Housing Expense Ratio

What it is

The housing expense ratio (also called the front-end ratio) is the percentage of your gross (pre-tax) income that goes toward housing costs. Lenders use it to help decide whether you can afford a mortgage.

Formula:
* Housing Expense Ratio = (Monthly housing expenses ÷ Monthly gross income) × 100

What counts as housing expenses

Common items included by mortgage underwriters:
* Mortgage principal and interest
Property taxes
Homeowners or hazard insurance
Mortgage insurance (PMI) if applicable
Homeowners association (HOA) or condo fees

Lenders typically calculate this using monthly amounts, but annual totals can be converted to a monthly figure.

Typical benchmarks

• A common guideline is a housing expense ratio of 28% or less of gross income.
• Lenders also evaluate your overall debt-to-income (DTI) ratio; a common target is 36% or lower, though some lenders allow up to 45% for borrowers with strong credit or other compensating factors.

Housing Expense Ratio vs. Debt-to-Income (DTI)

• Housing expense ratio (front-end) focuses only on housing-related costs.
• DTI (back-end) includes all monthly debt obligations—housing plus credit cards, student loans, auto loans, and other recurring debt.
  Underwriting considers both: the front-end shows housing affordability; the back-end shows total debt load.

28/36 rule

A simple budgeting rule:
* Spend no more than 28% of gross monthly income on housing.
* Keep total debt payments below 36% of gross monthly income.

These are guidelines, not guarantees—individual lender requirements differ.

Variations and lender flexibility

Lenders may accept higher front-end ratios if you have:
* Excellent credit history
Low loan-to-value (LTV) ratio (large down payment)
Co-borrower income that reduces the ratio
Adjustable-rate mortgages with lower initial payments can reduce your initial housing ratio, but future payment increases may affect affordability.

Household expense ratio (different concept)

A household expense ratio is a budgeting metric that compares daily living costs (groceries, utilities, transportation, etc.) to income. It’s distinct from the housing expense ratio and is often used for personal budgeting rather than mortgage underwriting. A common target is keeping household expenses below 50% of gross income.

Practical tips

• Calculate using gross (pre-tax) income.
• Include all housing-related costs lenders will count (PITI + HOA + mortgage insurance).
• Run both front-end and back-end calculations before house hunting to estimate what you can afford.
• Reduce the ratio by increasing income, making a larger down payment, paying down other debts, or choosing a less expensive home.
• Remember lender approval ≠ comfortable budget—factor in savings, repairs, and unexpected expenses.

Bottom line

The housing expense ratio is a key metric mortgage lenders use to assess affordability. Keeping it low improves your chances of approval and helps ensure a mortgage fits your overall financial picture.