What Counts as Your Monthly Housing Expense
Your housing expense includes more than just your mortgage payment. Lenders add up principal, interest, property taxes, homeowners insurance, and mortgage insurance if required. They also include HOA dues, special assessments with more than 10 payments left, and any payments on second mortgages or home equity lines of credit.
Say you're buying a $400,000 home with a $320,000 mortgage at 7% interest. Your principal and interest payment is $2,129. Add $350 for property taxes, $100 for homeowners insurance, $200 for mortgage insurance, and $150 for HOA dues. Your total monthly housing expense is $2,929.
If you have a HELOC with a $20,000 balance but no required monthly payment showing on your credit report, the lender will use 1.5% of the balance as your monthly payment. That adds $300 to your housing expense calculation.
The 28% Rule for Manual Underwriting
For manually underwritten loans, Fannie Mae sets the housing expense limit at 28% of your gross monthly income. This is a guideline, not an absolute rule. Lenders can exceed it with strong compensating factors documented in your file.
If you earn $8,000 per month gross, your maximum housing expense under the guideline is $2,240. The lender might approve $2,500 if you have excellent credit, substantial reserves, or a large down payment.
Automated underwriting systems like Loan Product Advisor may approve higher ratios. The system weighs your entire financial picture and might approve a 32% or 35% housing ratio for borrowers with strong credit and assets.
Special Rules for Investment Properties and Second Homes
Here's where it gets tricky. When you're buying a second home or investment property, lenders don't use that property's expenses in your housing ratio. They use your current primary residence costs instead.
You live in an apartment and pay $1,800 rent. You're buying a $300,000 vacation home with a $2,000 monthly payment. For your housing ratio, the lender uses your $1,800 rent payment, not the $2,000 vacation home payment.
If you own your primary residence and it costs $2,500 monthly, that's what goes into your housing ratio calculation for the second home purchase. The new property's payment gets counted in your debt-to-income ratio instead.
Required Documentation for Rental Payments
When you rent your current home, lenders need solid proof of your rental amount. They won't just take your word for it or accept a lease alone.
The strongest documentation is direct verification from your landlord or management company. The lender contacts them directly to confirm your monthly rent amount.
If direct verification isn't possible, you need your lease agreement plus two months of canceled checks or bank statements showing the payments. Some lenders will accept six months of consistent payment history from your bank statements without the lease.
Cash payments create problems. If you pay rent in cash, start paying by check or electronic transfer at least two months before applying for your mortgage.
Tax Abatements and Special Assessments
Property tax calculations can get complicated. If you're buying new construction, lenders estimate taxes based on the improved value since current tax bills only reflect the empty land.
Tax abatements reduce your housing expense calculation, but only if they continue for at least five years after your loan closes. You need documentation proving the abatement's duration. Age or disability exemptions don't require the five-year proof, but they cannot have a predetermined expiration within five years.
Special assessments for things like new sidewalks or sewer improvements get added to your housing expense if more than 10 payments remain. A $5,000 assessment paid over 60 months adds $83 to your monthly housing expense.
Energy-Efficient Properties Get Higher Ratios
GreenCHOICE mortgages for energy-efficient homes allow higher housing ratios. The logic is simple: lower utility bills free up income for mortgage payments.
You need professional documentation of the home's energy efficiency. A HERS report showing an index of 90 or below qualifies, as does a DOE Home Energy Score of six or higher. These reports must come from certified professionals, not the seller's marketing materials.
The lender keeps this documentation in your file and provides it to the appraiser for the property valuation.
Common Problems That Trip Up Borrowers
HELOC payments catch many borrowers off guard. Even if you're not making payments on your home equity line, lenders count 1.5% of the outstanding balance as a monthly payment. A $50,000 HELOC adds $750 to your housing expense even with no required payment.
Condo and townhome buyers often underestimate their housing expense. HOA dues, special assessments, and maintenance fees all count. That $200 monthly HOA fee plus a $100 special assessment for roof repairs adds $300 to your housing costs.
Property tax reassessments after purchase can shock new homeowners, but lenders must account for them upfront. If your county reassesses property taxes after ownership transfers, the lender estimates the new amount based on your purchase price, not the seller's old tax bill.
References
For the official guidelines, see 5401.1: Monthly housing expense-to-income ratio in the Fannie Mae Selling Guide.
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Original Freddie Mac Guideline Text
This section is effective for Mortgages with Note Dates on or after April 1, 2025.
This section contains requirements related to:
Establishing the monthly housing expense for Mortgages secured by Primary Residences
Establishing the monthly housing expense for Mortgages secured by second homes and Investment Properties
Establishing the monthly housing expense for Mortgages with a non-occupying Borrower
Rental payment documentation requirements
Housing expense-to-income ratio requirements based on underwriting method
Other Guide provisions related to the monthly housing expense-to-income ratio
The housing expense-to-income ratio is determined by dividing the Borrower’s monthly housing expense by the Borrower’s stable monthly income and/or qualifying asset amount as described in
Section 5307.1(b)
. The monthly housing expense must be documented in the Mortgage file and established as described below.
(a)
Establishing the monthly housing expense for Mortgages secured by Primary Residences
For Mortgages secured by a Primary Residence, the following expenses must be included in the calculation of the monthly housing expense-to-income ratio:
Principal and interest payments on the Mortgage
Real estate taxes
New construction: When the actual real estate tax amount is not yet available, the real estate tax amount included in the monthly housing expense must be based on the value of the improvements and the land
Transfer of ownership: If the Mortgaged Premises is in a jurisdiction where transfer of ownership causes or results in a recalculation of the amount of real estate tax, the monthly housing expense must include an estimate of the recalculated tax amount
Tax abatements or exemptions: The real estate tax amount may be reduced or excluded from the monthly housing expense calculation, as applicable.
