|Poll: What % do you pay for housing (rent/mortgage)?||Fez|
Nov 5, 2003 8:07 AM
|I am looking at getting a new home.
Lenders tell me a rule of thumb for housing payment is 33%-35% of annual gross income.
I think that is the stupidest thing I have ever heard. After taking into account all the deductions from my paycheck, I bring home less than 66% of my gross salary.
If anything, it should be based on cash flow and should be X% of take-home pay. After all, you can't make home payments with cash you aren't bringing home!
So what percentage of take-home pay is going towards the roof over your head?
|Debt to income is the only golden ratio I know||128|
Nov 5, 2003 8:35 AM
|if you're getting(giving actually) a mrtg.
My mrtg payment for a 200 yo colonial on the so Maine coast (bought it, upgrading it- house is winning so far)is probably about what TJ pays for the linen hutch in his fancy Back Bay condo! : ) (I gotta get one of those).
|Debt to income is the only golden ratio I know||TJeanloz|
Nov 5, 2003 9:11 AM
|About 65% of my total budget goes to the mortgage payment. The bank is pretty happy about that. But I live in an expensive 'hood, and have a relatively meager budget.
$200/month is about right for the linen closet - you can pay that little for a whole house?
|closet x10 might cover the prop. tax. I'm about 25%. nm||128|
Nov 5, 2003 9:27 AM
|about 6%, but I'm probably not normal (nm)||ColnagoFE|
Nov 5, 2003 8:35 AM
Nov 5, 2003 8:41 AM
|My income and my wife's income vary from month to month. But our the amount we pay annually for our mortgage is about 10-13% of our annual gross income. The prin + interest is only about 8% of our AGI. We have had our insurance, taxes, etc escrowed plus I add an additional $300/mo onto the payment.
With variable incomes and bringing home around 50% of my gross income after taxes,401k,etc...always made us err on the conservative side.
33-35% of annual gross income - that's called being "house poor". Don't do it if you want to eat next week.
|why is it stupid?||mohair_chair|
Nov 5, 2003 8:53 AM
|Your gross income is going to be a lot more predictable than your "cash flow." Furthermore, the math is the same. If you tell me you only keep 66% of your gross, and I should look at that instead, guess what, I'm still going to run a percentage against that value. It might be a smaller percentage, but in the end, it's still a percentage and it doesn't make any difference whether I use gross income or net income. Finally, your net income excludes taxes, some of which you will get back in the form of interest deductions, so your net income, after taxes, will actually increase.|
Nov 5, 2003 9:51 AM
|Assuming you don't try to manipulate your withholdings to owe more or less come tax time, I still think take home is what matters. Two individuals (assume both are single) making the same gross salary can have wildly different take home pays.
A few reasons:
1) State and local deductions depend on where you live and can vary rather substantially. Fed tax withholdings should be the same regardless of where you live.
2) 401(k) participation can vary depending on whether you are eligible yet and whether you want to max it out. The "smart" thing to do is to pay yourself first via 401(k) and to max it out. I have seen a lot of foolish folks cut back or eliminate this deduction. I realize this 401(k) is optional and discretionary, but I also believe you should pay yourself first before you spend on anything else, including housing.
3) Most get medical ins thru the employer. That can vary from no cost to several hundreds of dollars, even for a single person.
The 3 things I mentioned above can make a huge difference on what you bring home. My 2 cents.
Nov 5, 2003 10:08 AM
|You don't need to explain to me how take home pay works. I'm just saying that whatever value you choose to evaluate, the lendor is going to apply a percentage to it. That might be 33% of your gross income, or 50% of your net income. If your net is 66% of your gross, it's exactly the same number.
By the way, once you buy a house, the "smart" thing to do may not be to max out your 401K. Unless your 401K is really doing well, you are probably better off putting that money into your house. For most people, a house is the best investment in their future, and not maximizing that investment is bad investment planning. There's nothing sacred about a 401K that you would fund it before housing. If you think that way, you'll be renting forever, including in your retirement years, instead of owning a house free and clear.
Nov 5, 2003 8:54 PM
|As an aside, I want to say that I have found most lenders will loan you a lot of money (assuming excellent credit history). So much that if you took their maximum loan amount, you would have very little money left over after paying the mortgage. You probably would NOT be saving anything and/or you would be very frugal with any expense after paying the mortgage.
True, any amount they approve would be based on some formula, which would be a ratio or percentage of something.
