How is the back-end ratio calculated?

The back-end ratio is a measurement used to assess a borrower’s ability to manage monthly debt payments in relation to their gross monthly income. It is specifically calculated by taking the total of current monthly debt payments, including any long-term debt such as mortgage payments, car loans, credit card payments, and other financial obligations, and dividing that sum by the gross monthly income. This ratio reflects the overall financial burden a borrower carries and is a crucial metric for lenders in determining loan eligibility and borrowing limits.

The concept behind calculating the back-end ratio is to provide a clear picture of what portion of a borrower's income is allocated towards debt, indicating their capacity to take on any additional borrowing. This method of evaluation helps lenders ensure that borrowers are not over-leveraged, which can lead to financial strain.

In contrast, other options, which include methods for assessing different metrics related to income and debt, do not accurately reflect the calculation of the back-end ratio. For instance, multiplying gross income by certain percentages relates more to guidelines for managing a housing expense ratio rather than debt payments.