Housing Expense Ratio
Categories: Mortgage
We’ve all been there: we go to a restaurant hungry and order the huge taco-enchilada combo platter. About halfway through, we realize that there is absolutely no way we’re going to be able to eat all this food. Our eyes were bigger than our stomach, and we probably could have paid less money for less food and still had plenty to eat.
It’s easy to overestimate how many tacos we can eat. It’s also easy to overestimate how much house we can afford, which is why mortgage lenders calculate a housing expense ratio when they’re trying to figure out how much they should lend us to buy a new home. They want to make sure they’re not letting us take out a mortgage we might not be able to pay back.
In general, one of two housing expense ratios are used: either a top ratio or a bottom ratio. A top ratio divides the mortgage amount by our total income; if the result is more than 28%, the lender might conclude we can’t afford that much. The bottom ratio method adds the mortgage amount to any other debt we have, like student loans or other mortgages, and then divides that amount by our total income. That percentage should be 36% or less, or we run the risk of not getting approved for that amount.