Front-End Ratio

AAA

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

INVESTOPEDIA EXPLAINS '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.

RELATED TERMS
  1. Mortgage

    A debt instrument, secured by the collateral of specified real ...
  2. House Poor

    A situation that describes a person who spends a large proportion ...
  3. Back-End Ratio

    A ratio that indicates what portion of a person's monthly income ...
  4. Loan

    The act of giving money, property or other material goods to ...
  5. Principal, Interest, Taxes, Insurance ...

    The components of a mortgage payment. Principal is the money ...
  6. Mortgage Broker

    An intermediary who brings mortgage borrowers and mortgage lenders ...
Related Articles
  1. Personal Finance

    Understanding Your Mortgage

    We walk through the steps needed to secure the best loan to finance the purchase of your home.
  2. Budgeting

    Mortgages: How Much Can You Afford?

    Answering this means number-crunching as well as factoring in other considerations and expenses.
  3. Credit & Loans

    Understanding The Mortgage Payment Structure

    We explain the calculation and payment process as well as the amortization schedule of home loans.
  4. Options & Futures

    I'm about to retire. If I pay off my mortgage with after-tax money I have saved, I can save 6.5%. Should ...

    Only you and your financial advisor, family, accountant, etc. can answer the "should I?" question because there are many more factors that aren't in the assumptions you included, and a lot of ...
  5. Fundamental Analysis

    What is the difference between operating cash flow and net income?

    Learn how net income is an income statement for a certain period of time, while cash flow shows inflows and outflows based on conversion of sales into cash.
  6. Credit & Loans

    Are APRs different in different countries?

    Learn about the term APR and how it is used in the United States and other countries. Explore why different lenders charge different APRs.
  7. Credit & Loans

    What loans do and don't have an APR?

    Learn about what annual percentage rates (APR) are and what they mean. Explore different fixed and variable APRs charge by different lenders.
  8. Fundamental Analysis

    How do you calculate operating cash flow in Excel?

    Lenders and investors can predict the success of a company by using the spreadsheet application Excel to calculate the free cash flow of companies.
  9. Investing

    What Is Hollywood Spending On Oscar Campaigns?

    Here's a look at how much Hollywood is spending this awards season to take home the gold at the 2015 Academy Awards.
  10. Budgeting

    Are You Spending Too Much?

    Post-holiday credit card bills are just one signal that it's time to cut back on spending. Here are others.

You May Also Like

Hot Definitions
  1. Prospectus

    A formal legal document, which is required by and filed with the Securities and Exchange Commission, that provides details ...
  2. Treasury Bond - T-Bond

    A marketable, fixed-interest U.S. government debt security with a maturity of more than 10 years. Treasury bonds make interest ...
  3. Weight Of Ice, Snow Or Sleet Insurance

    Financial protection against damage caused to property by winter weather specifically, damage caused if a roof caves in because ...
  4. Weather Insurance

    A type of protection against a financial loss that may be incurred because of rain, snow, storms, wind, fog, undesirable ...
  5. Portfolio Turnover

    A measure of how frequently assets within a fund are bought and sold by the managers. Portfolio turnover is calculated by ...
  6. Commercial Paper

    An unsecured, short-term debt instrument issued by a corporation, typically for the financing of accounts receivable, inventories ...
Trading Center