The debt-to-income ratio, sometimes referred to as the back-end ratio, is a ratio that shows how much of a person’s monthly income is used to pay off debts. Total monthly debt includes costs like credit card payments, child support, mortgage payments (principal, interest, taxes, and insurance), and other loan obligations.
Total Monthly Debt Expense / Gross Monthly Income multiplied by 100 is the back-end ratio. This ratio is combined with the front-end ratio by lenders when approving mortgages.
One of the few criteria used by mortgage underwriters to determine the degree of risk involved in making a loan to a potential borrower is the back-end ratio. It’s crucial since it shows how much of the borrower’s revenue is owed to another person or business. An applicant is deemed to be a high-risk borrower if a significant portion of their monthly income is used to pay off debts. This is because a job loss or other decline in income could quickly result in an accumulation of unpaid liabilities.
The front-end ratio, like the back-end ratio, is a debt-to-income comparison used by mortgage underwriters; the only distinction is that the front-end ratio only takes the mortgage payment into account. Therefore, the front-end ratio is determined by subtracting the borrower’s monthly income from the sum of just the mortgage payment. A borrower can reduce their back-end ratio in two ways: by paying off credit cards and by selling an automobile that was financed. Consolidating other debt with a cash-out refinance can lower the back-end ratio if the mortgage loan being applied for is a refinance and the house has enough equity.