Back End Ratio
Back end ratio
indicates what portion of a person's monthly income goes toward paying debts - BACK END RATIO=MONTHLY DEBT/GROSS MONTHLY INCOME.
Total monthly debt includes expenses such as mortgage payments , property taxes, insurance (PITI), credit-card payments, child support and other loan payments. Lenders use this ratio in conjunction with the front-end ratio to approve mortgages.
An easy way to understand Back-End Ratio is to first, add up all your monthly expenses: monthly mortgage ( PITI), all other monthly obligations (car payments, revolving credit, child support, medical bills etc...). Then divide this by your gross monthly income.
Monthly expenses/Gross monthly income = BACK-END RATIO
For example: monthly expenses = $1500 and gross monthly income =$5000:
Monthly expenses $1500 / Gross Monthly Income $5000= Back-End Ratio 30%
30% is generally well within the back end ratio limits of all lenders.
Generally, lenders like to see a back-end ratio that does not exceed 36%; however, there are lenders who make exceptions for ratios of up to 50% if you have good credit. Some lenders consider only this ratio when approving mortgages, as opposed to using it in conjunction with the front-end ratio.
Back end ratio can be a useful tool in fiding out how much house you can afford . Here's a tool to easily find out the maximum amount you can borrow using the 36% as well as the 40% upper limit as the back end ratio - affordability calculator.
