An Overview of Housing Expense Ratio

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How is Housing Ratio Calculated

Before buying a house, one of the first and most important things to consider is finance. You should always buy a house you can afford conveniently; failure to do so would create quite a disaster in your finances.

The real estate market is competitive as there are more buyers for a limited number of available houses.  However, since finance is a major issue when it comes to purchasing a house, getting a mortgage and apportioning your income appropriately seems to be a better idea.

In a way, this would allow you to compare your income against your expenses.

If you then need to buy a house and you are not certain if you can afford it, making use of the housing expense ratio is the best way to find out. In this article, we will be discussing the housing expense ratio and the best way to calculate it before buying your desired house. Let’s start by finding out what the housing expense ratio is all about.

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What is a Housing Expense Ratio? 

The house-to-income or housing ratio, otherwise known as the housing expense ratio, is basically used to calculate how much income can be used to buy a house, including mortgage payments.

It is important to note that by making use of the housing ratio, you cannot be able to determine the overall cost of buying a house as its main focus is to calculate the monthly income that can be apportioned to the housing expenses. Lenders usually prefer and approve a housing expense ratio of 28% or less when calculated.

Most lenders use the housing ratio to calculate and determine the borrower’s income and the percentage that would be used to cater for the monthly housing expenses. In simple terms, the housing expense ratio is used to approve or disqualify an intending borrower for housing expenses.

The housing expense ratio is used by lenders in mortgage loans where they can carry out a comprehensive assessment of a borrower’s credit profile to make sure that he or she can repay the mortgage loan conveniently.

To get approved on time for a mortgage loan, it is important for borrowers to check and also calculate their debt-to-income ratio against their housing expense ratio. Once calculated and you find out that your housing expense ratio is quite high, it is best to consider searching for houses that are less expensive or have good interest rates.

To lower your housing expense ratio, you can choose to decrease the amount you plan to pay on your mortgage loan or find other means of income to increase your overall monthly income.

Overall, talking with your lender to find out more ways to get a lower mortgage payment is considered the best.

How Does the Housing Expense Ratio Work? 

The housing ratio, or housing expense ratio, is a tool used by many lenders to either approve or disqualify a prospective lender by evaluating their monthly income against their housing expenses.

It is also a useful way to determine how the borrower intends to pay back the mortgage loan on the house they want to buy.

The housing expense ratio is calculated together with debt-to-income ratios simultaneously, and this is done like this to fully understand the borrower’s credit score and ability to pay back once the loan is approved.

Intending borrowers can also conveniently make use of the housing ratio to determine how much money they can afford to purchase a house.

Borrowers should always keep in mind that most lenders prefer to approve those who have a 28% or lower housing expense ratio.

How to Calculate the Housing Ratio 

To calculate the housing expense ratio, or housing ratio, the borrower’s monthly expenses, such as utilities, insurance, and taxes, are summed together and then divided by the borrower’s pretax income.

The housing ratio can also be calculated by using both monthly and annual payments. To calculate the housing ratio, there are basic steps that must be followed. These are all going to be outlined below for your convenience.

  • Add all housing expenses 

Just as was earlier mentioned, all the housing expenses of the borrower must be added together before calculating the housing ratio. Things to be calculated may include tax, mortgage payments, insurance, utilities, and so on. The addition of all of these would give the borrower a clear view of his or her monthly expenses and also show if it would be possible to buy a house or not.

  • Calculate Your Total Income 

Next, you need to calculate your total monthly income as a borrower. The income to be calculated should include other sources of income, not just the salary paid from your job alone. Other income from side businesses, child support, or government aid should be included.

  • Divide by Your Pre-Tax Income 

To determine your housing expense ratio, you should also calculate your pre-tax income and divide it against your housing expenses.

For example, if you earn $7150 monthly and have monthly housing expenses of about $1924, you can simply calculate your housing expense ratio by dividing $1924, which is your total housing expense, by $7150, which is also your total housing income.

$1924 / $7150  = 0.269 (26.9%) This then means that your housing ratio has been calculated to be approximately 27% of pretax income for regular housing expenses.

  • Evaluate the results 

When you have successfully calculated your housing expense ratio, the next thing is to evaluate your results. Always remember that lenders prefer borrowers with a housing expense ratio of 28% or less.

Going by our above example, the borrower would much more likely be approved for the loan.

