BROWSE

Back-End Ratio

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. Lenders use this ratio in conjunction with the front-end ratio to approve mortgages.

Explaining 'Back-End Ratio'

The back-end ratio represents one of a handful of 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 has someone else's name on it. If a high percentage of an applicant's paycheck goes to debt payments every month, the applicant is considered a high-risk borrower, as a job loss or income reduction could cause unpaid bills to pile up in a hurry.

Calculating the 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.

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 other debt than the mortgage payment. Therefore, the front-end ratio is calculated by dividing only the borrower's mortgage payment by his monthly income. Returning to the example above, assume that out of the borrower's $2,000 monthly debt obligation, his mortgage payment comprises $1,200 of that amount.

How to Improve a Back-End Ratio

Paying off credit cards and selling a financed car are two ways a borrower can lower his 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 revolving debt in a cash-out refinance to close the debt accounts being paid off, lest he runs his balance back up.

Back End Ratio FAQ

What is a good front end ratio?

Lenders prefer a maximum front-end ratio of 28% for most loans and 31% or less for Federal Housing Administration (FHA) loans and a maximum back-end ratio of 36 percent. If unapproved, the borrower can reduce debts to lower the ratio.

What is the back end ratio for an FHA loan?

According to official FHA guidelines, borrowers can't have beyond debt ratios of 31% on the front end, and 43% on the back end.

What is the 28 36 rule?

When considering a mortgage, ensure your: maximum household expenses won't exceed 28 percent of your gross monthly income; total household debt doesn't exceed 36 percent of your gross monthly income (known as your debt-to-income ratio).

Can you pay off revolving debt to qualify for an FHA loan?

FHA and VA mortgage guidelines allow a borrower to pay down their credit card balances to $0 and the underwriter will only count a $10/month minimum payment towards the borrower's debt to income (DTI) ratio. This is definitely good news for FHA and VA loans.

How do you calculate debt to income ratio?

Calculate your debt-to-income ratio by adding up all your monthly debt payments and dividing them by your gross monthly income. Your gross monthly income is generally the amount of money earned before taxes and other deductions are taken out.

What is a back end loan?

Back End Loan Fund is a mutual fund that charges investors a fee to sell (redeem) shares, usually from 4% to 6%. Some back-end load funds impose a full commission if the shares are redeemed within a designated period after purchase, such as one year.

Further Reading


A Degree of Practical Wisdom: The Ratio of Educational Debt to Income as a Basic Measurement of Law School Graduates' Economic Viability
heinonline.org [PDF]
… Cosmetic differences aside, the educational back- end ratio (EBER) and the ratio of educational debt to annual income (EDAI) are mathematically related measures of the ratio of educational … eligibility often depends on two debt-to-income ratios." The first of these ratios is the …

A Degree of Practical Wisdom: The Ratio of Educational Debt to Income as a Basic Measurement of Law School Graduates' Economic ViabilityA Degree of Practical Wisdom: The Ratio of Educational Debt to Income as a Basic Measurement of Law School Graduates' Economic Viability
papers.ssrn.com [PDF]
… Cosmetic differences aside, the educational back- end ratio (EBER) and the ratio of educational debt to annual income (EDAI) are mathematically related measures of the ratio of educational … eligibility often depends on two debt-to-income ratios." The first of these ratios is the …

Economic impact of distriubution fees on mutual fundsEconomic impact of distriubution fees on mutual funds
search.proquest.com [PDF]
… Cosmetic differences aside, the educational back- end ratio (EBER) and the ratio of educational debt to annual income (EDAI) are mathematically related measures of the ratio of educational … eligibility often depends on two debt-to-income ratios." The first of these ratios is the …

Systematic mistakes in the mortgage market and lack of financial sophisticationSystematic mistakes in the mortgage market and lack of financial sophistication
www.sciencedirect.com [PDF]
… Cosmetic differences aside, the educational back- end ratio (EBER) and the ratio of educational debt to annual income (EDAI) are mathematically related measures of the ratio of educational … eligibility often depends on two debt-to-income ratios." The first of these ratios is the …

Are mutual fund investors in jail?Are mutual fund investors in jail?
www.tandfonline.com [PDF]
… Cosmetic differences aside, the educational back- end ratio (EBER) and the ratio of educational debt to annual income (EDAI) are mathematically related measures of the ratio of educational … eligibility often depends on two debt-to-income ratios." The first of these ratios is the …

The regulatory environment and housing finance market in GhanaThe regulatory environment and housing finance market in Ghana
www.emerald.com [PDF]
… Cosmetic differences aside, the educational back- end ratio (EBER) and the ratio of educational debt to annual income (EDAI) are mathematically related measures of the ratio of educational … eligibility often depends on two debt-to-income ratios." The first of these ratios is the …

Financial literacy and student debtFinancial literacy and student debt
www.tandfonline.com [PDF]
… Cosmetic differences aside, the educational back- end ratio (EBER) and the ratio of educational debt to annual income (EDAI) are mathematically related measures of the ratio of educational … eligibility often depends on two debt-to-income ratios." The first of these ratios is the …

Mortgage Pricing and Gender: A Study of New Century Financial CorporationMortgage Pricing and Gender: A Study of New Century Financial Corporation
search.proquest.com [PDF]
… Cosmetic differences aside, the educational back- end ratio (EBER) and the ratio of educational debt to annual income (EDAI) are mathematically related measures of the ratio of educational … eligibility often depends on two debt-to-income ratios." The first of these ratios is the …

Optimal Choice of Preferential Tax Pension Insurance Mode—Based on the Analysis of Payroll Tax Ratio EffectOptimal Choice of Preferential Tax Pension Insurance Mode—Based on the Analysis of Payroll Tax Ratio Effect
en.cnki.com.cn [PDF]
… Cosmetic differences aside, the educational back- end ratio (EBER) and the ratio of educational debt to annual income (EDAI) are mathematically related measures of the ratio of educational … eligibility often depends on two debt-to-income ratios." The first of these ratios is the …



FAQ


What is a good front end ratio?

Lenders prefer a maximum front-end ratio of 28% for most loans and 31% or less for Federal Housing Administration (FHA) loans and a maximum back-end ratio of 36 percent. If unapproved, the borrower can reduce debts to lower the ratio.

What is the back end ratio for an FHA loan?

According to official FHA guidelines, borrowers can't have beyond debt ratios of 31% on the front end, and 43% on the back end.

What is the 28 36 rule?

When considering a mortgage, ensure your: maximum household expenses won't exceed 28 percent of your gross monthly income; total household debt doesn't exceed 36 percent of your gross monthly income (known as your debt-to-income ratio).

Can you pay off revolving debt to qualify for an FHA loan?

FHA and VA mortgage guidelines allow a borrower to pay down their credit card balances to $0 and the underwriter will only count a $10/month minimum payment towards the borrower's debt to income (DTI) ratio. This is definitely good news for FHA and VA loans.

How do you calculate debt to income ratio?

Calculate your debt-to-income ratio by adding up all your monthly debt payments and dividing them by your gross monthly income. Your gross monthly income is generally the amount of money earned before taxes and other deductions are taken out.

What is a back end loan?

Back End Loan Fund is a mutual fund that charges investors a fee to sell (redeem) shares, usually from 4% to 6%. Some back-end load funds impose a full commission if the shares are redeemed within a designated period after purchase, such as one year.