back-end ratio

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Back-End Ratio

In loans, the portion of a person's gross income that goes toward debt service. It is calculated by dividing all monthly debt payments by one's gross monthly income. Lenders use the back-end ratio when determining whether to extend credit to an individual. Some lenders use it in conjunction with the front-end ratio, while others consider the back-end ratio exclusively. The lower one's back-end ratio is, the more likely one is to receive a loan. Generally speaking, lenders do not make loans to a person with a back-end ratio of more than 0.36, but they make exceptions for good credit.

back-end ratio

One method of analyzing a borrower's ability to meet underwriting requirements for a home loan.This method takes into account existing long-term debt of the applicant, plus the payments on the requested loan,in order to arrive at a percentage of income that will be devoted to debt service. Lenders typically like to see ratios below 36 percent of take-home pay. Contrast with front-end ratio,which compares only the requested loan against take-home pay.