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Housing Expense Ratio: What It Is & How To Calculate It

Written by Paul Esajian

To understand what home you can afford on the market, you need to know the housing expense ratio. It’s a critical indicator of what you can and cannot afford. It’s also vital to determine if you qualify for a loan to give you and the lender confidence.

The housing expense ratio is a vital part of the home-buying process today, and it can mean the difference between getting approved for a loan and receiving a denial from a lender. Let’s talk about what it is and how you can calculate it for your future.

What Is The Housing Expense Ratio?

The housing expense ratio, also known as the front-end ratio, represents a percentage. This percentage is the amount of the borrower’s tax, pre-income, that goes toward the monthly housing expenses. It’s a helpful value to know.

Housing expenses include property taxes, mortgage insurance, and HOA fees. The underwriter determines the housing expense ratio and uses it to determine if you can pay for the home you want. They can approve or deny the request, even if you have an excellent credit score on the market.

A housing expense ratio is simple. It’s a number that shows how much of your income pays for housing. It’s critical for your safety and the financial future of the lender.

How Does The Housing Expense Ratio Work?

The housing ratio works as a crucial player in a mortgage, and it determines if you can pay back what you owe on a mortgage taken out on a home.

The housing expense ratio works with the debt-to-income ratio. These numbers are critical to the underwriting process and can lead to a denial of loans, even if the person is in good standing with their credit score.

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housing expense ratio

How To Calculate Your Housing Expense Ratio

If you want to know your housing expense ratio right now, it’s possible. You need to follow a few steps to calculate your housing expense ratio.

Here are the steps:

  1. Combine All Housing Expenses

  2. Calculate Your Total Gross Salary

  3. Divide By Your Pre-Tax Income

  4. Evaluate The Results

You will have an answer after these.

Each step is necessary to find a percentage with the housing ratio formula. Let’s talk about each one a little more.

1. Combine All Housing Expenses

First, you need to find all of your housing expenses. Lay them out and combine them to determine an average per month. The fees come with a mortgage and other taxes and fees paid to own a home. This number is critical as a starting point to calculate housing expenses, so ensure you get it right with a housing expense calculator.

Housing expenses include principal and interest mortgage payments, estimated property taxes, homeowner’s insurance, mortgage insurance, and housing association fees. Add these together and note the total you pay per month.

2. Calculate Your Total Gross Salary

Next, consider the job you have. Calculate your total gross salary. This number should be written down or placed in a housing expense ratio calculator with the other number from your housing expenses.

Gross salary differs for everybody. It might include what you earn from a job, and it might incorporate money from a business. It might mean money from bonuses, overtime, child support, and alimony.

This salary includes everything you earn in a month. Add it together and determine what one month looks like for you. Once you have it, take your gross income number and housing expenses, and move on to the next step.

3. Divide By Your Pre-Tax Income

Next, it’s time to divide your expenses by your pre-tax income. Let’s examine an example – a family with a pre-tax income of $7,000 a month and expenses of $1,000 a month.

Take the expenses, $1,000, and divide it by the pre-tax income, $7,000. You end up with .14 or 14%. That means that if you pay $1,000 a month for expenses and earn $7,000 a month pre-tax, 14% of your money goes towards paying debts.

4. Evaluate The Results

Once you reach this stage, you have your final answer. It’s time to examine the number to determine if there is hope for a loan in the future with your housing expense ratio.

You need enough money to pay for your home and cover a loan. A lender will hesitate to give you money if the ratio is too high because they want to make it back.

Most lenders want a housing expense ratio below 28%. Although there are options if you drift above this percentage, they are much rarer and tricky to locate. Reduce your housing expense ratio for more affordable housing on the market.

Housing Expense Ratio vs. Debt-to-Income Ratio

The housing expense and debt-to-income ratio might seem similar, but they are different figures. Understanding the difference between the two is critical to provide you with all the knowledge you need in the borrowing process.

The housing expense ratio includes PITI expenses. Most lenders want this number to hit 28% or lower if you want approval for a mortgage.

The debt-to-income ratio includes PITI expenses and other monthly debts you owe. Lenders want to see the debt-to-income ratio at 36% or below if you need approval for a mortgage.

These ratios sit next to each other to determine how reliable a potential new homeowner will be when repaying their loans. They work together in something called the 28/36 rule.

What Is The 28/36 Rule & How Does It Affect Your Loan?

The 28/36 rule is commonplace in the housing market, but not everyone knows what it means. This standard can have an impact on your loans for a home.

In this rule, 28 represents the housing expense ratio. The 36 depicts the debt-to-income. The housing expense ratio, in this case, is the front-end ratio, while the debt-to-income is the back-end ratio.

If you spend more than 36% on loan repayment, it might be tricky for you to land a mortgage for a home. Lenders are less confident in your ability to have enough money.

To improve your shot at a mortgage, pay off your debts. This action will lower your debt-to-income ratio and make home ownership more likely.


It’s critical to know if you can buy a home or if you qualify for a mortgage before settling on a final choice. The housing expense ratio is a percentage that determines how much of your income pays for the home. It helps underwriters decide if you will pay or if they should refuse the loan. Calculate your housing expense ratio to see where you are.

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