{"id":19290,"date":"2023-01-22T11:05:00","date_gmt":"2023-01-22T11:05:00","guid":{"rendered":"https:\/\/businessyield.com\/?p=19290"},"modified":"2023-01-23T10:06:20","modified_gmt":"2023-01-23T10:06:20","slug":"housing-ratio","status":"publish","type":"post","link":"https:\/\/businessyield.com\/real-estate-investment\/housing-ratio\/","title":{"rendered":"HOUSING RATIO: How to Calculate Housing Ratio with Ease (+ Free Tools)","gt_translate_keys":[{"key":"rendered","format":"text"}]},"content":{"rendered":"

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\u2019s 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.<\/p>\n

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Photo Credit: iCompareLoan<\/figcaption><\/figure>\n

What is Housing Ratio?<\/span><\/h2>\n

It is a ratio that compares housing expenses to pre-tax income. Lenders often use it in qualifying borrowers for\u00a0loans. 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.<\/strong><\/p>\n

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.\u00a0In other words, lenders, such as banks, use the ratio during due diligence while qualifying a borrower for a loan.<\/p>\n

It is mainly used in\u00a0mortgage loans. Also, lenders make a complete assessment of a borrower\u2019s credit profile. Hence, making sure it would be able to repay the mortgage debt.<\/p>\n

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.<\/p>\n

How do you Calculate Housing Ratio?<\/span><\/span><\/h2>\n

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\u00a0interest expenses, monthly utilities, etc. Also, the borrower then divides the sum by the borrower\u2019s pretax income to get the housing expense ratio.<\/p>\n

Importantly, you can calculate the housing expense ratio using both monthly and annual payments.<\/p>\n

Income Housing Ratio<\/span><\/h2>\n

This\u00a0is a pleasant and relevant measurement of housing valuation and affordability.<\/p>\n

However, when purchasing an asset you must make two primary decisions:<\/p>\n

Investment Decision<\/strong><\/span><\/h3>\n

You must decide the value of this asset that you purchase. However, in an acquisition, you can perform this measurement by using the \u201cprice-to-earnings\u201d, 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\u2019s value in the future is expected to rise more quickly than assets with a lower P\/E ratio.<\/p>\n

Financing Decision<\/strong><\/span><\/h3>\n

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.<\/p>\n

For the\u00a0\u201c<\/strong>financing decision\u201d<\/strong>, the prospective homeowner will weigh the percentage of the financing costs to the family\u2019s income.<\/p>\n

Affordability Perspective<\/strong><\/span><\/h3>\n

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.<\/p>\n

Housing ratio Calculator<\/span><\/h2>\n

The housing ratio calculator, lenders use two ratios to approve the amount they will lend you:<\/p>\n