Housing expense ratio: What it is and how to calculate it

The housing expense ratio measures how much of your gross income goes toward your monthly housing expenses. Lenders look for a lower ratio as a sign that you can comfortably afford the loan without stretching your budget too thin.

For many buyers, that ratio isn’t just a number — it’s peace of mind. Knowing your limits up front helps you avoid the disappointment of falling in love with a home that’s outside your price range. 

Understanding this ratio also puts you in a stronger position with lenders that see you’re prepared to borrow responsibly. Read on to see how the housing expense ratio works and discover Better’s role in moving you from application to homeownership with less hassle.

...in as little as 3 minutes – no credit impact

What’s the housing expense ratio?

The housing expense ratio, sometimes referred to as the “front-end ratio,” is the percentage of your pre-tax (gross) income you use to pay for monthly housing costs. This includes property taxes, homeowners insurance, and mortgage payments. 

Lenders use your housing ratio, along with your credit score and debt-to-income ratio (DTI), to help determine how much you can realistically borrow. A lower front-end ratio shows that you can take on a mortgage without living beyond your means. 

That financial stability is exactly what lenders look for, and at Better, we use the latest AI technology to speed up the application process while keeping your data safe and secure. Apply in as little as three minutes to see your estimated interest rate and find out how much house you can afford.

...in as little as 3 minutes – no credit impact

How does the housing expense ratio work?

Lenders use the housing-to-income ratio to determine how well your wages cover your monthly housing costs. The lower the ratio, the less risky your application is. Many lenders consider 28% or below a healthy target. This extra cushion reassures lenders that even if your expenses rise or your income dips, you’re less likely to fall behind on mortgage payments. 

On the flip side, a higher housing income ratio makes lenders cautious. It suggests that even small unplanned costs could put your payments at risk. This doesn’t automatically disqualify you, but it could mean a less favorable interest rate. Other factors, like a low DTI ratio or strong credit score, can help mitigate concerns that come with a higher housing expense ratio.

What are housing expenses?

Housing expenses cover all the costs that come with owning a home, which often include the following:

Projected mortgage principal and interest

Principal is the money you borrow, while interest is the fee you pay the lender for borrowing money. Together, they form the core of your monthly mortgage payment, and lenders use this projection to estimate how affordable the loan is.

Property taxes

Higher property tax rates can push up your housing expense ratio and limit how much house you can manage, while lower rates may give you more room in your budget. 

These are based on the value of your home and vary dramatically depending on the state, from 0.18% in Louisiana right up to 1.89% in New Jersey. For borrowers, that difference can mean hundreds of dollars in extra costs each month. 

Homeowners insurance

Homeowners insurance covers damage to your home or possessions from events like fire, theft, and severe weather. While it’s not legally required, mortgage lenders may ask borrowers to get homeowners insurance to protect their investment. Premiums vary depending on the state and the value of the home, but the average cost for a $300,000 property is $2,110 a year.

Private mortgage insurance (PMI)

If you put down less than a 20% down payment on a home, you’ll need to pay for PMI, which protects the lender if you stop making mortgage payments. PMI premiums average 0.46% to 1.5% of the loan amount.

Homeowners association (HOA) fees

If you’re a member of an HOA, your fees go toward community-related expenses like landscaping, pool maintenance, and security services. Most homeowners in HOAs pay less than $50 a month, but the nationwide average is closer to $170. In high-end communities, fees can climb to $1,000 or more.

Utility bills

Some lenders include utilities, like electricity, water, and gas when reviewing your monthly expenses. Factoring in these recurring costs gives them a better picture of your overall financial commitments. It also helps ensure your budget can comfortably handle both your mortgage and day-to-day living expenses.

How can I calculate the housing expense ratio?

Let’s take a look at how to calculate your housing expense ratio.

Housing expense ratio calculation formula

The formula for calculating your housing expense ratio is pretty simple:

Housing expense ratio = (Total monthly housing expenses / Gross monthly income) x 100

Here’s how to use it.

1. Add up all your monthly expenses

Add up every housing expense you pay each month. Suppose your costs break down like this:

— Mortgage principal and interest: $2,000

— Property taxes: $250

— Homeowner’s insurance: $250

— PMI: $200

— Utility bills: $200

— HOA fees: $100

In total, your housing expenses are $3,000.

2. Divide your monthly expenses by your gross monthly income

Next, take your monthly expenses and divide them by your pre-tax income. Imagine your household grosses $150,000 a year, which comes out to $12,500 a month. Plugging the numbers into the formula gives you the following:

Housing expense ratio = ($3,000 / $12,500) x 100 = 24%

3. Analyze the results

Once you’ve found your housing expense ratio, you have a good idea of how lenders view your financial profile. Because they prefer ratios under 28%, a 24% ratio increases your odds of getting favorable terms.

Other qualifying ratios

The housing expense ratio is a type of qualifying metric lenders use to evaluate borrowers. These measures show how much of your income goes toward covering debts and expenses. In addition to the housing expense ratio, they also consider your DTI and loan-to-value (LTV). Let’s break down the differences.

Debt-to-income ratio

Your DTI, sometimes referred to as the “back-end ratio,” gives lenders a comprehensive view of your overall financial obligations. Instead of looking only at your household costs, it compares all of your debts, such as credit cards, car loans, and student loans, to your gross income. You can calculate it like this:

Debt-to-income ratio = (Monthly debt payments / Gross monthly income) x 100

Let’s say your monthly debt payments are $2,000, and you gross $6,000 monthly. Your DTI ratio works out to be:

Debt-to-income ratio = ($2,000 / $6,000) x 100 = 33%

Lenders like to see a DTI ratio below 36%, though some lenders will go as high as 43%.

Loan-to-value ratio

Lenders calculate the LTV ratio by dividing the amount of the loan by the appraisal value of the property. The formula is:

Loan-to-value ratio = (Mortgage amount / Appraised property value) x 100

For example, if you’re taking out $400,000 for a $500,000 home, your loan-to-value ratio is:

Loan-to-value ratio = ($400,000 / $500,000) x 100 = 80%

PMI is usually required on conventional loans with a loan-to-value ratio above 80%. Lenders automatically cancel PMI at 78% LTV, or you can request cancellation once you reach 80%. In the example above, you’d be off the hook for PMI since you’re right on the line.

What’s the 28/36 rule?

The 28/36 rule is a common guideline for organizing your budget. It suggests spending no more than 28% of your gross household income on housing and no more than 36% on all financial obligations combined (including total housing expenses). 

In this case, financial obligations include things like medical bills and personal loans — not everyday necessities like groceries and gas. Staying within these limits makes your budget more manageable and improves your chances of qualifying for a mortgage with favorable terms.

For example, if you make $120,000 a year, you’re taking home $10,000 a month. By the 28/36 rule, you should try to:

— Keep your total monthly housing expenses to $2,800 or less.

— Keep your total spending on debt to $3,600 or less. Since $2,800 goes to housing, that leaves $800 for paying down debt after accounting for housing expenses.

Fast-track your mortgage with Better

Understanding your housing expense ratio gives you a clearer picture of what you can comfortably afford. By using it as a guide, you’ll be better prepared to evaluate lenders’ offers and make confident decisions about your next home.

That’s where Better can help. We integrate your housing expense ratio directly into our AI-powered online pre-approval process so you can get a quote in as little as three minutes. From there, you can lock in competitive rates and track your progress entirely online.

Fill out the easy online application today to view your competitive rate.

...in as little as 3 minutes – no credit impact