Which formula helps to assess eligibility for a loan based on Back End criteria?

The correct answer is based on the formula that accurately reflects the assessment of eligibility for a loan using the Back End ratio approach. The Back End ratio, also known as the debt-to-income ratio, evaluates the proportion of a borrower’s gross monthly income that goes towards servicing total monthly debts, which includes various financial obligations.

In this scenario, the formula includes PITII (Principal, Interest, Taxes, Insurance), HOA (Homeowner Association dues), and any recurring monthly debts. By summing these components and then dividing by the gross monthly income, the formula provides a comprehensive view of the borrower’s overall financial obligations relative to their income. This assessment is crucial for lenders as it helps determine if a borrower can afford the total debt payments they are responsible for, including the mortgage.

This ratio is essential because it not only takes into account the direct costs associated with homeownership (like mortgage payments and HOA dues) but also includes other debts, which paint a complete picture of financial health. If the resulting percentage falls within the lender’s acceptable limits, it signals that the borrower is likely to be able to handle the financial responsibility of the loan in conjunction with other debts.