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 …



Q&A About Back-End Ratio


What can be done to lower your percentage on your Back End Ratio ?

Pay off credit cards or sell financed car .

What is the debt-to-GDP ratio?

The debt-to-GDP ratio measures a country's annual net fiscal loss in a given year as a percentage share of that country's GDP.

What should I do if I am trying to buy a house but my Back End Ratio is too high ?

Try getting rid of some debts like credit cards or pay off loans like student loans .

How do geopolitics and economics influence borrowing practices?

Geopolitical and economic considerations including interest rates, war, recessions, and other variables influence borrowing practices of a nation and choice to incur further debt.

Is the back-end ratio used to approve mortgages?

Yes, lenders use this ratio in conjunction with the front-end ratio to approve mortgages.

What is the back-end ratio?

The back-end ratio is a ratio that indicates what portion of a person's monthly income goes toward paying debts.

Can you give an example of how you would calculate this for someone who has $2,000 in mortgage payments and $1,200 in credit card payments each month?

$2,000 + $1,200 = $3,200 / 2 = $1,600/monthly income = 36% or 0.36 (back end)

How do you calculate the back end ratio?

You add together all of a borrower's monthly debt payments and divide it by their monthly income.

If I have a high percentage on my Back End Ratio , will I not get approved for my loan ?

It depends on if there are any other factors that outweighs your high percentage .

How does the back-end ratio differ from other ratios?

The front end and back end ratios are both debt to income ratios but they only consider different types of debt.

What does it not measure?

It should not be confused with deficit-to-GDP ratio, which measures total expenditures minus total revenue or the net change in debt per annum.

How does this relate to government budget balances?

It should not be confused with deficit-to-GDP ratio because it measures total expenditures minus total revenue or the net change in debt per annum while deficit/surplus only measures changes in revenues over time (i.e., surplus = increase in revenues).

Why is this ratio important?

At the end of the first quarter of 221, the United States public debt was $21 trillion and its GDP was $20 trillion. This means that for every dollar produced by Americans each year, one penny goes toward paying off their debts.