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What does the Back-end Ratio measure?
Monthly Housing Expense only
Total Monthly Obligations divided by Income
Gross Monthly Income only
Recurring Debt divided by Monthly Housing Expense
The correct answer is: Total Monthly Obligations divided by Income
The Back-end Ratio measures a borrower's total monthly obligations divided by their gross monthly income. This ratio provides lenders with a comprehensive view of the borrower’s financial commitment towards debts, including not just housing expenses like mortgage payments but also other recurring debts such as car loans, credit card payments, and any other monthly financial obligations. By calculating the Back-end Ratio, lenders can assess whether a borrower has sufficient income to manage their overall debt load. A lower Back-end Ratio indicates that the borrower has a manageable level of debt relative to their income, making them a more favorable candidate for loan approval. This is an essential consideration in the underwriting process since it helps lenders predict the likelihood of default. In contrast, the other options focus too narrowly on specific aspects of a borrower’s finances, which do not provide the comprehensive assessment required for understanding overall debt management. The Back-end Ratio is a critical metric in evaluating the borrower’s ability to carry additional debt relative to their total financial obligations.