Calculate Your Front-End Ratio for Mortgage Approval
A front-end ratio is a measure used by mortgage lenders to determine how much a borrower can afford for a monthly mortgage. Specifically, the ratio calculates how much of the borrower’s income is used to make those monthly mortgage payments. The front-end ratio is calculated by dividing monthly household expenses by gross income with the result expressed as a percentage.
The formula for the front-end ratio can be written as:
Front-end Ratio = Monthly Housing Expenses / Monthly Income
Monthly income would be the annual gross income divided by 12. Monthly housing expenses would include the mortgage principal plus interest, taxes, and insurance (known as PITI). To be a satisfactory measure, lenders typically look for a front-end ratio that does not exceed 28% of the borrower’s monthly gross income.
As part of the mortgage approval process, lenders look at both the borrower’s front-end and back-end ratios.
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The above information is educational and should not be interpreted as financial advice. For advice that is specific to your circumstances, you should consult a financial or tax advisor.
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