Ratios Used To Determine Mortgage
Ask the Real Estate Lawyer: Real Estate Law Q&A
REM #LAW 732
By Ilyce R. Glink and Samuel J. Tamkin
Summary: Are you applying for a mortgage?
Mortgage lenders use a variety of ratios including the front-end, back-end and
loan-to-value ratios to determine if you can afford the mortgage. Ilyce and
Sam explain how these ratios are used to assess your ability to pay back a mortgage.
Q: Are front-end and back-end ratios important in determining the loan-to-value
ratio? And if that is so, I’d like to know why.
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A: Each lender has certain criteria that help them determine how much money
to lend to a borrower. The lender must decide how much you can afford to borrow
and what you can afford to pay monthly toward housing expenses and other loan
Front-end-ratios are used to determine the difference between your gross monthly
income and your monthly mortgage payment. The back-end-ratio is used to determine
the difference between you gross monthly income and all of your debts including
the new mortgage loan.
Both ratios are an integral part of the process when you apply for a home loan.
If your income is high, but so are your debts, your back-end-ratio will tell
the lender that you have too much debt and you won’t be able to afford
The front end ratio tells the lender that based on the amount of your monthly
income, your mortgage payment alone won’t break you. If you don’t
qualify on the basis of your front-end-ratio, you certainly won’t qualify
on the basis of your back-end-ratio.
Both of these ratios only indirectly affect your loan-to-value ratio.
Let’s say you buy a home worth $100,000. If you borrow $80,000, your
loan-to-value ratio is 80 percent. If your front-end or back-end ratios won’t
allow you to borrow that much, because of other debt you carry, then the amount
of money the lender will give you will decrease as well.
Samuel J. Tamkin is a Chicago-based real estate attorney. Ilyce
R. Glink’s latest book is 50 Simple Steps You Can Take To Sell Your
Home Faster and For More Money In Any Market. If you have questions for
them, write: Real Estate Matters Syndicate, PO Box 366, Glencoe, IL 60022
or contact them through Ilyce’s website www.thinkglink.com