For many, the real estate industry is a business. They invest in a particular property in order to get high returns and make a profit. However, for that, you need to keep your expenses as well as your returns in check. In this context, learning more about the housing expense ratio can really help. Also known as the front-end ratio, the housing expense ratio is a percentage that helps find out how much of your income is being spent on the maintenance of the house over your pre-tax income. This simple figure then allows you to find out the value of your mortgage payment, taxes, insurance and more. This can be a great way to ensure that you do not go overboard with your investment on the property. This also comes in handy for mortgage lenders to judge if a home buyer qualifies for the loan and if they are a safe investment.
Understanding your housing expense ratio can really help you in a lot of sectors of the real estate industry, especially when it comes to financing. This is why it is best that you learn the two most commonly used definitions of housing expense ratio.
I. Known better as the house-to income ratio, the housing expense ratio is an indicator to how much you can afford a house. It compares how much you have to spend on the real estate property versus your income before tax payment.
II. The housing expense ratio mainly helps calculate the borrower’s ability to repay the loan by comparing the total expense on the real estate property with your overall pre-tax income. This way you can understand the total expense on your house and plan your finances accordingly.
There are a number of uses of housing expense ratio. Here mentioned are some of the the most common instances in which calculating the housing expense ratio can come in handy.
1. Firstly, it helps plan your real estate investments quite well. Since you already know how much you will have to invest in the property, you can then deduct it from your pre-tax income to see if you can manage your daily expenses along with the house investments.
2. Secondly, it helps understand the repay capacity of the borrower. Lenders often use the housing expense ratio to check if a particular borrower can qualify for the loan.
