CandleFocus Glossary Editor
Back-end ratio is an important consideration when evaluating a loan or mortgage application. It is a comparison of an individual's monthly obligations and debts to their gross monthly income, used to assess a borrower's ability to repay a loan. It provides lenders with a better understanding of the borrower's overall financial health and ability to manage debt.
When you apply for a loan or a mortgage, lenders use the back-end ratio to determine whether you are able to repay the loan. It's calculated by dividing the total monthly debt payments by your gross (or pre-tax) monthly income. Generally, lenders view a ratio of 36 percent or less as ideal.
Having a high back-end ratio might mean that a borrower is already stretching their budget to manage current obligations. As a result, lenders may be reluctant to extend credit if your ratio is too high, as this may indicate an inability to effectively manage another loan. On the flip side, if your back-end ratio is too low, it can demonstrate a low borrower risk and lenders may feel like they are missing out on potential profit.
It is important to note that the back-end ratio is closely correlated with a borrower’s credit score. A lower credit score generally indicates a lower back-end ratio. This means that if you can improve your credit score, you may be able to improve your back-end ratio and attract lenders who are more comfortable with your debt-to-income ratio.
To get a better understanding of your own back-end ratio, start by calculating your gross monthly income and dividing it by your total monthly debt payments. It is also important to note that this ratio should also include future loans or loan payments, such as a car loan or student loan. Be sure to also factor in other regular expenses, such as taxes, insurance, utilities, and other essential household costs.
Back-end ratio is an essential number that lenders use to assess a borrower's ability to successfully repay a loan. Knowing your back-end ratio can give you a better understanding of your overall financial health and what lenders are likely to accept. It is a good idea to aim for a ratio of 36 percent or lower, however, every situation is different so be sure to evaluate your own financial situation before applying for credit.
When you apply for a loan or a mortgage, lenders use the back-end ratio to determine whether you are able to repay the loan. It's calculated by dividing the total monthly debt payments by your gross (or pre-tax) monthly income. Generally, lenders view a ratio of 36 percent or less as ideal.
Having a high back-end ratio might mean that a borrower is already stretching their budget to manage current obligations. As a result, lenders may be reluctant to extend credit if your ratio is too high, as this may indicate an inability to effectively manage another loan. On the flip side, if your back-end ratio is too low, it can demonstrate a low borrower risk and lenders may feel like they are missing out on potential profit.
It is important to note that the back-end ratio is closely correlated with a borrower’s credit score. A lower credit score generally indicates a lower back-end ratio. This means that if you can improve your credit score, you may be able to improve your back-end ratio and attract lenders who are more comfortable with your debt-to-income ratio.
To get a better understanding of your own back-end ratio, start by calculating your gross monthly income and dividing it by your total monthly debt payments. It is also important to note that this ratio should also include future loans or loan payments, such as a car loan or student loan. Be sure to also factor in other regular expenses, such as taxes, insurance, utilities, and other essential household costs.
Back-end ratio is an essential number that lenders use to assess a borrower's ability to successfully repay a loan. Knowing your back-end ratio can give you a better understanding of your overall financial health and what lenders are likely to accept. It is a good idea to aim for a ratio of 36 percent or lower, however, every situation is different so be sure to evaluate your own financial situation before applying for credit.