What is used to measure a borrower's creditworthiness?

The payment-to-income ratio, often referred to as the front-end ratio, is a financial metric used to assess a borrower's creditworthiness. This ratio compares the borrower’s monthly housing expenses—such as mortgage payments, property taxes, and insurance—to their gross monthly income. A lower ratio suggests that the borrower has a manageable level of debt compared to their income, which indicates stronger creditworthiness in the eyes of lenders.

Lenders typically rely on this ratio, as it provides insight into how much of a borrower’s income is going towards housing costs, helping them gauge whether the borrower can afford their loan payments. A high payment-to-income ratio could signal that a borrower may struggle to meet repayment obligations, leading lenders to consider that individual a higher risk.

In contrast, while other ratios, such as the loan-to-value ratio, are useful for assessing the amount of equity a borrower has in a property relative to the loan amount, they do not directly measure the borrower's income against their debt obligations. The debt-equity ratio speaks to a company's leverage and financial health rather than an individual's credit risk, and the debenture ratio typically pertains to the outstanding debt of a corporation. Therefore, the payment-to-income ratio stands out as a direct measure of a borrower's