Back-End Ratio

The Back-End Ratio: A Key Factor in Determining Your Creditworthiness

What is a Back-End Ratio?

A back-end ratio, also known as a debt-to-income ratio, is a measure of your ability to repay your debts. It is calculated by dividing your total monthly debts by your gross monthly income. This includes all of your monthly debt payments, such as your mortgage, credit card payments, student loans, and any other debts you may have.

Lenders use your back-end ratio to determine your risk level as a borrower. If your back-end ratio is too high, it may indicate that you have too much debt relative to your income and may have difficulty making your monthly payments. On the other hand, a low back-end ratio may indicate that you have a strong financial foundation and are better equipped to handle your debts.

To calculate your back-end ratio, you'll need to gather information on your monthly income and debt payments. Here's an example of how to do it:

Example 1 with Student Loans

Income: \$4,000 per month

Debts:

• Mortgage: \$1,200 per month
• Credit card payments: \$400 per month
• Student loans: \$500 per month

Total monthly debts: \$1,200 + \$400 + \$500 = \$2,100

Back-end ratio: \$2,100 / \$4,000 = 52.5%

In this example, the individual has a back-end ratio of 52.5%, which is higher than the recommended maximum of 36%. This may indicate that they have too much debt relative to their income and may have difficulty making their monthly payments.

Example 2 with Car Loan:

Income: \$6,000 per month

Debts:

• Mortgage: \$1,500 per month
• Credit card payments: \$200 per month
• Car loan: \$400 per month

Total monthly debts: \$1,500 + \$200 + \$400 = \$2,100

Back-end ratio: \$2,100 / \$6,000 = 35%

In this example, the individual has a back-end ratio of 35%, which is within the recommended maximum of 36%. This may indicate that they have a strong financial foundation and are better equipped to handle their debts.