The front-end ratio compares monthly housing expense (PITI—principal, interest, taxes, insurance, plus HOA or PMI) to gross monthly income. The back-end ratio compares all monthly debt obligations (housing expense plus car payments, student loans, credit card minimums) to gross monthly income. Conventional loans typically require 28% front-end and 36% back-end maximum. FHA allows up to 31%/43%. VA primarily uses the back-end ratio at 41%.
A borrower earns $6,000/month gross. PITI is $1,500 and other debts are $300/month. Front-end ratio = $1,500 / $6,000 = 25%. Back-end ratio = ($1,500 + $300) / $6,000 = 30%. Under conventional guidelines (28%/36%), this borrower qualifies.
Memorize the conventional thresholds: 28% front-end and 36% back-end. Know what is included in each ratio—PITI for the front-end, and PITI plus all recurring debts for the back-end. Always use gross (pre-tax) income, never net income.
Related Terms
Related Concepts
The capitalization rate (Cap Rate) is the rate of return on a real estate investment based on its expected income.
In real estate, property value can be estimated by dividing the Net Operating Income (NOI) by the Capitalization Rate (Cap Rate).
Converting a percentage to a decimal involves dividing the percentage value by 100.
Monthly interest is the portion of the total annual interest that is paid or accrued each month.
Annual interest is the total amount of interest charged on a loan or investment over a year.
Frequently Asked Questions
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