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A Guide To The Housing Expense Ratio

Andrew Dehan3-minute read

September 19, 2022

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Your housing expense ratio, also known as the house-to-income or housing ratio, is a useful indicator to see how much you can afford on a house. Your lender will use it while underwriting your mortgage. This guide will lay out what 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 Ratio?

The housing expense ratio, also called the front-end ratio, is a percentage determined by dividing the borrower’s housing expenses by their pre-tax income. At its most basic, it’s a simple number showing how much of your income goes to paying for housing, and considers your mortgage payment, insurance, taxes and more. Mortgage lenders use this ratio to help determine whether a home buyer qualifies for a mortgage loan.

Lenders frequently use the housing expense ratio in conjunction with the debt-to-income ratio (DTI). DTI helps lenders see how much you spend on monthly debts versus how much money you have coming into your home.

Both of these formulas give lenders a better view of your financial situation without having to check your credit score or debt payment history.

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How To Calculate Your Housing Expense Ratio

To calculate your housing expense ratio, take your pre-tax monthly income and weigh it against housing expenses. This formula is what mortgage lenders do to determine the risk involved with a loan and is 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-related costs. For the first step of our example, we’ll use a loan amount of $250,000 for 30 years at a 3.2% interest rate. 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 median family gross income (annual pre-tax earnings) 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 number means that 27% of our pre-tax income goes to housing costs.

Evaluate The Results

At this point, an underwriter knows that our example gross monthly income will work with a loan. The rule of thumb to qualify for a mortgage with the housing expense ratio is that anything below 28% is good. Above 28%, you may be stretched too thin and may struggle to cover your monthly mortgage payment or other debt obligations.

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. Mortgage lenders want to make sure you have affordable housing, so if your income isn’t high enough to make the loan payments, you won’t be approved.

While some loan programs 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 or look for lower housing prices and smaller monthly payments. In other words, you can make a bigger down payment, find a more affordable home or house hunt in an area without HOA fees or lower real estate 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. When used together, the housing expense ratio is referred to as the “front-end ratio,” and the DTI ratio is referred to as the “back-end ratio.”

Where your housing expense ratio only includes housing expenses, 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 of 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.

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.