# Housing Expense Ratio

Posted in Finance, Accounting and Economics Terms, Total Reads: 489

## Definition: Housing Expense Ratio

Housing Expense ratio is the percentage of gross monthly income that is dedicated to housing expenses. It is a method by which lenders qualify borrowers for the mortgage loan.

To calculate housing expense ratio:

• We need to estimate the future monthly housing expense which includes principal and interest payment, property tax, insurance, and any other housing association fees.

• Calculate the gross monthly salary before tax, including overtime payments, bonuses, alimony and child support received.

• Calculate the percentage of estimated monthly housing expense to monthly income

Housing Expense Ratio= (Future Monthly Housing Expense)/(Monthly Income)

This is also called the top ratio and it should not exceed 28% of total monthly income for a person to be eligible for a mortgage loan. However a ratio higher than 28% may be acceptable to certain lenders if there are other compensating factors such as excellent credit history or having a co-borrower or low loan to value ratio (the value of collateral is much higher than the loan amount).

Also lenders calculate the debt to income or bottom ratio which is the ratio of the sum of estimated future monthly expenses and total monthly debt (includes credit card payments, consumer loans and other financial obligations) to monthly income.

Debt to Income Ratio= ((Future Monthly Housing Expense+Total Monthly Debt))/(Monthly Income)

Typically this ratio should not exceed 36% for disbursing a mortgage loan.

For e.g. If Jack’s salary is 10,000\$ per month and his future monthly expenses including mortgage payment, fire insurance, property tax and association fee are 2800\$, and his monthly bills including credit card and personal loan payments are 2000\$, we can calculate the ratios as given below

Housing Expense Ratio= 2800/10000= 28%

Debt to Income Ratio= (2800+2000)/10000=48%

So the Housing Expense ratio is within the limit of 28% but the Debt to Income ratio is 48% which exceeds the limit of 36%.

Hence, this concludes the definition of Housing Expense Ratio along with its overview.

Browse the definition and meaning of more terms similar to Housing Expense Ratio. The Management Dictionary covers over 7000 business concepts from 6 categories.

Search & Explore : Management Dictionary

Similar Definitions from same Category: