What Is Total Housing Expense? Explained with Examples, Types, and Impact on Mortgages

Total housing expense constitutes a critical component of homeownership costs. While a significant portion of a mortgage covers interest and principal payments, additional ongoing expenditures must be considered when assessing home affordability.
In essence, total housing expenses extend beyond the core mortgage-related expenses. These include but are not limited to regular bills, utilities, insurance premiums, property taxes, and any homeowners association fees. When applying for a mortgage, borrowers are invariably required to provide details about their total housing expenses, a metric gauged by the housing expense ratio. Mortgage underwriters also examine the borrower’s overall debt, as indicated by the debt-to-income ratio.

In the realm of mortgage underwriting, two qualifying ratios feature prominently in the approval process. These ratios shed light on the borrower’s financial capacity and their eligibility for a mortgage loan. Different lenders may emphasize specific components when considering a borrower’s suitability for a mortgage.
The housing expense ratio is one such metric. It delves into the core housing costs, which include mortgage principal and interest payments. However, it goes beyond these basic elements, encompassing items like insurance premiums, property taxes, and homeowners association fees. To gain mortgage approval, the housing expense ratio typically needs to be around 28% or less, a criterion often referred to as the front-end ratio.

A second pivotal qualifying ratio in the mortgage application process is the debt-to-income ratio. This ratio, known as the back-end ratio, is scrutinized alongside the housing expense ratio when evaluating mortgage loan approval. The debt-to-income ratio considers all forms of debt, including housing-related obligations and other financial commitments, in relation to the borrower’s monthly income. Generally, this ratio should be approximately 36% or less for approval. However, government agencies overseeing mortgage loans may allow for higher debt-to-income ratios, sometimes up to 50% or less.
Mortgage loan underwriters rely on these qualifying ratios not only for approval but also when determining the principal amounts a borrower is eligible for. Once a borrower secures approval for a mortgage loan, lenders use their housing expense ratio and debt-to-income ratio to gauge the maximum loan amount they are willing to extend.

Moreover, lenders take into account the loan-to-value ratio, a metric derived from credit underwriting and property approval assessments. This ratio impacts the maximum principal loaned and the required down payment from the borrower, reflecting the assessed risks associated with the loan and the property itself.

Here’s a closer look at the pros and cons to consider when assessing total housing expenses:

Total housing expenses encompass all the financial obligations required to maintain a residence, such as mortgage payments (interest and principal), insurance, property taxes, utilities, and homeowners association dues.

The housing expense ratio is crucial because it helps lenders assess a borrower’s ability to afford a home. It serves as a comprehensive metric that considers all housing-related costs.

The debt-to-income ratio is another essential metric considered in mortgage approval. It factors in all debts, including housing costs, in relation to a borrower’s monthly income, determining their eligibility for a mortgage.

Government agencies overseeing mortgage loans may permit higher debt-to-income ratios, sometimes up to 50% or less. However, these higher ratios come with certain requirements and considerations.

Total housing expenses play a pivotal role in determining a borrower’s borrowing capacity. Lenders use these expenses, along with other financial ratios, to gauge the maximum loan amount they are willing to offer.