Front-End Ratio

Ever gone by a construction site and seen the big ol’ backhoes and crawlers with those huge buckets on the front moving dirt and rocks around? Those front-end loaders are amazing; they can really make quick work of big jobs, but if the bucket is overloaded, the machine can’t move (or even worse, it tips over) and the work can’t get done.

Let’s segue this discussion nice and smooth-like into the world of homebuying. To mortgage lenders, our financial sitch is a lot like one of those front-end loaders: the bank might be willing to loan us the money we need to make our dreams of homeownership a reality, but they’re not going to loan us so much that the payments are too heavy for our financial bucket. Said another way, they’re not going to loan us more than they think we can afford to pay back. And one way they figure out how much that is...is by calculating the front-end ratio, or how much of our income would go toward paying our mortgage.

The equation is fairly simple: lenders look at the monthly cost of ownership, including the mortgage principal and interest, HOA fees, property taxes, and any other taxes or insurance costs, and they divide that total amount by our gross monthly income. If the number is less than .28, or 28%, we are a lot more likely to get approved for that loan. There are exceptions: high down payments, good credit scores, the terms of our loan (like, if it’s an FHA loan), etc. And manageable or nonexistent student debt can help us get financed, even if our front-end ratio is higher than 28%.