How would you calculate the front-end ratio given monthly mortgage payments of $635, taxes and insurance of $125, and a gross monthly income of $2,500?

To determine the front-end ratio, you need to first calculate the total monthly housing expense, which includes the mortgage payment as well as property taxes and insurance.

In this scenario, the monthly mortgage payment is $635, and the additional costs for taxes and insurance are $125. By adding these two amounts, you find the total monthly housing expense:

Total Monthly Housing Expense = Monthly Mortgage Payment + Taxes and Insurance Total Monthly Housing Expense = $635 + $125 = $760

Next, the front-end ratio is calculated by taking the total monthly housing expense and dividing it by the gross monthly income, then multiplying by 100 to convert it into a percentage:

Front-End Ratio = (Total Monthly Housing Expense / Gross Monthly Income) x 100 Front-End Ratio = ($760 / $2,500) x 100 = 30.4%

This calculation reflects how much of a borrower’s gross income is allocated to housing expenses, which is a critical factor for lenders determining loan eligibility and risk. A front-end ratio of 30.4% indicates that 30.4% of the borrower’s gross income is used for housing costs, aligning with acceptable lending guidelines for many financial institutions.