# front-end ratio

(redirected from Front-End Ratios)

## Front-End Ratio

A ratio of an individual's monthly mortgage expenses to his/her monthly income. The expenses used in this calculation are usually the principal, interest, taxes, and insurance that an individual owes on a monthly basis. Mortgage lenders often use front-end ratios to determine whether an individual has sufficient income in order to qualify for a mortgage. Generally speaking, lenders look for a front-end ratio of less than 0.30 - 0.33. Persons with ratios in excess of that have more difficulty securing mortgages. See also: Back-end ratio.

## front-end ratio

A mortgage qualification calculation prepared by taking the proposed monthly mortgage payments, plus real estates taxes and insurance, and dividing that number by the borrower's gross monthly income without reduction for taxes.

Example: Steve makes \$4,000 per month. The mortgage for a home he would like to buy would result in payments of \$1,100 per month. His front-end ratio is \$1,100 \$4,000 27.5%. This is an acceptable ratio for lenders, who would prefer to keep it at 29 percent or lower.

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Specifically, those who underestimate their total nonmortgage debt by \$5,000 or more have monthly mortgage payments that are about \$41 higher and front-end ratios that are 1.
Controlling for other model covariates, minority borrowers and borrowers with a college degree tend to have higher mortgage payments and front-end ratios.
In line with other studies (Quercia, McCarthy, and Wachter 2003), we measure mortgage consumption in two ways: (1) as the dollar amount of the monthly mortgage payment, and (2) as the ratio of the monthly mortgage payment to monthly household income, referred to here as the front-end ratio.
As shown in Table 2, the average mortgage payment for borrowers in our sample is \$815, based on an average purchase price of \$102,007, with a resulting average front-end ratio of 22.
To explore the relationship between perceived and actual borrowing capacity and mortgage debt, we first estimate a series of OLS models with the full monthly mortgage payment as the dependent variable (Table 4, columns 1 and 2), and then the front-end ratio as the dependent variable (Table 4, columns 3 and 4).
93) The lack of variation in DTI ratios but wide range of front-end ratios would seem to indicate that borrowers with less recurring nonmortgage debt at origination were more likely to default.
The lack of a similar clustering for front-end ratios may have to do with the characteristics of FHA borrowers or other confounding variables.
Hans noted that front-end ratios were lifted by a move in the sales mix toward higher-margin categories, especially digital photo processing.

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