Back-End Ratio

What is the 'Back-End Ratio'

The back-end ratio is a ratio that indicates what portion of a person's monthly income goes toward paying debts. Total monthly debt includes expenses such as mortgage payments (made up of PITI), credit-card payments, child support and other loan payments. Lenders use this ratio in conjunction with the front-end ratio to approve mortgages.

Back-End Ratio



Also known as "debt-to-income ratio".

BREAKING DOWN 'Back-End Ratio'

For example, if your monthly income is $5,000 ($60,000/12) and your total monthly debt payments are $2,000, your back-end ratio is 0.40 or 40%. Generally, lenders like to see a back-end ratio that does not exceed 36%; however, there are lenders who make exceptions for ratios of up to 50% if you have good credit. Some lenders consider only this ratio when approving mortgages, as opposed to using it in conjunction with the front-end ratio.

RELATED TERMS
  1. Mortgage

    A debt instrument, secured by the collateral of specified real ...
  2. Mortgage Broker

    An intermediary who brings mortgage borrowers and mortgage lenders ...
  3. Front-End Ratio

    A ratio that indicates what portion of an individual's income ...
  4. House Poor

    A situation that describes a person who spends a large proportion ...
  5. Loan

    The act of giving money, property or other material goods to ...
  6. Principal, Interest, Taxes, Insurance ...

    The components of a mortgage payment. Principal is the money ...
Related Articles
  1. Personal Finance

    Understanding Your Mortgage

    We walk through the steps needed to secure the best loan to finance the purchase of your home.
  2. Credit & Loans

    Avoid The Generation Debt Trap

    There is a worldwide generation of young, educated individuals mired in unmanageable debt. Find out why.
  3. Budgeting

    Mortgages: How Much Can You Afford?

    Answering this means number-crunching as well as factoring in other considerations and expenses.
  4. Credit & Loans

    Understanding The Mortgage Payment Structure

    We explain the calculation and payment process as well as the amortization schedule of home loans.
  5. Home & Auto

    Where Rents Are Rising Most (Or Not So Much)

    If you’re in the market for rental housing, rents are rising more slowly in major metro areas; secondary-market rents, however, are growing faster.
  6. Investing

    How to Prepare for the Low Return Environment Ahead

    Learn about the big takeaway from this week’s chart: Investors aiming for higher returns over the next five years should be prepared to stomach more volatility.
  7. Budgeting

    6 Best Personal Finance Apps

    The right app can help you track your bills, monitor your bank accounts and credit cards, and otherwise stay on top of your financial life.
  8. Economics

    Capital Budgeting: Which is Better, IRR or NPV?

    Using internal rate of return and net present value for capital budgeting evaluations often end in the same result. But there are times when using NPV to discount cash flows makes more sense.
  9. Your Clients

    How to Guide Married Clients Who Fight About Money

    Money is a top conflict among couples. Here's how to deflate the tension so that couples can focus on maximizing their finances, not their frustrations.
  10. Budgeting

    5 Ways to Budget Home Remodeling Costs

    A bit of preparation and research on home remodeling can help you avoid unpleasant surprises and anticipate the real costs of a project. Here's how to do it:
RELATED FAQS
  1. I'm about to retire. If I pay off my mortgage with after-tax money I have saved, ...

    Only you and your financial advisor, family, accountant, etc. can answer the "should I?" question because there are many ... Read Answer >>
  2. How can I budget for both short-term expenses and long-term goals?

    The first step in planning for long-term goals is actually determining how much you spend on short-term expenses. Once you ... Read Answer >>
  3. What is the 50/20/30 budget rule?

    Learn about Elizabeth Warren's 50/30/20 budget rule, a simple and effective plan for personal money management and wealth ... Read Answer >>
  4. Do plane tickets get cheaper closer to the date of departure?

    Read about when to buy flights. See how statistics can predict optimal pricing. Read about price volatility over time. Learn ... Read Answer >>
  5. Is Colombia an emerging market economy?

    Learn the definition of an emerging market economy, and understand how Colombia, while not yet developed, meets the standards ... Read Answer >>
  6. What assumptions are made when conducting a t-test?

    Learn what a t-test is, and discover the five standard assumptions that are made regarding the validity of sampling and data ... Read Answer >>
Hot Definitions
  1. Keynesian Economics

    An economic theory of total spending in the economy and its effects on output and inflation. Keynesian economics was developed ...
  2. Society for Worldwide Interbank Financial Telecommunications ...

    A member-owned cooperative that provides safe and secure financial transactions for its members. Established in 1973, the ...
  3. Generally Accepted Accounting Principles - GAAP

    The common set of accounting principles, standards and procedures that companies use to compile their financial statements. ...
  4. DuPont Analysis

    A method of performance measurement that was started by the DuPont Corporation in the 1920s. With this method, assets are ...
  5. Call Option

    An agreement that gives an investor the right (but not the obligation) to buy a stock, bond, commodity, or other instrument ...
  6. Economies Of Scale

    Economies of scale is the cost advantage that arises with increased output of a product. Economies of scale arise because ...
Trading Center