Which statement correctly describes how to determine the maximum mortgage amount?

Which statement correctly describes how to determine the maximum mortgage amount?

• A. The lower of the two computed values using front-end and back-end ratios is the maximum.
• B. The higher of the two computed values using front-end and back-end ratios is the maximum.
• C. Take the average of the two computed values.
• D. Use only the front-end ratio value.

Answer: (A)

Lenders determine the maximum mortgage amount by applying front-end and back-end ratios and using the more restrictive limit. The front-end ratio looks at housing expenses (principal, interest, taxes, and insurance) as a portion of gross monthly income. The back-end ratio looks at total monthly debt payments (including housing plus any other debts) as a portion of gross monthly income. To find the maximum loan, you calculate the highest loan that fits each ratio, then take the smaller of those two amounts. That ensures the loan respects both limits, not just one. If you picked the larger amount, you’d risk violating at least one ratio; averaging doesn’t reflect how lenders cap qualifying debt, and using only the front-end ratio ignores other debts counted in the back-end ratio.

Lenders determine the maximum mortgage amount by applying front-end and back-end ratios and using the more restrictive limit. The front-end ratio looks at housing expenses (principal, interest, taxes, and insurance) as a portion of gross monthly income. The back-end ratio looks at total monthly debt payments (including housing plus any other debts) as a portion of gross monthly income. To find the maximum loan, you calculate the highest loan that fits each ratio, then take the smaller of those two amounts. That ensures the loan respects both limits, not just one.

If you picked the larger amount, you’d risk violating at least one ratio; averaging doesn’t reflect how lenders cap qualifying debt, and using only the front-end ratio ignores other debts counted in the back-end ratio.