# 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. The monthly mortgage payment is derived from administrative data at the time of origination, and includes principal, interest, taxes, insurance, and private mortgage insurance.
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 22.6% (ranging from 7.7% to 51.6%).
(10) Most real estate lenders cap the front-end ratio at 28 percent and
Administration (FHA) will in some circumstances allow a front-end ratio
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.
If the lender says that the front-end ratio cannot exceed 32%, this means that his PITI divided by his gross monthly income must equal 32% or less.
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.
(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.) Rather, we've found the nonhousing ratio - the difference between the front- and back-end ratio - to be much more reliable because it accurately measures the borrower's cash-flow situation.
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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