A guide to the housing expense ratio

The housing expense ratio helps aspiring home buyers understand how much they can afford to borrow to buy a home. It’s used by lenders to assess whether a loan applicant can afford to repay a mortgage.

What is the housing expense ratio?

The housing expense ratio shows how much of your gross income is taken up by housing expenses, expressed as a percentage. It helps borrowers and lenders evaluate how affordable a loan is.

It’s one metric lenders use to gauge creditworthiness and is similar to the debt-to-income ratio, which measures how much of your monthly gross income is taken up by debt payments. DTI considers all monthly debts, including auto loans, student loans, and credit cards.

Lenders often refer to the housing expense ratio as the front-end ratio and DTI as the back-end ratio.

Though loan requirements vary, most lenders require you to maintain a DTI of 36% or lower. The lower your DTI, the easier it is to qualify for a mortgage and the better loan terms you can secure.

How to calculate your housing expense ratio

Here are three steps to calculating your housing expense ratio.

1. Add up your housing expenses

First, add up all your housing expenses, including the estimated mortgage payment for the home you’re hoping to buy. Also include your monthly rate for property taxes, homeowners insurance, private mortgage insurance, and homeowners association fees. 

Here’s an example, based on buying a for $416,900 with a 10% down payment and a 30-year fixed rate mortgage at 6.84%. The other figures are estimates.

2. Divide by your gross income

Figure out your gross monthly income. This is what you earn before taxes and deductions, such as health insurance and saving for retirement.

Say you and your spouse have a household gross income of $12,000 a month. You would divide your monthly housing costs of $3,037 by $12,000 and multiply the result by 100 to get a housing expense ratio of 25%.

3. Evaluate the results

Once you’ve calculated your housing expense ratio, you can compare it with different lenders’ loan requirements and your own budget and comfort level. 

What is the 28/36 rule, and how does it affect your loan?

The 28/36 rule is an industry rule of thumb that says your front-end ratio should not exceed 28%, and your back-end ratio should not exceed 36%.

Using the example above, the front-end ratio of 25% meets this rule. But if you have debts such as credit cards, student loans, and auto loans that push your DTI ratio past the 36% mark. In that case, you may need to focus on paying down your debts to meet the 28/36 rule and get approved for a mortgage.

Though loan requirements vary, most lenders require a DTI ratio of 36% or lower. The lower your DTI ratio, the easier it is to qualify for a mortgage and the better loan terms you can secure.

The bottom line: Calculating the housing expense ratio leads to financial empowerment

Calculating your housing expense ratio helps you understand how much you can afford to borrow to buy a house. This saves you from wasting time looking at homes you can’t afford and gives you a better idea of what lenders are looking for.

Take the next step on your home buying journey by reaching out to a Rocket Mortgage^® Home Loan Expert today.