What Is Total Housing Expense?

What Is Total Housing Expense?

Total housing expense is the sum of a homeowner's monthly mortgage principal and interest payments plus any other monthly expenses associated with their home such as insurance, taxes or utilities. If approved for a mortgage loan, a lender will consider a borrower’s housing expense ratio and debt-to-income ratio capacity in determining the maximum amount they are willing to lend. Total housing expense is a key component in the calculation of a borrower’s housing expense ratio which is used in the underwriting process for a mortgage loan. Debt-to-income is a second qualifying ratio that is also considered in conjunction with a housing expense ratio when determining approval for a mortgage loan. Debt-to-income ratios divide a borrower’s total debt service, including housing debt and all other debt by a borrower’s monthly income.

Total housing expense adds up all of the relevant ongoing costs needed to maintain home ownership.

What Is Total Housing Expense?

Total housing expense is the sum of a homeowner's monthly mortgage principal and interest payments plus any other monthly expenses associated with their home such as insurance, taxes or utilities. Total housing expense is a key component in the calculation of a borrower’s housing expense ratio which is used in the underwriting process for a mortgage loan.

Total housing expense adds up all of the relevant ongoing costs needed to maintain home ownership.
This will include monthly bills, insurance costs, taxes, and homeowners association dues in addition to mortgage interest and principal.
Total house expense is essential in determining whether a borrower can truly afford to carry the home that they wish to purchase.

Understanding Total Housing Expense

A mortgage cost is largely made up of loan interest and principal payments. Some mortgages also have escrow accounts that pay out property taxes and mortgage insurance (PMI). However, other ongoing home expenses must be factored into affording a home.

Total housing expenses can encompass a wide range of costs including bills, utilities, insurance premiums, and taxes in addition to direct mortgage costs. A borrower’s total housing expenses are typically required in a credit application for a mortgage loan. These expenses are measured by the borrower’s total housing expense ratio. Mortgage loan underwriters will also require that a borrower provide details on their total debt, which is measured by a borrower’s debt-to-income ratio.

Mortgage Loan Qualifying Ratios

The total housing expense ratio is one of two qualifying ratios commonly analyzed by an underwriter in the approval process for a mortgage loan. Some lenders will focus just on a borrower’s mortgage principal and interest payments while others may require a broad analysis of housing costs. For a borrower, housing costs will include the principal and interest on a mortgage. It may also include a variety of other items such as insurance premiums, property taxes, and homeowner's association fees.

The housing expense ratio divides a borrower’s total housing expenses by their monthly income. This ratio must typically be approximately 28% or less for approval. It is also known as the front-end ratio.

Debt-to-income is a second qualifying ratio that is also considered in conjunction with a housing expense ratio when determining approval for a mortgage loan. This ratio is known as the back-end ratio. Debt-to-income ratios divide a borrower’s total debt service, including housing debt and all other debt by a borrower’s monthly income. This ratio must generally be approximately 36% or less for approval. In some cases, higher debt-to-income levels may be allowed for mortgage loans sponsored by government agencies. Agencies can allow debt-to-income ratios on mortgage loans of approximately 50% or less.

Mortgage loan underwriters use qualifying ratios for approvals and also for determining principal amounts. If approved for a mortgage loan, a lender will consider a borrower’s housing expense ratio and debt-to-income ratio capacity in determining the maximum amount they are willing to lend.

Mortgage lenders will also typically factor in a loan-to-value ratio based on the risks determined in the credit underwriting and property approval analysis. The loan-to-value ratio will also influence the maximum principal offered and the down payment required by the borrower.

Related terms:

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

Housing Expense Ratio

Housing expense ratio is a ratio comparing housing expenses to pre-tax income. Discover more about the housing expense ratio here. read more

Interest

Interest is the monetary charge for the privilege of borrowing money, typically expressed as an annual percentage rate. read more

Lender

A lender is an individual, a public or private group, or a financial institution that makes funds available to another with the expectation that the funds will be repaid. 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

28/36 Rule

The 28/36 rule is used to calculate debt limits an individual or household should meet to be well-positioned for credit applications. read more