Texas Real Estate Sales Agent ExamFinancingHard
A lender is evaluating a borrower's ability to repay a loan. They consider the borrower's total monthly debt payments, including the proposed housing expense, in relation to their gross monthly income. This calculation is known as the back-end ratio. Which of the following is typically included in the 'total monthly debt payments' for this calculation?
- ASavings account contributions and entertainment expenses
- BUtility bills and groceries
- CCredit card minimum payments and car loan payments
- DHealth insurance premiums and gym memberships
Show answer & explanationAnswer & explanation
Correct answer: C. Credit card minimum payments and car loan payments
The back-end debt-to-income ratio includes recurring monthly debt obligations such as credit card minimum payments, car loans, student loans, and other installment debt, in addition to the proposed housing payment. Non-debt expenses like utilities, groceries, and discretionary spending are not included.
Why the other options are wrong
- A. Savings and entertainment are discretionary expenses, not debt obligations.
- B. Utility bills and groceries are living expenses, not considered recurring debt for DTI.
- D. Health insurance and gym memberships are regular expenses but not typically classified as debt for DTI calculation.
Back-End DTI Components
The back-end debt-to-income (DTI) ratio includes all recurring monthly debt payments, plus the proposed housing expense, divided by gross monthly income.
- Includes credit cards, car loans, student loans, personal loans
- Does NOT include non-debt living expenses (utilities, food, insurance)
- Typically has a higher acceptable limit than the front-end ratio
Memory trick: Back-End is ALL Borrowed Debt, not just Bills.