Housing Expense Ratios

An Explanation of the Front Ratio and Debt-to-Income Ratio

 

Your housing expense ratio is an important metric when you’re applying for a mortgage. Even if all other factors in your application are acceptable to your lender, having a subpar expense ratio means that you are likely to be denied.

 

The Housing Expense or Front Ratio

The housing expense ratio, sometimes referred to as the front ratio, quantifies just how much mortgage payments will affect your income. This metric compares all of your housing expenses—mortgage principal, interest payments, hazard insurance, property taxes, mortgage insurances and association fees—with your household income before tax.

 

What is a Good Housing Expense Ratio?

Typically, the highest expense ratio a lender will accept is 28%. If your expense ratio is higher than 28%, you may still be qualified for some mortgages if you have a low loan-to-value ratio or a truly excellent credit history. Additionally, applying jointly with a co-borrower could potentially lower your housing expense ratio. This could result in more debt down the line, however, so buyers should be careful.

 

The Debt-to-Income Ratio

Most lenders will also take your debt-to-income ratio into consideration as well. This metric includes all debt payments, such as car and student loans, thus providing a more in-depth look at how a mortgage would affect your finances. If you need to lower your debt-to-income ratio, you can do so by increasing monthly gross income or by decreasing your monthly debts.

 

What is a Good Debt-to-Income Ratio?

Your debt-to-income ratio when applying for a mortgage should be no higher than 43%. Most lenders prefer that you have a debt-to-income ratio of 36% or lower, and according to some experts, your debt-to-income ratio should be no higher than 28% if you’re applying for a mortgage. It’s a good idea to make sure that most of your debts are paid off or are close to being paid off before making the decision to apply for a mortgage and purchase a home. This ensures you’ll have a low debt-to-income ratio, which means you’re more likely to be approved for a mortgage.

 

In order to be approved for a mortgage, a buyer must have an excellent credit score as well as a good housing expense ratio. Knowing how housing expense ratios work ensures that buyers will be more prepared when they apply for a mortgage, thus increasing their chances of being approved.