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
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.