Total housing expense is the sum of a homeowner's monthly mortgage principal and interest payments plus any other monthly expenses associated with their home. Total housing expense is a key component in the calculation of a borrower’s housing expense ratio which is used in the underwriting process for a mortgage loan.
Breaking Down Total Housing Expense
Total housing expenses can encompass a wide range of costs. A borrower’s total housing expenses are typically required in a credit application for a mortgage loan. These expenses are measured by the borrower’s total housing expense ratio. Mortgage loan underwriters will also require that a borrower provide details on their total debt, which is measured by a borrower’s debt-to-income ratio.
Mortgage Loan Qualifying Ratios
The total housing expense ratio is one of two qualifying ratios commonly analyzed by an underwriter in the approval process for a mortgage loan. Some lenders will focus just on a borrower’s mortgage principal and interest payments while others may require a broad analysis of housing costs. For a borrower, housing costs will include the principal and interest on a mortgage. It may also include a variety of other items such as insurance premiums, property taxes, and homeowner's association fees.
The housing expense ratio divides a borrower’s total housing expenses by their monthly income. This ratio must typically be approximately 28% or less for approval. It is also known as the front-end ratio.
Debt-to-income is a second qualifying ratio that is also considered in conjunction with a housing expense ratio when determining approval for a mortgage loan. This ratio is known as the back-end ratio. Debt-to-income ratios divide a borrower’s total debt service, including housing debt and all other debt by a borrower’s monthly income. This ratio must generally be approximately 36% or less for approval. In some cases, higher debt-to-income levels may be allowed for mortgage loans sponsored by government agencies. Agencies can allow debt-to-income ratios on mortgage loans of approximately 55% or less.
Mortgage loan underwriters use qualifying ratios for approvals and also for determining principal amounts. If approved for a mortgage loan, a lender will consider a borrower’s housing expense ratio and debt-to-income ratio capacity in determining the maximum amount they are willing to lend.
Mortgage lenders will also typically factor in a loan-to-value ratio based on the risks determined in the credit underwriting and property approval analysis. The loan-to-value ratio will also influence the maximum principal offered and the down payment required by the borrower.