I just have a problem with them attaching it to GROSS, since I just explained in an earlier post how 2 people making identical gross figures can have far less available to pay the monthly payment.
To put it bluntly, gross salary doesn't mean sh1t and I think anyone who took the max loan is going to learn the hard way how to eat ramen noodles 5 nights a week and PB&J the other 2 nights.
An extreme case is a friend who had a good job and was buying her first house. She drove an absolute crap car and needed a new one badly, but she thought a car loan would reduce her ability to get a home loan, so she figured she would get one after she bought the house.
So she took the max home loan. Found she really couldn't make ends meet, so she reduced her withholdings so she could get more cash each paycheck. Come tax time she had to pay out a huge amount (and penalties for incorrect withholding). She was miserable and she still drove a rusty piece of crap. No way could she afford a new car now. So her dad bailed her out and "gave" her money to get a new car. Pretty sad story. As her friend she wasn't all that fun to be around anymore.
|Financially, she is kicking your ass||53T|
Nov 6, 2003 8:41 AM
|Her borrowed money is going into an appreciating asset, her house. I suspect that a good deal of your borrowed money is going into expenses and depreciation assets, a car.
The rational person gets as much real estate and as little car as possible. Teenagers would tend to do the opposite. It's all part of growing up.
My bank lends me money for houses at about 6%. The houses all appreciate at about 8% per year. So enjoying my houses costs me -2% every year. Can you have pool parties in your car?
|Not at all. And your assumptions are incorrect.||Fez|
Nov 6, 2003 9:27 AM
|First of all, you are completely wrong about me. I have zero debt and save nearly all of what I don't pay out in rent and basic human needs. I put in excess of 70% of my NET income into savings. And since this is a bike board, YES, I DO spend more than I should on bikes, parts, and clothes. I've been saving and investing away for a better part of 10 years.
My point about the woman was that she took everything to the extreme. Her car was badly in need of replacement and she chose not to get one before she maxed herself silly on the house. And if you think she at age 36 she did the right thing by going to her father for an early inheritance so that she could get rid of her 80s car, then we disagree. BTW this woman makes over $100,000/yr. I think she is kicking her own ass more than anything.
Its all about moderation and having peace of mind.
Your last statement must be tongue in cheek. You do know that your house isn't like the bluest of blue chip stocks that guarantee appreciation of 8% per year on a linear basis. You do remember the years when houses did not appreciate and when interest rates were not single digit?
And you do remember that huge sum of money that most people have to bring to settlement of their first house? And you do know that the pool you speak of (and roof, and heater, etc.) all require maintenance. Homes are a combination of lifestyle, tax benefit, and appreciation, but by no means the greatest investment that you should max yourself silly on.
|You slay me||53T|
Nov 6, 2003 5:27 PM
|Do you remember the last 10 year period when US real estate did not appreciate? I didn't think so.
Blue chip stocks are garbage investments compared to real estate. They can always make more stock, but unless you want to live on the lava flows in Hawaii, they aren't making any more real estate.
A lot of people let Fidelity invest their money in stock funds. Where does Fidelity put all the money it earns? (hint: Who owns downtown Boston?)
This chick makes 100K, and is strapped on her mortgage. that calcs out to a 390K house (using 35% of gross, $450/m for insurance and taxes, and 20% down). On a bad year she's going to get 4.8% appreciation. She's paying 6% interest on 80% of her house, that equals 4.8. So worst year she lives in a nice house for free. BTW, most 390K houses are not maintenance hogs. Her roof is fine. I haven't even gotten into the tax payback.
I didn't say that her house is the greatest investment, but I will now. YOUR HOUSE IS YOUR GREATEST INVESTMENT! Sink as much money as you can into good real estate. That's my story and I'm sticking to it.
BTW, on what planet did houses not appreciate when their was double digit inflation?
|Whoa, slow down here||Fez|
Nov 7, 2003 8:19 AM
|The post started as "what percentage was spent on the housing pmt," not "what the greatest investment to put all your avail $$."
Then it sort of evolved into the fact that if taxes and mortgage took over 67% of gross pay, then most folks would be strapped trying to live on the remaining 33%.
As far as 53T, I think we are just arguing about some pretty abstract things.
Real estate wasn't always as liquid as it is now. There were times when it took months, even years to sell your house. No, the house wasn't literally on the market for 2 straight years, but there were no takers, so people just stayed put and continued to live in them or if they turned them into investment properties and rented them out. God help you if you needed the cash fast. Otherwise, be patient. And renting out houses can be a pain in the ass, and if you lose money, you are limited in deducting the loss if it is a passive activity (it is for most of us).
