What Are “Front” and “Back” Ratios?
Different loan programs use different calculations, or ratios, to qualify would-be borrowers.
The “front” ratio is generally equal to your monthly costs for principal, interest, property taxes, and property insurance (what lenders call “PITI”). The “back” ratio includes the front ratio plus all regular monthly costs such as credit card payments and auto payments.
For example, Hall has a household income of $6,000 a month. With a conventional loan, a lender might allow ratios of “28/36.” The front ratio is “28.” This means 28 percent of Hall’s pre-tax income can be used for principal, interest, taxes, and insurance. In this case, 28 percent of $6,000 is $1,680 per month.
The back ratio is “36.” This means lender guidelines will allow Hall to devote 36 percent of $6,000, or $2,160 a month, to PITI plus regular monthly costs for items such as credit card debt, auto payments, etc.
Different programs use different front and back ratios: basic FHA loans are at 31/43 while VA ratios are more liberal at 41/41. Some ARM programs use 33/38 ratios.
Program ratios can be elastic. For instance, the use of energy efficient appliances and construction can help liberalize ratios, sometimes by 2 percent. This can be important for those trying to meet qualification standards.
In recent years, lender guidelines for many programs have become more liberal — meaning that more can be borrowed with a given income. For details, speak with lenders and real estate brokers.
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