Anyone who has a housing expense ratio higher than the ideal 28% can still be approved for a mortgage loan; the only problem is that their loan options will be limited and there can be an unnecessary strain on their finances.

However, if you consider making a down payment or giving off collateral, lenders can increase your chances of getting higher mortgage loans, like those with a 28% or lower housing expense ratio.

You can also improve your housing expense ratio over time by looking for a more affordable home or getting a better job to cover your costs.

Simple Housing Expense Ratio Calculator


Why Is the Housing Ratio Important for Borrowers? 

By calculating the housing ratio, borrowers can confidently make decisions about the type of house they want to buy. Also, they can approach a lender and be sure that they have a better chance of getting approved for the loan without having to give up any collateral.

A housing expense ratio of 28% or lower gives the intending borrower a better chance of getting approved for the mortgage loan.

Borrowers who do not have the required housing expense ratio of 28% or less can still get approved, but the only difference is that their creditworthiness would be put into consideration and some might be requested to offer collateral for a higher mortgage loan.

Those with the perfect housing ratio score can skip all of these and get their preferred housing loan.


As has already been discussed extensively above, the housing expense ratio is a great tool for both lenders and borrowers when deciding to get a mortgage loan.

Borrowers can also use it to determine what type of housing is suitable and convenient for their expenses and needs.

With a housing ratio score of 28% or less and a good credit score, intending homeowners can be confident in approaching lenders and also have a higher chance of getting approved once they apply. The housing ratio gives intending homeowners a clear picture of what they can afford when they decide to go search for houses to buy.

Frequently Asked Questions

Does the Housing Expense Ratio Include MIP?

Mortgage insurance premiums (MIP) are put in place to assist lenders to approve mortgage loans for borrowers who may otherwise not qualify.

The main point of mortgage insurance premiums is to guard lenders from loan defaulters and losses. The housing expense ratio, however, does not include the MIP but the FHA includes it.

Housing Ratio and Debt Ratio 

The housing ratio is a part of the borrower’s total debt-to-income ratio, which would be considered when the need for the approval of a mortgage loan comes into play.

The housing ratio is required for showing the borrower’s pre-tax income, and this is an essential factor when determining both the housing ratio and the debt ratio.

The debt ratio is calculated by totaling the borrower’s monthly expenses, which always include insurance, taxes, utilities, and the mortgage payments and interest that he or she is about to make. This is then divided by the borrower’s income to determine if the mortgage loan will be approved or not.

What is the 36% Rule? [aka 28/36 Rule]

The 36% rule, or the 28/36 rule, is used as a reminder that the housing expense ratio of any intending homeowner or borrower should not exceed 28% of the gross monthly income to get approved.( and the debt-to-income ratio should not exceed 36%).

Debt to income FHA

The debt-to-income ratio is used to measure the borrower’s debts against his or her gross income every month. The gross income is the overall salary or paycheck received before tax by the borrower.

The FHA loan requirements always include a maximum debt-to-income ratio. When a borrower applies for an FHA mortgage, the creditworthiness, debts, and all areas of income are expected to be disclosed.

When this information is gathered, the FHA then calculates the borrower’s debt-to-income ratio. The FHA ratio score for mortgage loan approval is set at 31%. Borrowers are always encouraged to have a debt-to-income ratio of 36% or less to be approved faster for a mortgage loan.

FHA Housing Expense Ratio 

Unlike the housing expense ratio which has an acceptance score of 28% or less, the Federal Housing Administration (FHA) puts its approval score at about 31% for the front-end ratio and 43% for the back-end ratio. The FHA housing loan allows for a higher ratio to provide more options for borrowers with higher housing ratio scores to secure loans for their desired housing needs.

Income-to-expense Ratio for Mortgage

The back-end ratio, also known as the debt-to-income ratio, is used to determine the total income that will be used to cover monthly debts. To know your income-to-expense ratio for a mortgage, making use of the housing ratio formula is the best.

With this, you can know if you will be approved for a mortgage loan or not. Your housing expense ratio should follow the 28/36 rule.

What is the Total Housing Expense? 

The total housing expense includes those expenses that the borrower pays every month. These can include mortgage payments, taxes, utility bills, insurance, and other payments.

The housing expenses can cover a larger cost, and borrowers must submit the total of these expenses to be divided by their pre-tax income before they can be approved for a mortgage loan.

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