Housing Expense Ratio

What Is A Housing Expense Ratio?

A housing expense ratio is a figure that compares housing costs to pre-tax earnings. It is frequently used by lenders to approve customers for loans. A front-end ratio is another name for this ratio.

Deeper Definition

For a mortgage loan, the housing expense ratio is used to assess a borrower’s credit profile. This ratio assesses a borrower’s capacity to pay back a house loan.

Borrowers with good credit may be denied a mortgage because of their income ratios. Having a co-borrower, such as a spouse, can help to reduce the housing expense ratio. When examining a borrower’s credit profile for a loan, one indicator utilized is the housing expense ratio. It’s most commonly used in mortgage loans to assess a potential borrower’s capacity to repay a home’s mortgage obligation.

When establishing the maximum credit amount to provide to a borrower, this ratio is usually utilized in conjunction with debt-to-income. Even with a decent credit score, income ratios are an important part of the screening process and can prevent an applicant from gaining credit approval. An underwriter will include all of a borrower’s housing expenditure responsibilities, including possible mortgage principal and interest payments, property taxes, hazard insurance, mortgage insurance, and association fees when computing the ratio.

The sum of the housing expenses is then divided by the borrower’s pre-tax income to arrive at the housing expense ratio. This can be calculated using monthly payments or annual payments. The threshold for mortgage loan approvals is typically 28%.

Housing Expense Ratio Example

Jane wants to buy a new house and applies for a mortgage with Bank of America. In order to determine whether Jane is to be accepted for the mortgage, the bank takes a look at Jane’s total amount of debt and her income. Jane has a current debt of $5,000 due to spending on her credit card. Her income is above the national average. She earns $70,000 per year. Her housing expense ratio is therefore very low, so Jane is accepted for the mortgage.