What is the 'Front-End Ratio'

The front-end ratio is a ratio that indicates which portion of an individual's income is used to make mortgage payments. When lenders approve mortgages, the front-end ratio is calculated as an individual's monthly housing expenses divided by his monthly gross income, and is used in conjunction with the back-end ratio. By asking a lender what front-end ratio would be required for approving a mortgage, a borrower may determine how much he can allocate for monthly payments that include principle, interest, taxes and insurance (PITI) payments. Calculated as:

Front-End Ratio

BREAKING DOWN 'Front-End Ratio'

When deciding whether to extend a mortgage, lenders consider a debt-to-income (DTI) ratio even more important than having stable income, paying bills on time, and possessing a high credit score. One type of DTI ratio is the front-end ratio. It is comprised of how much a borrower would be spending on monthly mortgage payments, real estate taxes, homeowner’s insurance and association dues, if applicable.

When calculating a front-end ratio, anticipated housing expenses are added up and divided by the borrower’s gross monthly income, then multiplied by 100. For example, Sarah’s housing-related expenses are $2,000 and her monthly income is $9,000. Therefore, her front-end ratio is approximately 22%.

Recommended Front-End Ratios

Lenders prefer a front-end ratio of 28% or less for most loans, and 31% or less for Federal Housing Administration (FHA) loans. Higher ratios indicate increased risk of defaulting on the loan, due to greater monthly financial commitments and a potential inability to cover them all. However, factors such as down payment amount, savings and credit score may permit higher percentages when extending mortgages. For example, if a borrower has a 50% down payment or six months’ worth of housing expenses set aside, he may have a higher front-end ratio and still be offered a mortgage.

If a borrower’s front-end ratio is too high, he may pay off debt as a way of lowering the ratio. The borrower may also consider having a cosigner on a mortgage. For example, an FHA loan lets a relative with enough monthly income and a good credit score cosign for a mortgage.

Example of a Front-End Ratio

Student debt is preventing large numbers of millennials from purchasing homes. Even with excellent credit scores, many millennials believe their front-end ratios will be too high for lenders and they will be denied a mortgage. However, debt can be restructured so that it makes less of an impact on a potential homeowner’s DTI. For example, the monthly payment on a student loan may be lowered. Also, federal student loans may allow payments that comprise only 10% of a borrower’s income.

RELATED TERMS
  1. Front-End Debt-to-Income Ratio ...

    A variation of the debt-to-income ratio (DTI) that calculates ...
  2. Qualification Ratio

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

    A ratio comparing housing expenses to before-tax income that ...
  4. Total Housing Expense

    The sum of a homeowner's monthly mortgage principal and interest ...
  5. Home Affordable Modification Program ...

    A loan modification program introduced in 2009 to promote stability ...
  6. No-Ratio Mortgage

    A mortgage program in which a borrower's income isn't used or ...
Related Articles
  1. Personal Finance

    What’s Considered To Be A Good Debt-To-Income (DTI) Ratio?

    The debt-to-income ratio measures the amount of debt a person has compared to overall income.
  2. Personal Finance

    Tips to Afford a Mortgage with Student Loan Debt

    Use these guidelines to decide whether you can afford a mortgage along with student loan debt.
  3. Financial Advisor

    Explaining Front-End Load

    A front-end load is a commission or sales charge paid by the investor at the initial purchase of an investment.
  4. Personal Finance

    Purchasing a Home with Bad Credit Is Possible: Here's How

    A bad credit report can become an obstacle, resulting in denials for credit or higher interest rates, but borrowers with low credit scores can still purchase a home.
  5. Personal Finance

    Why Choose an FHA Jumbo Mortgage Over Other Jumbos?

    Housing prices are through the roof in the locale where you’d like to live. How will you afford to buy? One of these home loans may be the answer.
  6. Investing

    What to Consider When You Finance a Home

    These are the many factors that need to be considered when obtaining financing for a home.
  7. Personal Finance

    Understanding the Mortgage Payment Structure

    We explain the calculation and payment process as well as the amortization schedule of home loans.
  8. Investing

    Financing Basics For First-time Homebuyers

    If you're looking to get your first mortgage, there are many financing options available.
  9. Retirement

    Understanding FHA Home Loans

    Don't be overwhelmed when filling out these forms. Find out what you need to do here.
RELATED FAQS
  1. What's considered to be a good debt-to-income (DTI) ratio?

    Your debt-to-income ratio helps lenders determine your credit worthiness. Find out how to calculate your score and whether ... Read Answer >>
  2. What are the requirements for an FHA loan?

    Qualify for homeownership with an FHA-backed mortgage. Borrowers with imperfect credit benefit from this government-sponsored ... Read Answer >>
  3. What is the difference between the debt ratio of a company and the debt ratio of ...

    Discover the different financial evaluation measures that are most commonly applied to individuals and corporations, respectively. Read Answer >>
  4. When Is Mortgage Insurance Typically Required?

    Learn about the situations in which borrowers may be required to buy private mortgage insurance, and discover who this insurance ... Read Answer >>
Hot Definitions
  1. Down Round

    A round of financing where investors purchase stock from a company at a lower valuation than the valuation placed upon the ...
  2. Keynesian Economics

    An economic theory of total spending in the economy and its effects on output and inflation. Keynesian economics was developed ...
  3. Portfolio Investment

    A holding of an asset in a portfolio. A portfolio investment is made with the expectation of earning a return on it. This ...
  4. Treynor Ratio

    A ratio developed by Jack Treynor that measures returns earned in excess of that which could have been earned on a riskless ...
  5. Buyback

    The repurchase of outstanding shares (repurchase) by a company in order to reduce the number of shares on the market. Companies ...
  6. Tax Refund

    A tax refund is a refund on taxes paid to an individual or household when the actual tax liability is less than the amount ...
Trading Center