Complicated Terms, Simple Definitions: Front and Back-End Ratios

Front-End Ratio: Compares housing expenses to gross monthly income. Housing expenses include principle, interest, taxes and insurance. A good rule of thumb: the ratio should be 28%* or below.

Housing expenses may include homeowners association fees, development taxes, homeowners insurance, flood insurance and mortgage insurance.

Does not include: electric bill, cable or wifi.

For example: homebuyers in Virginia Beach, Norfolk and Chesapeake, should consider housing expenses when they choose between a single-family residence or a condominium. Condo and amenity fees may push the ratio too much and prevent mortgage qualification.

Back-End Ratio (debt-to-income): Compares housing expenses and all other monthly debt payments to gross monthly income. A good rule of thumb: the ratio should be 36%* or below.

Monthly debt may include credit cards, child support, student loans, car loans, furniture, etc.

Does not include: child care, cell phone bill, or Netflix subscription

For example: Buyers should avoid major purchases before closing on a home. Yes, a July 4th deal on a washing machine looks attractive, here’s the reality: the new debt will become part of the debt-to-income ratio could disqualify a person from the mortgage.

* Manual underwriting for Conventional loans. Front and Back-End Ratios requirements depend on loan programs and guidelines.

Photo courtesy of nikcname (Flickr)

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