Front-End Ratio

The front-end ratio, also known as the mortgage-to-income ratio, is a ratio that indicates what portion of an individual's income is allocated to mortgage payments. The front-end ratio is calculated by dividing an individual's anticipated monthly mortgage payment by his/her monthly gross income.  The mortgage payment generally consists of principal, interest, taxes, and mortgage insurance (PITI).  Lenders use the front-end ratio in conjunction with the back-end ratio to determine how much to lend.

When deciding whether to extend a mortgage, lenders consider the debt-to-income (DTI) ratio more important than having a stable income, paying bills on time, and having a high FICO score. One type of DTI ratio is the front-end ratio. In addition to the general mortgage payment, it also considers other associated costs, such as homeowners association (HOA) dues, if applicable.  For example, Sarah's anticipated mortgage expenses are $2,000 ($1,700 mortgage payment and $300 HOA fees) and her monthly income is $9,000; as a result, her front-end ratio is approximately 22%.

Lenders prefer a front-end ratio of 28% or less for most loans and 31% or less for Federal Housing Administration (FHA) loans. Higher ratios indicate an increased risk of default. However, higher ratios can be accepted when certain factors (e.g., substantial down payments, sizable savings, and favorable credit scores) are present. For example, if a borrower with a high front-end ratio pays half of the purchase price as a down payment or increases his savings substantially, he may still be offered a mortgage.

If unapproved, the borrower can reduce debts as a means to lower the ratio. The borrower may also consider having a cosigner on a mortgage. For example, FHA loans allow relatives with sufficient incomes and good credit scores to cosign.

Sizable student debt prevents many consumers from purchasing homes. Even with excellent credit scores, many realize that their front-end ratios are too high for lenders. However, debt can be restructured so that it makes less of an impact on a potential homeowner’s DTI. For example, the monthly payment on a student loan may be lowered. Also, federal student loans may allow payments that use only 10% of a borrower’s income.