Front-End Ratio
A ratio that indicates what portion of an individual's income is used to make mortgage payments. It is calculated as an individual's monthly housing expenses, divided by his or her monthly gross income, and then expressed as a percentage. Monthly housing expenses include the mortgage principal, interest, taxes and insurance payments - collectively known as PITI. Monthly gross income is simply annual income divided by 12 (months). Lenders use the front-end ratio in conjunction with the back-end ratio to approve mortgages.
Investopedia Commentary
For example, if your annual income is $60,000, your monthly income is $5,000(60,000/12). By asking your lender what they require your front-end ratio to be for them to approve your mortgage, you can figure how much of that $5,000 you can allocate to your mortgage payments. If the required front-end ratio is 31%, you can allocate $1,550 (5,000 x 0.31). Thus, if your PITI is $1,550 or less, you would be approved.
Related Links
Mortgages: How Much Can You Afford?
Understanding the Mortgage Payment Structure
Understanding Your Mortgage
See also: Back-End Ratio, House Poor, Loan, Mortgage, Mortgage Broker, PITI
Also spelled: front end ratio