Underwriting & credit
Back-End Ratio: Definition & Example
What Is a Back-End Ratio?
The back-end ratio is the percentage of gross monthly income used for all monthly debt payments, including housing, car loans, student loans, credit cards, and other recurring debts.
What does back-end ratio mean?
The back-end ratio is what most people mean by debt-to-income ratio. It starts with the housing payment used in the front-end ratio and adds every other required monthly debt payment that appears on the credit report or application.
Common benchmarks are 36% for conventional loans under traditional guidelines, 43% for FHA and many qualified mortgages, and up to about 50% for some automated approvals with compensating factors.
A borrower can have a comfortable front-end ratio and still be denied because of a high back-end ratio driven by car payments or student loans.
Back-end ratio example
The buyer from the front-end example has $1,960 in housing costs plus a $450 car payment and a $290 student loan payment. Total debts are $2,700, so the back-end ratio is $2,700 ÷ $7,000 = 38.6%.
Related terms
- Front-End RatioThe front-end ratio is the percentage of gross monthly income that goes toward housing costs: mortgage principal and interest, property taxes, homeowners insurance, and HOA dues or mortgage insurance.
- Debt-to-Income RatioDebt-to-income ratio (DTI) is the percentage of a person’s gross monthly income that goes toward monthly debt payments, including housing, car loans, student loans, and minimum credit card payments.
- Compensating FactorsCompensating factors are strengths in an application, such as large savings, long job history, or low payment shock, that can offset a weakness like a high debt-to-income ratio or thin credit.
- UnderwritingUnderwriting is the process a lender, insurer, or landlord uses to evaluate the risk of an applicant and decide whether to approve them, and on what terms.
