How is the front-end ratio calculated?

The front-end ratio is a financial metric used primarily in the context of mortgage lending to assess a borrower's ability to manage monthly housing expenses relative to their income. It is calculated by dividing the total monthly housing costs by the gross monthly income.

Total monthly housing costs typically include expenses such as mortgage payments, property taxes, homeowners insurance, and any homeowners association (HOA) fees. By comparing these costs to the borrower's gross income, lenders can gauge how much of a borrower's income is going towards housing expenses. A common benchmark for this ratio is that it should be no more than 28-31% of gross monthly income, depending on lender guidelines.

This ratio is significant because it helps lenders determine the risk involved in providing a loan; if a borrower has a high front-end ratio, it may indicate that they could struggle to meet their mortgage payments. Therefore, this ratio serves as a crucial part of the overall assessment of a borrower's financial health when evaluating loan applications.