Front-End Ratio

DEFINITION of 'Front-End Ratio'

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.

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