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Ratios Used To Determine Mortgage

Ask the Real Estate Lawyer: Real Estate Law Q&A

REM #LAW 732

By Ilyce R. Glink and Samuel J. Tamkin

Summary: Are you applying for a mortgage? Mortgage lenders use a variety of ratios including the front-end, back-end and loan-to-value ratios to determine if you can afford the mortgage. Ilyce and Sam explain how these ratios are used to assess your ability to pay back a mortgage.

Q: Are front-end and back-end ratios important in determining the loan-to-value ratio? And if that is so, I’d like to know why.
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A: Each lender has certain criteria that help them determine how much money to lend to a borrower. The lender must decide how much you can afford to borrow and what you can afford to pay monthly toward housing expenses and other loan expenses.

Front-end-ratios are used to determine the difference between your gross monthly income and your monthly mortgage payment. The back-end-ratio is used to determine the difference between you gross monthly income and all of your debts including the new mortgage loan.

Both ratios are an integral part of the process when you apply for a home loan. If your income is high, but so are your debts, your back-end-ratio will tell the lender that you have too much debt and you won’t be able to afford the loan.

The front end ratio tells the lender that based on the amount of your monthly income, your mortgage payment alone won’t break you. If you don’t qualify on the basis of your front-end-ratio, you certainly won’t qualify on the basis of your back-end-ratio.

Both of these ratios only indirectly affect your loan-to-value ratio.

Let’s say you buy a home worth $100,000. If you borrow $80,000, your loan-to-value ratio is 80 percent. If your front-end or back-end ratios won’t allow you to borrow that much, because of other debt you carry, then the amount of money the lender will give you will decrease as well.

Samuel J. Tamkin is a Chicago-based real estate attorney. Ilyce R. Glink’s latest book is 50 Simple Steps You Can Take To Sell Your Home Faster and For More Money In Any Market. If you have questions for them, write: Real Estate Matters Syndicate, PO Box 366, Glencoe, IL 60022 or contact them through Ilyce’s website www.thinkglink.com