8.3B Front and Back End Ratios Worksheet

Front

What is the front-end ratio in mortgage lending?

Back

The front-end ratio is the percentage of a borrower's gross monthly income that goes towards housing costs, including mortgage payments, property taxes, and homeowners insurance. It is typically recommended to be no more than 28-31%.

Front

What is the back-end ratio in mortgage lending?

Back

The back-end ratio is the percentage of a borrower's gross monthly income that goes towards all monthly debt payments, including housing costs, car loans, credit card payments, and other debts. It is typically recommended to be no more than 36-43%.

Front

How do you calculate the front-end ratio?

Back

Front-end ratio = (Total monthly housing costs / Gross monthly income) x 100.

Front

How do you calculate the back-end ratio?

Back

Back-end ratio = (Total monthly debt payments / Gross monthly income) x 100.

Front

What is considered a good credit rating for mortgage approval?

Back

A good credit rating is typically a FICO score of 700 or above, which indicates responsible credit management and a lower risk for lenders.

Front

What are the components of monthly housing costs?

Back

Monthly housing costs typically include mortgage payments, property taxes, homeowners insurance, and sometimes homeowners association (HOA) fees.

Front

What is the significance of the front-end ratio for lenders?

Back

Lenders use the front-end ratio to assess a borrower's ability to manage housing costs without overextending their finances.

Front

What is the significance of the back-end ratio for lenders?

Back

Lenders use the back-end ratio to evaluate a borrower's overall debt load and ability to repay all debts, not just housing costs.

Front

If a borrower has a gross monthly income of $5,000 and monthly housing costs of $1,400, what is their front-end ratio?

Back

Front-end ratio = (1400 / 5000) x 100 = 28%.

Front

If a borrower has a gross monthly income of $5,000 and total monthly debt payments of $2,200, what is their back-end ratio?

Back

Back-end ratio = (2200 / 5000) x 100 = 44%.