Definition of "Affordability ratio"

Patty  Orchard real estate agent

Written by

Patty Orchardelite badge icon

EXP Realty LLC

Affordability is a term used to describe the ability of a person or entity to pay in relation to the income earned by them. Affordability is the comparison of a person's income against their liabilities. The extent to which something is affordable can be described as an affordability ratio. For example, some people might be able to purchase a luxury car because it is affordable when considering their high income, while for others, owning an expensive car is not affordable because of their low income.

Affordability ratio in real estate

If we are to define affordability ratio in real estate, household expenses in relation to the income within the same household is the affordability ratio. If we deduct the household income from the housing expenditure then we obtain the net affordability ratio. This is useful in order to measure how much the expenses weigh in relation to the housing occupancy and how it affects the household budget.

The income used in order to calculate the affordability ratio includes all streams of income within the household. Retirement pensions, family benefits, financial assets, replacement income, and salaried or non-salaried professional activities contribute to the household income. 

This measurement is relevant to determine the home affordability ratio, which tells homebuyers how much they can afford to spend on a house. The affordability ratio is also used by lenders to determine a borrower’s ability to follow monthly loan repayments. Different cities have a different affordability ratio, therefore, the country has cities that are most affordable and cities that are less affordable.

It all comes down to the cost of living when a comparison between two states, cities, or neighborhoods is made. The cost of living in comparison to the median household income can also be considered as an example of the affordability ratio for different cities or areas.

image of a real estate dictionary page

Have a question or comment?

We're here to help.

*** Your email address will remain confidential.
 

 

Popular Real Estate Terms

Latin term meaning legal capacity to act on behalf of oneself. ...

Main street having a divider either in the center or between the curb and sidewalk with trees, grass, or other shrubbery. ...

Threat of violence to obtain a contract. ...

The label American Land Title Association, also known as ALTA, is a trade association that helps in managing the title insurance industry. Another focus of ALTA is the abstract of title of ...

An oral will made by a testator/testatrix just prior to death before an insufficient number of witnesses. Nuncupative wills depend on the oral testimony of those witnesses present as proof. ...

Functional utility in real estate typically defines a property’s usefulness to the homeowner or lessee. The more purposes it can fulfill, the better. For instance, you can call a ...

Passageway providing public access from a building interior to an exit. Long interior passageway providing access to rooms. ...

Worth of the property part which is left subsequent to a condemnation action. ...

Marketing attractive space at the appropriate location at a good time in the correct square footage at a reasonable price or rental charge. An example is the renting out of space for retail ...

Popular Real Estate Questions