HOUSING RATIO: How to Calculate Housing Ratio with Ease (+ Free Tools)

Housing Ratio
Image Credit: the Real Estate Textbook

In the real estate business, the housing ratio has been a vital aspect that must be carefully considered. However, it is used to evaluate a borrower’s credit profile for a mortgage loan. Also, this article will discuss how to calculate the housing ratio, and also give the formula. However, we will discuss more on the income housing ratio and its calculator.

Photo Credit: iCompareLoan

What is Housing Ratio

It is a ratio that compares housing expenses to pre-tax income. Lenders often use it in qualifying borrowers for loans. This is similar to that of the front-end ratio. However, this comes into play when lenders are deciding whether an individual qualifies for a mortgage.

Additionally, it compares housing expenses to earnings before tax (EBT) or pretax income. However, lenders during the lending process often use this ratio in credit analysis. In other words, lenders, such as banks, use the ratio during due diligence while qualifying a borrower for a loan.

It is mainly used in mortgage loans. Also, lenders make a complete assessment of a borrower’s credit profile. Hence, making sure it would be able to repay the mortgage debt.

In conjunction with the debt-to-income ratio (DTI) and determining the maximum amount of credit being available to the borrower, firms use the ratio.

How to Calculate Housing Ratio

To calculate the housing expense ratio, lenders add all the housing expense obligations of a borrower. However, these obligations are operating expenses like future mortgage principal and interest expenses, monthly utilities, etc. Also, the borrower then divides the sum by the borrower’s pretax income to get the housing expense ratio.

Importantly, you can calculate the housing expense ratio using both monthly and annual payments.

Income Housing Ratio

This is a pleasant and relevant measurement of housing valuation and affordability.

However, when purchasing an asset you must make two primary decisions:

Investment Decision

You must decide the value of this asset that you purchase. However, in an acquisition, you can perform this measurement by using the “price-to-earnings”, or P/E ratio. This is how much is paid for each dollar of earnings made by the asset. Also, the higher the P/E ratio, the more expensive the asset. The value paid may be deemed fair if the asset’s value in the future is expected to rise more quickly than assets with a lower P/E ratio.

Financing Decision

In what ways can the purchase of this asset be financed? For an acquisition, it may be new equity through the issuance of stock. Measurements may take years to pay back based upon cash flows or earnings contribution after financing costs.

For the financing decision, the prospective homeowner will weigh the percentage of the financing costs to the family’s income.

Affordability Perspective

However, the more years of a household income that one must invest to purchase a home shows lesser affordability. In this case, the family must redirect more of their income to paying for the home rather than saving or investing in other financial assets.

Housing ratio Calculator

The housing ratio calculator, lenders use two ratios to approve the amount they will lend you:

  • housing ratio
  • debt-to-income ratio

The “housing ratio” is measured by dividing monthly housing expenses by your gross monthly income. However, it should not surpass 28%.

Furthermore, monthly housing expenses include real estate taxes, insurance, etc. However, to know more about the calculator click here.

Housing ratio Formula

The formula for housing ratio is total housing expenses divided by pretax income multiplied by 100.

Photo Credit: Corporate Finance Institute

Conclusion

in conclusion, it compares housing expenses to earnings before tax (EBT) or pretax income. However, lenders during the lending process often use this ratio in credit analysis. In other words, lenders, such as banks, use the ratio during due diligence while qualifying a borrower for a loan.

Housing Ratio FAQ

How is housing ratio calculated?

The “housing ratio” is measured by dividing monthly housing expenses by your gross monthly income. However, it should not surpass 28%.

What is a good housing to income ratio?

This is a pleasant and relevant measurement of housing valuation and affordability.

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