Alternate names: house-to-income ratio, front-end DTI ratio, PITI ratio
How the Housing Expense Ratio Works
The 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.
How to Calculate The 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
Also, mortgage lenders look for a housing expense ratio below 28%, and a DTI below 36% (though in some cases up to 45% is acceptable. Exceptions can be made for both ratios, depending on the lender and type of loan. You can improve your housing expense ratio by finding a less expensive mortgage, or applying a larger down payment to reduce your monthly bill. The best way to reduce your DTI ratio is to lower your existing debt overall.
What the 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. 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.
