Front-End Ratio

What is the 'Front-End Ratio'

The front-end ratio is a ratio that indicates what portion of an individual's income is used to make mortgage payments. It is calculated as an individual's monthly housing expenses divided by his or her monthly gross income and is expressed as a percentage. Monthly gross income is simply annual income divided by 12 (months). Lenders use the front-end ratio in conjunction with the back-end ratio to approve mortgages.

Calculated as:

Front-End Ratio

BREAKING DOWN 'Front-End Ratio'

For example, if your annual income is $60,000, your monthly income is $5,000(60,000/12). By asking your lender what front-end ratio would be required in order for your mortgage to be approved, you can figure how much of that $5,000 you can allocate to your mortgage payments. If the required front-end ratio is 31%, you can allocate $1,550 (5,000 x 0.31). Thus, if your PITI is $1,550 or less, you would be approved.

Typical monthly housing expenses include the mortgage principal, interest, taxes and insurance payments - collectively known as PITI.

RELATED TERMS
  1. Back-End Ratio

    A ratio that indicates what portion of a person's monthly income ...
  2. Principal, Interest, Taxes, Insurance ...

    The components of a mortgage payment. Principal is the money ...
  3. Qualification Ratio

    Ratio of debt to income and housing expense to income that is ...
  4. Housing Expense Ratio

    A ratio comparing housing expenses to before-tax income that ...
  5. Gross Income

    1. An individual's total personal income, before accounting for ...
  6. Annualized Income

    An estimate of the amount of money that an individual, business ...
Related Articles
  1. Personal Finance

    Mortgages: How Much Can You Afford?

    Answering this means number-crunching as well as factoring in other considerations and expenses.
  2. Personal Finance

    Mortgages: How Much Can You Afford?

    The cost of a home is the single largest expense most people ever face. Prior to taking on such an enormous debt, it’s best to do the math.
  3. Personal Finance

    Mortgage Basics: Loan Eligibility

    By Lisa Smith"How much house can I afford?" It's a critical question that every homebuyer faces, and one that many people answer by going to a lender and taking out the largest mortgage that ...
  4. Personal Finance

    5 Reasons To Save For A Big Mortgage Down Payment

    You may be anxious to buy a home, but taking time to save a large down payment has numerous advantages.
  5. Investing

    Understanding the Mortgage Payment Structure

    We explain the calculation and payment process as well as the amortization schedule of home loans.
  6. Managing Wealth

    The Best Mortgage Deal (May Not Be What You Think)

    Don't judge a mortgage solely by payment amount. Here's what insiders know about choosing the most advantageous mortgage offer.
  7. Investing

    Score a Cheap Mortgage

    Hidden costs can create what looks like a good deal. Find out how to find the best mortgage possible.
  8. Managing Wealth

    8 Must-Have Numbers For Evaluating A Real Estate Investment

    These calculations can help you figure out if a particular property will be a valuable investment.
  9. Personal Finance

    What is Gross Income?

    Gross income is an individual’s total income before taxes and other adjustments are considered.
  10. Personal Finance

    Best 3 Mortgage Calculator Websites without PMI

    Discover the three best mortgage calculator websites online that do not require you to factor private mortgage insurance (PMI) into your payments.
RELATED FAQS
  1. What is the debt ratio for an FHA loan?

    Borrowing through the Federal Housing Administration requires individuals to provide proof of income as well as information ... Read Answer >>
  2. Should I rent an apartment or buy a condo?

    I am wondering if it's a good idea to buy a condo if I already have a mortgage on a house and student loans. My debt ... Read Answer >>
  3. What is the difference between gross income and earned income?

    Being able to distinguish between earned income and gross income is an important tool in preparing for and filing your individual ... Read Answer >>
  4. What are the main income statement ratios?

    Learn how to calculate and interpret some of the most common and insightful financial ratios, like earnings per share, from ... Read Answer >>
  5. What is the difference between gross income and taxable income?

    Understanding common tax terms including gross income and taxable income can help individuals navigate tax accounting in ... Read Answer >>
  6. What is the difference between taxable income and gross income?

    Understand the basic differences between the terms gross income and taxable income, and what is included in the total of ... Read Answer >>
Trading Center