What is the housing expense ratio?

• A. The percentage of the loan amount paid as discount points.
• B. The interest rate on the mortgage.
• C. The relationship of the borrower's total monthly housing expense to income.
• D. The maximum allowable loan-to-value ratio.

Answer: (C)

The housing expense ratio shows how much of a borrower’s income goes to housing costs each month. It’s calculated by taking the total monthly housing costs—typically mortgage principal and interest, property taxes, homeowners insurance, and sometimes HOA dues or mortgage insurance—and dividing that amount by gross monthly income. This ratio helps lenders gauge affordability and whether the borrower can sustain housing payments within their income, often guiding underwriting decisions.

For example, if someone earns $5,000 per month before taxes and their monthly housing costs are $1,400, the housing expense ratio would be 28%. This ratio is distinct from the loan-to-value ratio, which compares the loan amount to the property’s value, and from the interest rate or points, which affect cost differently.