The Mortgage file must contain evidence of its continuance for at least five years after the Note Date and evidence of:
The tax abatement for a reduced real estate tax amount, or
The exemption for an excluded real estate tax amount
If the tax exemption is due to the Borrower's age or disability, documentation verifying five years’ continuance is not required. However, the exemption must not have a predetermined expiration date within five years of the Note Date.
The following additional expenses must be included when applicable:
Leasehold payments
Special assessments with more than 10 monthly payments remaining
Homeowners association dues (excluding unit utility charges)
Maintenance Fees (excluding unit utility charges)
Payments on secondary financing, including a Home Equity Line of Credit (HELOC).
HELOC payments must be included when there is an outstanding balance on the account. In the absence of a monthly payment on the credit report for the HELOC, and if there is no documentation in the Mortgage file indicating a monthly payment amount, 1.5% of the outstanding balance is considered the monthly payment amount. Refer to
Section 4204.1
for when documentation of HELOC terms is required and to
Section 5501.3
when HELOC proceeds are used for the transaction.
For properties subject to resale restrictions, recurring monthly payments associated with the financial subsidy that was provided when the property was purchased by the Borrower. See
Section 4406.3
for additional requirements related to such payments.
(b)
Establishing the monthly housing expense for Mortgages secured by second homes and Investment Properties
For Mortgages secured by second homes and Investment Properties, the monthly housing expense is the sum of the monthly charges described above in
Section 5401.1(a)
for
each
Borrower's Primary Residence.
If the Borrower does not own but rents their principal domicile, the Borrower's rental payment for that principal domicile must be included in the calculation of the monthly housing expense-to-income ratio.
(c)
Establishing the monthly housing expense for Mortgages with a non-occupying Borrower
For Mortgages with a non-occupying Borrower, the monthly housing expense is the sum of the monthly charges described above in
Section 5401.1(a)
for
each
Borrower's Primary Residence.
If the Borrower does not own but rents their principal domicile, the Borrower's rental payment for that principal domicile must be included in the calculation of the monthly housing expense-to-income ratio.
(d)
Rental payment documentation requirements
When the Borrower rents their principal domicile, one of the following is required to verify the monthly rental payment amount:
Direct verification of rent from a management company
Direct verification of rent from an individual landlord supported by two months of canceled checks or other evidence of two months' payments
A copy of the current, fully executed lease agreement supported by two months of canceled checks or other evidence of two months' payments
Six months of canceled checks or bank statements supporting consistent payments in the amount used in qualifying
(e)
Housing expense-to-income ratio requirements based on underwriting method
(i)
Mortgages underwritten with Loan Product Advisor
®
For Loan Product Advisor Mortgages, Loan Product Advisor calculates and assesses the Borrower's qualifying ratios based on submitted data.
For Accept Mortgages, Loan Product Advisor has determined that the Borrower's qualifying ratios are acceptable.
(ii)
(A)
For all Manually Underwritten Mortgages
For Manually Underwritten Mortgages, the Seller must evaluate the Borrower's ability to pay the monthly housing expense and other obligations. As a guideline, the monthly housing expense-to-income ratio should
not be greater than 28%
.
An exception can be made only with an offset documented in the Mortgage file. Examples of offsets that might support the use of higher monthly payment ratios are found in
Section 5401.2(d)
.
Generally, more flexibility is appropriate for the monthly housing expense-to-income ratio than for the monthly debt payment-to-income ratio. Less flexibility is appropriate for situations involving additional layers of risk (i.e., ARMs, a marginal credit reputation, minimal reserves or maximum financing).
For any Manually Underwritten Mortgage for which either of the ratio guidelines is exceeded, the Seller must prepare and retain in the Mortgage file a written explanation justifying its underwriting decision.
(B)
Additional requirements for GreenCHOICE Mortgages
®
that are Manually Underwritten Mortgages
GreenCHOICE Mortgages
that are Manually Underwritten Mortgages, higher qualifying ratios may be appropriate, considering the impact energy efficiency has on the Borrower's utility charges (i.e., an energy-efficient property results in lower utility charges, allowing the homeowner to apply more income to housing expense).
If one or both of the higher qualifying ratios are used for a GreenCHOICE Mortgage
, the Seller must provide one of the following to the appraiser, as well as maintain a copy in the Mortgage file, to evidence that the property has a level of energy efficiency greater than that of a “standard” (i.e., non-energy-efficient) property:
Home Energy Rating Systems (HERS) report
completed by a certified Residential Energy Services Network (RESNET
®
) Home Energy Rater reflecting a HERS Index of 90 or below (
http://www.resnet.us/directory/search
(opens in new window)
)
Department of Energy (DOE) Home Energy Score Report
completed by an independent Home Energy Score Certified Assessor
TM
reflecting a DOE Home Energy Score of six or greater (
https://betterbuildingssolutioncenter.energy.gov/home-energy-score/home-energy-score-map
(opens in new window)
)
Section 5601.4
for detailed appraisal requirements for properties with energy-efficient improvements.
(f)
Other Guide provisions related to the monthly housing expense-to-income ratio
Refer to the following Guide sections for details on:
Section 4204.3(a)
Special underwriting requirements for second home Mortgages
Section 4201.12(b)
Special underwriting requirements for Investment Property Mortgages
Section 4201.13(b)
Mortgages including a non-occupying Borrower
Section 5103.1
