Back End Ratio
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Back End Ratio
Description:
The back end ratio is used by lenders in conjunction with the front end ratio as one method of examining a borrower's financial strength and ability to repay if given a loan.
The ratio is determined by adding up existing debt payments plus the proposed loan payment, in order to arrive at a percentage of income that will be devoted to paying debts every month. Lenders typically want this percentage, or back end ratio, below 36 percent of take home pay.
Example: If a borrower's monthly take home pay were $4,000, and they had a car payment of $400 and the proposed mortgage payment would be $1,200, then their combined payments of $1,600 would be 20% of their take home pay.
Example 2: borrower's take home pay: $10,000. Car loan: $500 per month. Proposed Mortgage: $2,500 per month. In this case the backend ratio would be 30%.
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