Definition
The Housing Ratio (Front-End Ratio) is a financial metric used by mortgage lenders to determine whether a borrower can afford a home loan. It measures the percentage of a borrower’s gross monthly income that goes toward housing expenses, including mortgage payments, property taxes, homeowners insurance, and HOA fees.
Explanation
Lenders use the front-end ratio to assess a borrower’s ability to handle monthly housing costs. A lower ratio indicates financial stability, while a higher ratio suggests a borrower may struggle with mortgage payments.
The formula for the Housing Ratio (Front-End Ratio) is:
Housing Ratio = (Total Monthly Housing Costs ÷ Gross Monthly Income) × 100
Most lenders prefer a front-end ratio of 28% or lower, though some loan programs (such as FHA loans) allow ratios up to 31%-35% if the borrower has compensating factors like a high credit score or additional savings.
Example
A borrower earns $6,000 per month in gross income and has the following monthly housing costs:
- Mortgage payment: $1,500
- Property taxes: $300
- Homeowners insurance: $100
- HOA fees: $100
Housing Ratio = ( (1,500 + 300 + 100 + 100) ÷ 6,000 ) × 100
Housing Ratio = 33.3%
Since the housing ratio is above 28%, the borrower may struggle to qualify for a conventional loan but could still qualify for an FHA or other government-backed mortgage.