When applying for a home mortgage loan, your lender will perform a front-end ratio calculation to determine the percentage of your gross monthly income that is dedicated toward your housing expenses. Mortgage lenders perform this measurement to ensure that borrowers obtain affordable home loans.
A mortgage underwriter uses an applicant’s gross monthly income in calculating a front-end ratio. You gross monthly income equals your annual earnings divided by 12.
The calculation for a front-end ratio takes into account items that are solely related to your housing expenses, such as your principal and interest payment, property taxes, homeowners insurance, as well as other housing-related costs, such as private mortgage insurance and homeowner association fees.
A mortgage underwriter will perform a front-end calculation to determine if you qualify for the loan you have requested. He will divide your housing expenses into your gross monthly income to find your front-end ratio. For example, if your total housing expenses equal $1,000 per month and your income equals $4,000 per month, your front-end ratio will amount to 25 percent.
Conventional mortgage lenders often consider a borrower who has a front-end ratio of 28 percent or less to have sufficient income to meet her housing expenses. Loans that are backed with government guarantees such as the Federal Housing Administration and the Department of Veterans Affairs allow a borrower to have a front-end ratio up to 29 percent of her gross monthly income. A ratio higher than this could create an affordability issue and lead to a loan denial. For example, a borrower who anticipates buying a home that carries monthly housing expenses equal to $2,000 per month and earns $4,000 per month will have a front-end ratio of 50 percent, thereby using half of her gross monthly income toward housing expenses.