Mortgage bankers use the housing expense-to-income ratio to determine whether a borrower is creditworthy and whether a borrower can afford a mortgage. According to the Federal Reserve, bankers commonly look for a ratio of about 28 percent. That means that housing costs, including mortgage, taxes, interest and insurance should eat up about 28 percent of a borrower's pre-tax income.

Formula
• To calculate the housing expense-to-income ratio, add the annual mortgage payment, including interest, to annual insurance costs and property taxes. Divide that by annual pre-tax income.

Example
• For example, a borrower wants to buy a house. The bank determines that the annual mortgage payments will be about $18,000. Add to that $4,000 per year in property taxes and $1,800 for insurance. Total housing costs for this borrower are $23,800. The borrower's income is $70,000 ($28,000 divided by $70,000 is 40 percent). The borrower's housing expense-to-income ratio exceeds what the Federal Reserve considers safe.

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Census
• According to the U.S. Census Bureau's American Housing Survey, about half of all Americans spent less than 23 percent of their incomes on housing costs. But a significant amount of Americans spend a much larger chunk of income on housing expenses. About 12 million American households direct more than half of their income to housing expenses, the bureau says. Of those, about 4.7 percent spent more than 70 percent of household income on housing expenses.

Total Debt-to-Income
• Bankers will also want to know how much of an applicant's total monthly income are diverted to debt payments. According to The Federal Reserve, the total debt-to-income ratio should sit below 36 percent. This calculation adds other debts, including car payments, credit card payments, student loans and alimony into housing expenses, then compares it to pre-tax income.