What is the 'FrontEnd Ratio'
The frontend ratio is a ratio that indicates which portion of an individual's income is used to make mortgage payments. When lenders approve mortgages, the frontend ratio is calculated as an individual's monthly housing expenses divided by his monthly gross income, and is used in conjunction with the backend ratio. By asking a lender what frontend 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:
BREAKING DOWN 'FrontEnd Ratio'
When deciding whether to extend a mortgage, lenders consider a debttoincome (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 frontend 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 frontend ratio, anticipated housing expenses are added up and divided by the borrower’s gross monthly income, then multiplied by 100. For example, Sarah’s housingrelated expenses are $2,000 and her monthly income is $9,000. Therefore, her frontend ratio is approximately 22%.
Recommended FrontEnd Ratios
Lenders prefer a frontend 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 frontend ratio and still be offered a mortgage.
If a borrower’s frontend 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 FrontEnd Ratio
Student debt is preventing large numbers of millennials from purchasing homes. Even with excellent credit scores, many millennials believe their frontend 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.

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