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. Lenders don't want your back end ratio to exceed 36% of your gross monthly income.
To calculate back-end ratio first, add up all your monthly debt and 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 Over 36% bad...under 36% ok...
For example: Your monthly expenses = $1500 and your gross monthly income = $5000:
Monthly expenses $1500 / Gross Monthly Income $5000. Your back end ratio therefore is 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.
