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. Qualifying Ratios

    A set of ratios that are used by lenders to approve borrowers ...
  3. Total Debt Service Ratio - TDS

    A debt service measure that financial lenders use as a rule of ...
  4. FHA Loan

    A mortgage issued by federally qualified lenders and insured ...
  5. Debt-To-Income Ratio - DTI

    A personal finance measure that compares an individual's debt ...
  6. High Ratio Loan

    A loan of any type for which a relatively small down payment ...
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

    How to Use a Mortgage Calculator to Save Time and Money

    Calculate your monthly mortgage payment using the Investopedia's free calculator.
  3. 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.
  4. 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.
  5. 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.
  6. Personal Finance

    Top Reasons To Apply For An FHA Loan

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

    Too Much Debt For a Mortgage?

    Just because a lender is willing to offer you a loan doesn't mean you should take it.
  9. Personal Finance

    5 Ways to Up Your Chance of Getting a Mortgage

    Tips and ways to improve your chances of getting a mortgage.
  10. Investing

    Financial Ratios to Spot Companies Headed for Bankruptcy

    Obtain information about specific financial ratios investors should monitor to get early warnings about companies potentially headed for bankruptcy.
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. What is the difference between debt to income and debt to assets?

    Understand the differences between the debt-to-income ratio and the debt to assets ratio as they apply to personal and corporate ... Read Answer >>
  3. 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 >>
  4. 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 >>
  5. 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 >>
Hot Definitions
  1. 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 ...
  2. Treynor Ratio

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

    The repurchase of outstanding shares (repurchase) by a company in order to reduce the number of shares on the market. Companies ...
  4. 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 ...
  5. Gross Domestic Product - GDP

    The monetary value of all the finished goods and services produced within a country's borders in a specific time period, ...
  6. Inflation

    The rate at which the general level of prices for goods and services is rising and, consequently, the purchasing power of ...
Trading Center