
Housing Expense Ratio
A housing expense ratio is a ratio comparing housing expenses to pre-tax income. The housing expense ratio requires disclosing a borrower’s pre-tax income, which is an essential factor for both the housing expense ratio and the debt-to-income ratio. Therefore, when determining the maximum amount of mortgage credit available to a borrower, an underwriting analysis includes hypothetical scenarios of monthly mortgage payments and the potential effects on both the housing expense ratio and the debt-to-income ratio levels. When calculating the housing expense ratio, an underwriter will sum all housing expense obligations of a borrower, including the potential mortgage principal and interest payments, property taxes, hazard insurance, mortgage insurance, and association fees. The housing expense ratio is also referred to as the front-end ratio because it is a partial component of a borrower’s total debt-to-income and may be considered first in the underwriting process for a mortgage loan.

What Is a Housing Expense Ratio?
A housing expense ratio is a ratio comparing housing expenses to pre-tax income. Lenders often use it in qualifying borrowers for loans. A housing expense ratio may also be referred to as a front-end ratio.




How a Housing Expense Ratio Works
The housing expense ratio is one metric used when evaluating a borrower’s credit profile for a loan. It is most often considered in a mortgage loan when analyzing a potential borrower’s ability to repay the mortgage debt on a home.
This ratio is typically used in conjunction with debt-to-income when determining the maximum credit level to extend to a borrower. Income ratios are an essential component of the underwriting process and can keep a borrower from receiving credit approval even with a good credit score.
If you are considering a mortgage or other kind of loan, figuring out your housing expense ratio can be a useful tool to understand what amount of money you can afford to borrow.
Housing Expense Ratio vs. Debt-to-Income Ratio
The housing expense ratio is also referred to as the front-end ratio because it is a partial component of a borrower’s total debt-to-income and may be considered first in the underwriting process for a mortgage loan. The housing expense ratio requires disclosing a borrower’s pre-tax income, which is an essential factor for both the housing expense ratio and the debt-to-income ratio.
When calculating the housing expense ratio, an underwriter will sum all housing expense obligations of a borrower, including the potential mortgage principal and interest payments, property taxes, hazard insurance, mortgage insurance, and association fees.
The sum of the housing expenses is then divided by the borrower’s pre-tax income to arrive at the housing expense ratio. The housing expense ratio can be calculated using monthly payments or annual payments. The housing expense ratio threshold for mortgage loan approvals is typically 28%.
Debt-to-Income
Debt-to-income is also another critical component of loan approval. When you are considered for a mortgage loan, a credit issuer will obtain the average amount of money you pay to creditors every month. Then, the total is divided by a borrower’s monthly income to identify their debt-to-income ratio. Borrowers generally must have a debt-to-income ratio of 36% or less for loan approval.
Mortgage underwriters will consider the potential stress that a mortgage payment will add to a borrower’s credit profile. Therefore, when determining the maximum amount of mortgage credit available to a borrower, an underwriting analysis includes hypothetical scenarios of monthly mortgage payments and the potential effects on both the housing expense ratio and the debt-to-income ratio levels.
Special Considerations
A housing expense ratio higher than the standard 28% may be acceptable to lenders based on compensating factors such as a low loan-to-value ratio and/or an excellent credit history. Also, applying jointly with a co-borrower can lower a housing expense ratio, as can choosing certain mortgage products with initial low payments.
Borrowers thinking of a potential home loan purchase may want to use the 28% and 36% levels when planning their monthly budgets. Keeping monthly housing expenses at 28% of a borrower’s income can help to create an estimate for how much a borrower can afford to pay monthly on a mortgage. Generally, keeping total debt-to-income far below 36% can also make it easier for a borrower to obtain all types of credit and specifically mortgage credit when applying for a mortgage loan.
Related terms:
Defining a Co-Borrower
A co-borrower is any additional borrower whose name appears on loan documents and whose income and credit history is used to qualify for the loan. read more
Debt-to-Income (DTI) Ratio & Formula
Debt-to-income (DTI) ratio is the percentage of your gross monthly income that is used to pay your monthly debt and determines your borrowing risk. read more
Federal Housing Administration (FHA) Loan
A Federal Housing Administration (FHA) loan is a mortgage insured by the FHA that is designed for home borrowers. read more
Front-End Ratio
The front-end ratio is a ratio that indicates what portion of an individual's income is allocated to mortgage payments. read more
Loan
A loan is money, property, or other material goods given to another party in exchange for future repayment of the loan value amount with interest. read more
Mortgage Insurance
Mortgage insurance protects a mortgage lender or title holder if a borrower defaults on payments, dies, or otherwise can't pay the mortgage. read more
Mortgage
A mortgage is a loan typically used to buy a home or other piece of real estate for which that property then serves as collateral. read more
Qualification Ratio
A qualification ratio notes the proportion of either debt to income or housing expense to income. read more
Qualifying Ratios
Qualifying ratios are ratios that are used by lenders in the underwriting approval process for loans. read more
What Is Total Housing Expense?
Total housing expense is the sum of a homeowner's monthly mortgage principal and interest payments plus any other expenses associated with their home. read more