What is the primary purpose of the housing expense ratio in mortgage lending?

The primary purpose of the housing expense ratio in mortgage lending is to determine a borrower's financial ability to pay for housing costs. This ratio compares the monthly housing expenses, which typically include principal, interest, taxes, and insurance (often abbreviated as PITI), to the borrower's gross monthly income. By analyzing this ratio, lenders can assess whether a borrower has the financial capacity to handle monthly mortgage payments in relation to their overall income.

This assessment helps lenders ensure that the borrower is not overextending themselves financially, which could lead to default on the loan. A lower ratio indicates a better financial cushion, while a higher ratio may signal the risk of financial strain. Therefore, this ratio is a critical tool for lenders in evaluating the affordability of a mortgage for the borrower.