |
cost divided by monthly income (50,000/12) |
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| 28.3% |
front ratio |
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 o for the above loan, Lender one might use a 28/36 ratio, Lender two uses 35/42, and Lender three uses 45/45.
With your $150,000 house, $50,000/year salary and $15,000 down payment, you're borrowing $135,000 at 7.5% interest. Your monthly payment for principal and interest, for a fixed rate 30 year mortgage will be $943.
Add on to that $187/month for taxes (1.5% of 150,000/12 months) $50/month for insurance and you get: $1,180 per month in PITI. This is your actual payment to the lender each month, note it is significantly more than just the loan principal and interest.
Back ratio
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| $1,180 |
PITI |
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250 |
monthly car payment |
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150 |
monthly student loan |
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60 |
monthly credit card |
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| $1,640 |
expenses |
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| $1,641 |
expenses |
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4,166 |
monthly income |
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| 39.4% |
back ratio |
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he Back ratio is $1,180 PITI, added to, say, $250/month in car payments, $150 in student loans, and $60/month in credit card minimums, you get $1,640 to $4,166 (monthly income) or a ratio of 39.4%.
Results
So with a 28/39 ratio, you wouldn't qualify for Lender one (28/36), but Lender two (35/42) and three (45/45) will both be interested in selling you a loan.
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