What is ‘back end ratio’
Background ratio, also known as debt to income is a ratio that indicates what portion of the monthly income goes toward paying debts. Total monthly debt includes expenses such as mortgage payments (principal, interest, taxes and insurance), credit cards, alimony and other loan payments.
The back-end ratio = (total monthly debt expense / gross monthly income) x 100
Lenders use this ratio in conjunction with the front-end ratio to approve mortgages.
Breaking down the ‘background correlation’
The ratio of the background is one of the few indicators that mortgage underwriters use to assess the level of risk associated with the credit the potential borrower. This is important because it indicates how much of the income of the borrower owed to someone else or another company. If a high percentage of the applicant’s payroll is spent on debt payments every month, the applicant is considered a high risk borrower, like a job loss or reduced income may lead to unpaid bills accumulate in a hurry.
The calculation of the final ratio
The server ratio is calculated by adding up all monthly debt payments of the borrower and dividing the sum of monthly income of the borrower.
Consider a borrower whose monthly income is $ 5,000 ($60,000 per year divided by 12) and which has total monthly payments on debt of $2000. This borrower’s server ratio 40%, (2,000 $/ $5,000).
As a rule, creditors would like to see the server, the ratio of which does not exceed 36%, but there are lenders who make exceptions for ratios up to 50% for borrowers with good credit. Some lenders consider only this ratio when approving mortgages, while others use it in combination with a frontal attitude.
Back-end and front-end ratio
As the back-end ratio, front ratio other debt to income comparison used, mortgage insurers, the only difference being the ratio of the front-end considers any debt other than the mortgage payment. Thus, the front end ratio is calculated by dividing the total mortgage payment of the borrower on his or her monthly income. Returning to the example above, suppose that the borrower $2,000 monthly debt, their mortgage payment is $1200 of that amount.
The borrower’s front end ratio, then, (1,200 $ / $5,000), or 24%. The front end ratio to 28% of the total upper limit imposed by mortgage companies. As the server ratio, some lenders offer greater flexibility at the front end of the ratio, especially if the borrower has other mitigating factors such as good credit, a reliable income or large cash reserves.
How to improve background ratio
Credit card repayments and the sale of the vehicle be financed in two ways a borrower can reduce their ratio. If a mortgage is applied for refinancing a home has enough equity to consolidate other debts with a cash out refinance can lower the ratio the back-end. However, because creditors bear more risk, on cash out refinancing, the interest rate is often slightly higher compared to standard rate-term refinancing, to compensate for the higher risk. In addition, many lenders require the borrower to repayment of working capital refinancing to close the debt paid, so they run the balance back.