A housing expense ratio is one of the major calculations that mortgage lenders use to determine what percentage of a borrower’s income will be needed to cover housing expenses. Housing expenses include the mortgage payment (principal and interest), property taxes, insurance, and other home-related fees like maintenance or homeowner’s association dues.
Learn more about the housing expense ratio requirements for borrowers, as well as how to calculate and improve yours.
Definition and Examples of Housing Expense Ratio
Housing expense ratio refers to how much of your income is needed to pay your monthly mortgage and housing costs (sometimes called PITI: principal, interest, taxes, and insurance).
- 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 Does Housing Expense Ratio Work?
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.
Calculating 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 and debt-to-income (DTI) ratio are two distinct figures. Here are the differences:
|Housing Expense Ratio||Debt-to-Income Ratio|
|Includes PITI expenses||Includes PITI + all other monthly debts (auto loans, student loans, personal loans, credit cards, child support, alimony, etc.)|
|Lenders generally prefer this to be 28% or less (depending on loan type, some exceptions will be made)||Lenders prefer this to be 36% or less, but may still approve borrowers who have up to 45% DTI in some cases|
|Might be improved by finding a less expensive mortgage or applying a larger down payment to reduce your monthly bill||Can be improved by lowering your housing costs or paying down any of your existing debts|
What 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).