And, it all depends on location. Around here in certain better neighborhoods, the $390K house is the oldest, cheapest one that most definitely IS the maintenance hog. In Iowa, it may be one of the newest and nicest.
And finally, your analysis looks great on paper. God help you if you have an emergency. Because those beautiful paper gains aren't going to help you when you need some cash, unless you get a home equity loan or refinance and cash out. Maybe "sink as much money as you can into good real estate" means AFTER building a good emergency cash savings account.
Lets just agree to disagree.
Nov 10, 2003 5:51 PM
|Yeah, I hate arguing in the abstract. That is why I always quantify my arguments with the best available numerical data. It drives some people crazy, but it is much better than waving my hands in the air and talking about how the issue makes me feel.|
|Yeah but where is the quality of life?||ColnagoFE|
Nov 6, 2003 9:28 AM
|There's more to life than having a lot of valuable assets. If she is scraping that hard to make mortgage payments, god help her if something goes wrong with the house. A furnace blowing up or a new roof needed and she's gonna have to start robbing banks to make ends meet.|
|income tax is just another expense||DougSloan|
Nov 5, 2003 10:09 AM
|What you are arguing, essentially, is that the lender should more accurately consider your expenses, not just your total income. Income taxes are just another expense. According to your reasoning, the lender should also consider real estate tax, sales taxes, your car payments, cost of gasoline, food costs, etc., particularly if they are essential and for the most part inescapeable. My bet is that they have generally already done that in coming up with the percentage of gross rule of thumb, figuring that over all the other expenses usually even out among borrowers.
Nov 5, 2003 10:55 AM
|I wonder what most people pay in car payments vs. housing. Some people's car payments must equal or exceed their housing payments.|
Nov 5, 2003 8:58 PM
|that a lot of apartment complexes have really nice cars in the parking lot?
Not counting the folks who are relocating or are in between houses, some folks would rather put off buying a home and make owning a fancy car a higher priority.
|car payment=50% of house payment right now (nm)||ColnagoFE|
Nov 6, 2003 8:25 AM
|Expensive car pmt or low house pmt? nm||Fez|
Nov 6, 2003 9:28 AM
|low house payment--average car nm||ColnagoFE|
Nov 6, 2003 10:09 AM
|I'd estimate 35% of my net. nm||sn69|
Nov 5, 2003 9:39 AM
|about 13% of gross, 22% of net, on a 15 yr note nm||DougSloan|
Nov 5, 2003 9:54 AM
|Gross income is easier for an underwriter to consider ...||HouseMoney|
Nov 5, 2003 10:34 AM
|when making a lending decision. You don't have to worry about taxes, deductions, 401k contributions, etc. Most lenders today look at total debt-to-income, not just housing payment. Someone having a total mortgage pmt (incl taxes & ins) that's 35% of their gross, but with little other consumer debt is in a much better position than someone whose housing pmt takes up 25% of their gross, but then has $2000+ of other installment/credit card debt (i.e. $750 a month for a Benz that they *had* to have).
What's really scary are the lenders who use a total dti ratio of 55-60% of gross income. Talk about eating pb&j sandwiches 5 days a week! There are some underwriting guidelines that are based more on net residual monthly income, and not ratios.
Bottom line, only borrow what you're comfortable paying, even if it's much lower than what a lender will allow.
|So where is savings in that equation?||Fez|
Nov 5, 2003 9:05 PM
|Yeah, I agree... just borrow what you are comfortable paying.
But a debt ratio like you describe that is 55-60% of gross? Besides that sounding insane, lets just break that down. Taxes are conservatively 33% of gross. Total debt like you describe equals 55-60%. So what does that leave, 7-12% of gross to basically take care of every other expense you have that is not an installment?
Obviously, you are not going to save a dime with a lifestyle like that. In fact, you probably will have to run up your credit cards higher and get an overdraft checking account to function month to month. And that will push you further into debt.
|Yep. Exactly ...||HouseMoney|
Nov 6, 2003 5:02 AM
|I'm not saying I recommend taking on that much of a debt load. (btw, my own mortgage is at approx 25% gross on a 20-yr term) I'm just saying, as someone who is in the business (ref my handle), that some lenders will go this high. Sadly, I've come across homeowners who have a dti of over 90%! (that's of their GROSS income) Don't ask me how they manage. Some may have other source(s) of income that are not "on the books", so in reality it's not as bad as it looks, i.e. a part-time cash job, boarders paying rent, etc.
