Definition and Example of the Housing Expense Ratio
- Alternate names: house-to-income ratio, front-end DTI ratio, PITI ratio
The housing expense ratio is also known as front-end debt-to-income (DTI) ratio. Its counterpart, back-end DTI, factors in all of your debt—housing costs plus any credit card balances, loans, and other debt obligations.
How the Housing Expense Ratio Works
The housing expense ratio is one of the important income-related data points that lenders look at carefully to make sure a borrower has enough stable income to afford their loan obligations. Aspiring homeowners should get a sense of their housing expense ratio to learn how much home they can afford.
A good rule of thumb: Most conventional lenders prefer to see a housing expense ratio of 28% or less. Other loan programs may vary, like those of the Federal Housing Administration (FHA), which allows for a slightly higher ratio of 31%. Just remember that mortgage lenders look at this number in context with the borrower’s DTI and other factors, so exceptions are sometimes made to allow for a slightly higher ratio.
If you’re in the early stages of homebuying research, you can estimate what your housing expenses would be using a mortgage calculator. You’ll need this to determine your housing expense ratio.
How to Calculate The Housing Expense Ratio
To figure out your housing expense ratio, simply divide your projected monthly mortgage payment by your monthly gross income (that’s the total you earn before taxes and deductions).
So let’s say your total PITI expenses would be $1,800 and you earn $7,000 per month in gross income. Just divide $1,800 by $7,000, and you’ll get a ratio of 25.7%.
Housing Expense Ratio vs. Debt-to-Income Ratio
|Housing Expense Ratio||Debt-to-Income Ratio|
|Includes PITI expenses||Includes PITI + all other monthly debts|
|Lenders generally prefer this to be 28% or less||Lenders prefer this to be 36% or less|
Housing expense ratio and debt-to-income (DTI) ratio are two distinct figures. The main difference between the two ratios is the scope. While the housing expense ratio includes all PITI expenses (principal, interest, taxes, and insurance), the DTI covers your full debt, meaning PITI as well as any monthly bills you have, such as auto loans, student loans, personal loans, credit cards, child support, alimony, etc.
Also, mortgage lenders look for a housing expense ratio below 28%, and a DTI below 36% (though in some cases up to 45% is acceptable. Exceptions can be made for both ratios, depending on the lender and type of loan.
You can improve your housing expense ratio by finding a less expensive mortgage, or applying a larger down payment to reduce your monthly bill. The best way to reduce your DTI ratio is to lower your existing debt overall.
What the Housing Expense Ratio Means for Borrowers
You should go into the homebuying process knowing your approximate housing expense ratio. That way, if yours is 28% or less, you can feel fairly confident that you’ll meet at least that part of the lender’s criteria.
Keep in mind that lenders look at your overall DTI ratio and credit history, as well. So in some cases, and for certain loan programs, a slightly higher housing expense ratio may not disqualify you from being approved if your credit score is good.
If your ratio is on the high side, you may be able to drive it down in the months before you apply for a mortgage. First, apply a larger down payment, which will lower your monthly mortgage bill. If you can manage it, put down 20% or more, which will eliminate having to pay private mortgage insurance (PMI). This is another way to lower your monthly housing expenses.
It’s also smart to shop around for the lowest interest rate possible, which will lower your monthly mortgage payment. Improving your credit score in the months preceding your house hunt could further help you qualify for better rates.
- Housing expense ratio shows the percentage of one’s income that is needed to cover the monthly mortgage payment, property taxes, and home insurance.
- This ratio is one of the key figures that lenders look at when determining if a borrower can afford a mortgage.
- In general, lenders prefer a housing expense ratio of 28% or less.
- Borrowers should try to figure out both their housing expense ratio and debt-to-income ratio to gauge their likelihood of getting approved for a mortgage.
- If your housing expense ratio is high, consider shopping for less expensive homes or better interest rates. You could also put down more money to reduce your monthly payment amount (and, therefore, your housing expense ratio).
Frequently Asked Questions (FAQs)
How can I get a better housing expense ratio?
You can lower your housing expense ratio by focusing on either component: either decrease the amount you plan to pay on your mortgage, or increase your monthly income. That's the simple mathematical explanation, but in practice this takes some strategy and effort. Talk to your lender about ways to get a lower monthly mortgage payment. This could mean a longer loan term, or putting more money down upfront. If you have some home equity, you might be able to refinance for a lower monthly payment as well.
What is the 28/36 rule?
People in the homebuying market commonly use the 28/36 rule to calculate how much debt a homebuyer can reasonably take on. It is also a description of manageable debt-to-income ratio (DTI). According to this rule, you shouldn't pay more than 28% of your monthly pre-tax income on your mortgage payment, and it shouldn't account for more than 36% of your total debt.
Quicken Loans. "Housing Expense Ratio."
Freddie Mac. "Monthly Housing Expense-to-Income Ratio." Accessed Sept. 2, 2021.
Department of Housing and Urban Development. "Section F. Borrower Qualifying Ratios," Page 4-F-4.
Fannie Mae. "What Is the Maximum DTI Allowed?"
Freddie Mac. "The Math Behind Putting Less Than 20% Down."