The housing expense ratio plays a crucial role in mortgage underwriting by showing lenders what portion of your monthly income is committed to housing costs. It is also called the front-end ratio and is one part of the broader debt-to-income (DTI) analysis.
How to Calculate the Housing Expense Ratio
To calculate your housing expense ratio, divide your total monthly housing costs by your gross (pre-tax) monthly income, then multiply by 100 to get the percentage:
(Total Monthly Housing Costs / Gross Monthly Income) × 100 = Housing Expense Ratio %
Your total monthly housing costs include the principal and interest payments on your mortgage loan, property taxes, homeowner’s insurance, and homeowners association (HOA) fees if applicable. This sum is commonly referred to as PITI—Principal, Interest, Taxes, and Insurance. For details about PITI, see our article on PITI (Principal, Interest, Taxes, Insurance).
Your gross monthly income is your total earnings before any taxes or deductions. For self-employed individuals, it reflects net business income.
Why It Matters to Lenders
Lenders use the housing expense ratio to evaluate your ability to afford monthly mortgage payments without jeopardizing your financial stability. A commonly cited guideline is the 28% rule, meaning housing costs should not exceed 28% of your gross income. However, the overall debt-to-income ratio, which includes all monthly debt payments, should generally not exceed 36%.
Learn more about overall loan qualification and DTI in our Debt-To-Income Ratio article.
Example:
If your gross monthly income is $7,000 and your total monthly housing expenses (PITI plus HOA fees) are $1,800, your housing expense ratio is:
($1,800 / $7,000) × 100 = 25.7%
This is within the typical acceptable range for most lenders.
Tips to Improve Your Housing Expense Ratio
- Increase your income: Consider negotiating a raise, switching jobs, or earning additional income.
- Reduce housing costs: Look for less expensive homes, increase your down payment to lower loan principal, or shop for cheaper homeowner’s insurance.
- Boost your credit score: A higher credit score can qualify you for lower interest rates, reducing mortgage payments.
Common Misconceptions
- The housing expense ratio is not the only factor lenders consider; your total debt, creditworthiness, savings, and job stability also impact loan approval.
- It’s based on gross income, not your take-home pay.
- Meeting the 28% guideline doesn’t guarantee loan approval but helps meet standard lending criteria.
For official guidance, refer to the Consumer Financial Protection Bureau for detailed standards on Qualified Mortgages and debt ratios.
By understanding and managing your housing expense ratio, you can better prepare for successful home financing and make informed decisions about what you can afford.