# front-end ratio

## 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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The front-end ratio calculates the yearly gross income devoted towards making the monthly payment, which consist of three components which are principal, interest and insurance.
If an employee earning those wages applied for a mortgage, his or her front-end ratio would only allow for \$630 in housing costs, which would include taxes, homeowner's insurance and home association dues, in addition to the monthly mortgage payment.
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).
While both of these studies analyzed the correlation between the back-end ratio and default risk, an analysis of 179 FHA loans originated in Utah between 2000 and 2001 estimated the impact of a borrower's front-end ratio as well.
There are two mortgage qualification ratios widely used--the front-end ratio and the back-end ratio.
The front-end ratio (or housing-cost-to-income ratio) is monthly housing expenses (principal, interest, taxes, and insurance, or PITI) divided by gross monthly income.
Standard underwriting criteria for 30-year, fixed-rate mortgages include a 28% constraint for the front-end ratio and a 36% constraint for the back-end ratio.
The front-end ratio is the monthly housing debt (PITI) divided by the borrower's monthly gross income; the back-end ratio is a borrower's total monthly debt divided by monthly gross income.
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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