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.

References in periodicals archive ?
Specifically, the proposal addresses the use of debt service coverage ratios, also known as "back-end ratios" which refer to the ratio of the mortgage payments relative to all of the borrowers' debt payments, to assign risk weights to mortgages held by Basel III-compliant institutions.
This led to abuses of the automated underwriting systems and borrowers getting loans with back-end ratios that consumed 65 percent to 70 percent or more of their true income.
With the greatest respect for underwriters and particularly those trained for the FHA programs, the landscape of what matters (e.g., front-end and back-end ratios, bankruptcy and foreclosure status, and the number and nature of late payments) is no longer a black-and-white calculation or captured on a document, or even a viable measure of creditworthiness when taken together (as we are learning from loan workouts).
Simulated loan applicants were characterized by income and desired loan amount, loan-to-value ratio, front and back-end ratios, a qualitative measure of credit history, and race.
The greater the number of imperfections, the greater the likelihood of rejection, as various threshold levels are reached (for example, a 40 percent back-end ratio or 95 percent LTV).
Front-end or back-end ratios in and of themselves are not always reliable predictors of loan performance.