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. Back-End Ratio

    A ratio that indicates what portion of a person's monthly income ...
  2. Front-End Debt-to-Income Ratio ...

    A variation of the debt-to-income ratio (DTI) that calculates ...
  3. Qualifying Ratios

    A set of ratios that are used by lenders to approve borrowers ...
  4. Principal, Interest, Taxes, Insurance ...

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

    Ratio of debt to income and housing expense to income that is ...
  6. Front-End Load

    A commission or sales charge applied at the time of the initial ...
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. 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.
  3. Personal Finance

    How Much Mortgage Can You Afford?

    Here's how to determine what you should be borrowing to finance your home.
  4. Personal Finance

    How to Use a Mortgage Calculator to Save Time and Money

    Calculate your monthly mortgage payment using the Investopedia's free calculator.
  5. 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.
  6. Personal Finance

    Calculating Debt-To-Income Ratio (DTI)

    The debt-to-income ratio measures the percentage of a person’s debt when compared to his overall income.
  7. Personal Finance

    Top Reasons To Apply For An FHA Loan

    When is it a good idea to apply for a Federal Housing Administration loan?
  8. 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.
  9. 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.
  10. Personal Finance

    Finding the Best Mortgage Rates in 2017

    As home-buying technology has progressed, the process of finding the best mortgages rates can all be done online. Here's how:
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. Why does the loan-to-value ratio matter?

    Learn how the loan-to-value (LTV) ratio is calculated, and why this metric is important to lenders when evaluating a home ... Read Answer >>
  3. 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 >>
Hot Definitions
  1. Private Placement

    The sale of securities to a relatively small number of select investors as a way of raising capital.
  2. AAA

    The highest possible rating assigned to the bonds of an issuer by credit rating agencies. An issuer that is rated AAA has ...
  3. Backward Integration

    A form of vertical integration that involves the purchase of suppliers. Companies will pursue backward integration when it ...
  4. Pari-passu

    A Latin phrase meaning "equal footing" that describes situations where two or more assets, securities, creditors or obligations ...
  5. Interest Rate Swap

    An agreement between two parties (known as counterparties) where one stream of future interest payments is exchanged for ...
  6. Custodian

    A financial institution that holds customers' securities for safekeeping so as to minimize the risk of their theft or loss. ...
Trading Center