What does the Back End Ratio calculation include?

The Back End Ratio, also known as the debt-to-income (DTI) ratio, provides an estimate of an individual's total debt obligations as they relate to their gross monthly income. This ratio is calculated by taking all of the monthly debt payments, which includes PITI (Principal, Interest, Taxes, and Insurance) along with any other recurring debts like credit card payments, car loans, student loans, and other monthly obligations. Dividing this total by the gross monthly income gives lenders an idea of a borrower's overall financial health and ability to manage additional debt, such as a mortgage.

This ratio is crucial in the lending process because it helps lenders determine whether a borrower can afford the additional monthly payments without overextending their financial situation. A higher Back End Ratio may indicate a greater risk to lenders, impacting approval and interest rates.

In contrast, the other options do not fully capture the essence of what the Back End Ratio entails, as they either exclude key components of monthly debt obligations or do not accurately represent the calculation method used in practice.