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A Guide To The Housing Expense Ratio

Andrew Dehan3-minute read

December 15, 2020

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Your housing expense ratio, also known as house-to-income ratio, is a useful indicator to see how much house you can afford. Your lender will use it while underwriting your mortgage. This guide will lay out what exactly it is, how to calculate it and what it means for you.

Read on to learn more about this important term.

What Is The Housing Expense Ratio?

The housing expense ratio is determined by dividing a borrower’s total housing expenses from their pre-tax income. Mortgage lenders use the housing expense ratio to help determine whether borrowers qualify for loans.

At its most basic, it’s a simple percentage, showing how much of your income goes to paying for housing. It considers your mortgage payment, insurance, taxes and more.

Lenders frequently use the housing expense ratio in conjunction with the debt-to-income ratio (DTI). DTI is a way lenders see how much you spend verses how much money you have coming into your home.

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How To Calculate Your Housing Expense Ratio

To calculate your housing expense ratio, take your pre-tax income and weigh it against housing expenses. This is what mortgage lenders do to determine the risk involved with a loan. It’s officially performed by an underwriter.

Let’s break down the calculation for you step-by-step. We’ll walk it through with an example so you can see how it fits together.

Add Together All Housing Expenses

To determine your housing expense ratio, a mortgage underwriter adds together all your housing expenses. For the first step of our example, we’ll use a loan of $250,000 for 30 years at 3.2% interest. The taxes, HOA fees, homeowners insurance and private mortgage insurance used are based on national averages.

Added together, this brings the total monthly housing expense to $1,925.50.

Divide By Pre-Tax Income

The next step is to compare your expenses to your pre-tax income. For this example, we’ll use the national median family income of $86,011. That breaks down to $7,167.58 monthly.

To determine our housing expense ratio, we’ll divide our expense ($1,925.50) by our income ($7,167.58). Rounded up, our result is 0.27, or 27%. This means that 27% of our pre-tax income goes to housing costs.

Evaluate The Results

At this point, an underwriter knows how our example will work with a loan. The rule of thumb for the housing expense ratio is that anything below 28% is good. Above 28% and you may be stretched too thin.

Final loan approval decisions are made using this threshold. It’s an important number to determine if you can or can’t afford a home.

While there are loan programs that allow for higher housing expense ratios, your options will be limited above 28%. If you find yourself in this situation, you can consider ways to reduce your expense ratio. These include making a bigger down payment, finding a more affordable home or house hunting in area without HOA fees or lower taxes.

What Is The 28/36 Rule, And How Does It Affect Your Loan?

In the 28/36 rule, the “28” is your housing expense ratio and the “36” is your DTI, or debt-to-income ratio. The housing expense ratio is referred to as the “front-end ratio” and the DTI ratio is referred to the “back-end ratio” in the context of this rule.

Where your housing expense ratio only includes housing expense, your DTI factors in debt like car loans, student loans and credit cards. If over 36% of your income is being spent to pay off debt, you may have more difficulty getting a home loan. Paying down your debt to lower your DTI will help your chances getting a mortgage.

The Bottom Line

The housing expense ratio, or house-to-income ratio, is a quick way you and your lender can determine how much house you can afford. If you’re thinking about applying for a loan, you should calculate your housing expense ratio before you apply.

Take it a step further and learn more about your debt-to-income ratio. Want to find what purchase options you qualify for based on your housing expense and DTI ratio results? Use Rocket Mortgage® to get your answers.

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Andrew Dehan

Andrew Dehan is a professional writer who writes about real estate and homeownership. He is also a published poet, musician and nature-lover. He lives in metro Detroit with his wife, daughter and dogs.