Total Expense Ratio
Definition and meaning of Total Expense Ratio in real estate.
The total expense ratio, also known as the back-end debt-to-income ratio, measures the percentage of a borrower's gross monthly income that goes toward paying all recurring monthly debt obligations. This calculation includes housing costs plus consumer debts like auto loans, student loans, and credit cards.
In more detail
Lenders use this ratio to assess a borrower's overall financial health and ability to manage a new mortgage. In the US mortgage market, the total expense ratio is a crucial underwriting standard for conventional and government-backed loans. Standard guidelines typically cap this ratio around 43% for conventional mortgages, though some programs allow higher ratios under specific compensating factors.
If your total expense ratio is too high, you can lower it by paying off outstanding credit cards, consolidating loans, or selecting a lower-priced home to reduce the prospective housing payment.
Key facts
| Category | Mortgages & Financing |
|---|---|
| Also known as | Back-end ratio or debt-to-income ratio |
| Standard limit | Typically capped at 43% for conventional loans |
| Who calculates it | Mortgage underwriters during the loan approval process |
A homebuyer with a gross monthly income of $5,000 who has $1,500 in housing costs and $500 in credit card and student loan payments has a total expense ratio of 40%.
Frequently asked questions
What debts are included in the total expense ratio?
This ratio includes your future monthly mortgage payment, property taxes, homeowners insurance, association dues, and all recurring consumer debts such as car payments, student loans, child support, and credit card minimums.
Can I get a mortgage with a total expense ratio above 43%?
Yes, some loan programs, such as FHA loans, may allow ratios up to 50% or higher if you have compensating factors, which can include a high credit score, significant cash reserves, or a large down payment.