Housing Expense Ratio

The housing expense ratio is a percentage derived from dividing all of a borrower’s monthly obligations by their gross monthly income. The borrower’s monthly expenses usually include principle on the loan, interest, property taxes, insurance and any association dues. This ratio is used by lenders to determine the credit worthiness of a prospective home buyer. The lender may also refer to this as the front end ratio, front ratio or debt-to-income ratio. There is a top ratio and bottom ratio in deciding what a buyer can afford, but the general rule among lenders is that this ratio should not be more than 28 percent. For example, if a potential buyer expects to spend $1500 in monthly housing expenditures and has a gross monthly income of $6000, his or her housing expense ratio would be 25 percent.