Definition:
The housing expense ratio is the percentage of a borrower’s gross monthly income that goes toward housing costs, including mortgage payments, property taxes, insurance, and HOA fees. Lenders use it to help determine if a borrower can afford the loan.
Example:
Lena earns $6,000 per month before taxes. Her proposed monthly mortgage payment, including taxes and insurance, is $1,500. Her housing expense ratio is 25% ($1,500 ÷ $6,000), which falls within most lenders’ acceptable range.
Explanation:
Lenders use the housing expense ratio—also called the "front-end ratio"—to evaluate a borrower’s ability to handle mortgage payments. It measures how much of your gross (before-tax) monthly income would be spent on housing if the loan is approved.
The housing expense ratio typically includes:
- Mortgage principal and interest
- Property taxes
- Homeowner’s Insurance
- HOA dues (if applicable)
Most lenders prefer this ratio to be no higher than 28% of gross monthly income, though some loan programs, like FHA loans, may allow higher percentages. If the ratio is too high, the lender may view the borrower as a higher risk for default and either deny the loan or ask for a smaller loan amount or larger down payment.
This ratio is often used alongside the debt-to-income (DTI) ratio, which includes all monthly debt obligations—not just housing.
Why is Housing Expense Ratio Important in Real Estate Transactions?
The housing expense ratio is important because it directly affects how much home a buyer can afford. For buyers, understanding this ratio helps set a realistic budget. For sellers, it helps identify serious, pre-qualified buyers. Lenders rely on it to make safe lending decisions. In short, this ratio keeps both buyers and lenders protected from overextending financially.