Back-End Ratio: Definition, Calculation Formula, Vs. Front End

What Is the Back-End Ratio?

The back-end ratio, also known as the debt-to-income ratio, is a ratio that indicates what portion of a person's monthly income goes toward paying debts. Total monthly debt includes expenses, such as mortgage payments (principal, interest, taxes, and insurance), credit card payments, child support, and other loan payments.

Back-End Ratio = (Total monthly debt expense / Gross monthly income) x 100

Lenders use this ratio in conjunction with the front-end ratio to approve mortgages. The lower your back-end ratio, the lower risk you are.

Key Takeaways

  • Back-end ratios show the percentage of income a borrower is allotting to other lenders.
  • To calculate a back-end ratio, divide total monthly debt expenses by gross monthly income and divide by 100.
  • Mortgage underwriters use back-end ratios to help assess a borrower's risk.
  • Lenders usually require long-term debt and housing expenses equate to less than 33% to 36% of a borrower's gross income.

How Back-End Ratio Works

The back-end ratio represents one of several metrics that mortgage underwriters use to assess the level of risk associated with lending money to a prospective borrower. It is important because it denotes how much of the borrower's income is owed to someone else or another company.

A back-end ratio is also called a total fixed payments to effective income ratio.

Lenders usually require long-term debt and housing expenses equate to less than 33% to 36% of a borrower's gross income.

If a high percentage of an applicant's paycheck goes to debt payments every month, the applicant is considered a high-risk borrower. For these borrowers, a job loss or income reduction could more easily result in financial strain and missed payments.

How to Calculate a Back-End Ratio

The back-end ratio is calculated by adding together all of a borrower's monthly debt payments and dividing the sum by the borrower's monthly income and multiplying by 100.

Consider a borrower whose monthly income is $5,000 ($60,000 annually divided by 12) and who has total monthly debt payments of $2,000. This borrower's back-end ratio is 40% ($2,000 / $5,000 * 100). 

Generally, lenders like to see a back-end ratio that does not exceed 36%. However, some lenders make exceptions for ratios of up to 50% for borrowers with good credit. Some lenders consider only use this ratio when approving mortgages, while others use it in conjunction with the front-end ratio.

Back-End vs. Front-End Ratio

Like the back-end ratio, the front-end ratio is another debt-to-income comparison used by mortgage underwriters, the only difference being the front-end ratio considers no debt other than the mortgage payment. Therefore, the front-end ratio is calculated by dividing only the borrower's mortgage payment by his or her monthly income. Returning to the example above, assume that out of the borrower's $2,000 monthly debt obligation, their mortgage payment comprises $1,200 of that amount.

The borrower's front-end ratio, then, is ($1,200 / $5,000), or 24%. A front-end ratio of 28% is a common upper limit imposed by mortgage companies. Like with the back-end ratio, certain lenders offer greater flexibility on front-end ratio, especially if a borrower has other mitigating factors, such as good credit, reliable income, or large cash reserves.

How to Improve a Back-End Ratio

Paying off credit cards and selling a financed car are two ways a borrower can lower their back-end ratio. If the mortgage loan being applied for is a refinance and the home has enough equity, consolidating other debt with a cash-out refinance can lower the back-end ratio.

However, because lenders incur greater risk on a cash-out refinance, the interest rate is often slightly higher versus a standard rate-term refinance to compensate for the higher risk. In addition, many lenders require a borrower paying off the revolving debt in a cash-out refinance to close the debt accounts being paid off, lest they run the balance back up.

What Are the Back-End Ratio Requirements?

Typically, lenders want to see a back-end ratio of at least 36%, although some lenders may allow for a higher back-end ratio. For example, some lenders may allow for a maximum back-end ratio of 43%.

What Is a Front-End Ratio?

A front-end ratio is the percentage of your housing expenses in proportion to your total income. To calculate a front-end ratio, divide your total housing expenses, including your mortgage payment, property taxes, mortgage insurance, and homeowner's association fees by your total income.

What Is a Good Front-End Ratio?

Many lenders require a minimum front-end ratio of 28% to approve you for a mortgage. The lower your front-end and back-end ratios, the more likely you are to qualify for a mortgage.

The Bottom Line

Understanding your back-end ratio is key to preparing for getting a mortgage and other types of loans, as lender use this ratio among other factors to assess how risky you are. You can improve your back-end ratio by minimizing debt and increasing income. Consider consulting a professional financial advisor to review how your back-end ratio fits into your financial picture.

Article Sources
Investopedia requires writers to use primary sources to support their work. These include white papers, government data, original reporting, and interviews with industry experts. We also reference original research from other reputable publishers where appropriate. You can learn more about the standards we follow in producing accurate, unbiased content in our editorial policy.
  1. U.S. Department of Housing and Urban Development. "Borrower Qualifying Ratios."

  2. FDIC. "Loans and Mortgages."