HER and OER (Housing Expense Ratio and Overall Expense Ratio) are ratios used by mortgage lenders to evaluate whether a borrower can reasonably afford a proposed mortgage loan. The Housing Expense Ratio (HER) compares the borrower’s expected monthly housing expenses with the borrower’s gross monthly income. Housing expenses generally include the mortgage principal and interest payment, property taxes, homeowners insurance, and, when applicable, mortgage insurance and homeowners association dues. For example, if a borrower has $2,000 in qualifying monthly housing expenses and $8,000 in gross monthly income, the HER is 25 percent. This ratio is also commonly called the front-end ratio.
The Overall Expense Ratio (OER) takes a broader view by comparing the borrower’s total recurring monthly debt obligations with gross monthly income. In addition to the housing expenses included in the HER, the OER generally includes obligations such as automobile loans, student loans, credit card payments, and other qualifying debts. It is commonly known as the back-end ratio or debt-to-income ratio (DTI). Lenders use HER and OER together when underwriting a mortgage because the first indicates how much of the borrower’s income will be devoted specifically to housing, while the second provides a more complete picture of the borrower’s overall debt burden.
