What is the formula for the debt to income or back end ratio?

The debt-to-income ratio, often referred to as the back-end ratio, is an important metric used by lenders to assess a borrower's ability to manage monthly payments and repay debts. It provides a comprehensive view of how much of a borrower's income is going towards all of their recurring monthly debt obligations.

The correct formula involves taking all of the borrower’s recurring monthly debts, which typically include monthly housing expenses (such as principal, interest, taxes, and insurance – referred to as PITI), as well as other obligations like car payments, student loans, credit card payments, and any other debts, and dividing that total by the borrower’s gross monthly income.

This ratio is critical because it helps lenders understand the financial stability and risk associated with lending to the borrower. A lower ratio indicates that a borrower has a greater capacity to manage their debt, whereas a higher ratio may suggest potential financial strain.

In contrast, the other options primarily focus on specific components of income or expenses rather than the overall financial picture that the debt-to-income ratio provides. For example, calculating monthly PITI divided by gross monthly income only considers housing debt, which does not reflect the total debt burden the borrower faces. Thus, the comprehensive nature of the chosen formula makes it more suitable