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Housing expense ratio is a money term you need to understand. Here’s what it means.
A housing expense ratio is the comparison of a borrower’s before-tax income. The number often is calculated when lenders are deciding whether an individual qualifies for a mortgage.
When a lender is making a decision about offering a mortgage loan to an individual, he or she wants to know that the individual makes enough money to pay it back without struggling to pay for other expenses.
For this reason, the lender will measure the person’s income before taxes against housing expenses to find out how much risk is involved. Typical housing expenses include the principal, interest, property taxes, insurance and HOA fees.
Most lenders will not approve a loan if the number is higher than 28 percent. Exceptions may be made if the individual applies with a co-borrower or has an exceptional credit rate. Housing expense ratio also is referred to as front ratio.
Many lenders suggest finding out what your housing expense ratio is before applying for a mortgage. It is easy to do with a simple formula.
If you are thinking about applying for a mortgage, use our mortgage calculator to estimate just how much your monthly payments will be.
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