Back-End Ratio

Back-End Ratio

A ratio that indicates what portion of a person's monthly income goes toward paying debts. It is calculated as an individual's total monthly debt, divided by gross monthly income and expressed as a percentage. Total monthly debt includes such expenses as mortgage payments (made up of PITI), credit-card payments, child support and other loan payments. Lenders use this ratio in conjunction with the front-end ratio to approve mortgages. Also known as "debt-to-income ratio".

Notes:

For example, if your monthly income is $5,000 ($60,000/12), and your total monthly debt payments are $2,000, your back-end ratio is 0.40 or 40%. Generally, lenders like to see a back-end ratio that does not exceed 36% however, there are lenders who make exceptions for ratios of up to 50%, given you have good credit. Some lenders consider only this ratio when approving mortgages, as opposed to using it in conjunction with the front-end ratio. Just remember, before you take out the largest mortgage you can get, consider what makes good sense for your quality of life, your overall financial situation and your long-term goals.

See also: House Poor, Loan, Mortgage, Mortgage Broker, PITI