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).
First, as would be expected, an increase in monthly DTI is significantly associated with a decrease in mortgage payment and the front-end ratio across all specifications, highlighting the importance of nonmortgage borrowing capacity for mortgage consumption.
Because monthly income is a component of the front-end ratio (denominator), an increase in monthly income is associated with a decrease in the front-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.