Usually, though, these people are desparate & looking for someone, anyone, to help them get out of their financial mess. Generally, not only are their debt loads racked up too high, but they have no equity in their homes, either. I have, on several occasions, directed these folks to phone an attorney who specializes in bankruptcies.
|Zero, except for prop taxes, insurance and||OldEdScott|
Nov 5, 2003 7:35 PM
|maintenance. You can do it too, if you're willing to spend five years living in a trailer on-site while you build the damn thing your own damnself as you get the money.
I realize that's not the American Dream, but I'm a Clintonian deficit hawk. (I may be the only average un-rich American alive who's never had a house payment or a car payment).
So who said liberals aren't self-sufficient? I read Thoreau a LOT in those years. I think they (the trailer years) also explain why my daughter went NUTS on her wedding. Sometimes the acorn LEAPS off the tree.
|No house payment here either||Continental|
Nov 5, 2003 7:50 PM
|Paid mine off last year, a 15 year note paid in 10. I'm a cheapskate who lives under my means and thinks money provides freedom and security while wanton spending results in servitude and uncertainty. My daughter's 11 years old and already knows I'll keel over and die if she asks for a big wedding.|
|You familar with Dave Ramsey? Strange as it may seem||OldEdScott|
Nov 6, 2003 5:44 AM
|(being a tax and spend liberal) I'm a Dave Ramsey disciple. No debt (no credit cards especially, although I do have one tucked away in the closet, with a very low limit, for online bike-stuff purchases and car rentals).
I like your statement 'wanton spending results in servitude and uncertainty.' I would add this gloss: 'Wanton spending with borrowed money is even worse.'
|Never heard of Dave Ramsey||Continental|
Nov 6, 2003 7:00 AM
|My frugality is passed down from great grandparents, who emigrated, drained a swamp, cleared the land, and became quite wealthy farmers. My maternal grandma was always angry that her brothers got the farm. She got married, had 4 kids and was pregnant during the Great Depression when her husband died. She got by with a more than a little help from her moonshine business. In the same year, 500 miles away, my paternal grandfather died, leaving a widow with 6 kids in rural Missouri. Needless to say, I heard my share of Depression stories while growing up and was pummelled with the work-and-save ethic.|
|this advice is like advice for losing weight||ColnagoFE|
Nov 6, 2003 8:34 AM
|easy enough in theory, but hard for most to do. i have a couple of credit cards and pay them off each month. my dad always taught me to use cards for convenience and not for credit and that a good credit rating was invaluable. great advice. i hate debt. with the recent refi i did i can now pay my house off totally by the time my youngest is out of the house. if you pay cash for everything it's much harder to get in over your head. that said...it's hard to establish a good credit rating if you NEVER use credit. i love being able to walk into the car dealer or real estate agent's office and not even have to think about not being approved for credit.|
|If you have your head on straight, what do you need credit for?||Fez|
Nov 6, 2003 9:37 AM
|Besides a house? And maybe an automobile?
I laugh when I see that you can get credit at a jewelry store. If there is one thing that you don't NEED, its jewelry. Don't you think you should pay cash for that, rather than borrowed money?
And I like the silly Litespeed ad last winter about getting credit and deferred payments.
Isn't it a waste of time applying for credit? If that isn't a deterrent, the how about the inconvenience of getting another monthly statement in the mail, writing monthly checks, and keeping track of it all? I just like living free of all the hassles.
Every time you apply for credit, it shows up on your report and stays there for min 7 years. And I just like my privacy and don't want any potential opportunities for identity theft.
|I take advantage of those 12 months same as cash offers||ColnagoFE|
Nov 6, 2003 10:12 AM
|Why not use their money for free for 12 months when you buy something like a TV or camera? Assuming you have the ability to pay it off in full by the end of that period. Credit cards also provide a bit more protection from fraud--especially when buying online. It limits your liability somewhat. If you pay cash you are screwed if someone rips you off. My privacy is shot anyway. I think you'd have to be a hermit and totally off the grid to have any semblance or privacy these days.|
|That's what THEY want you to do...||Fez|
Nov 6, 2003 10:37 AM
|Yeah, I realize a credit card is a necessity for online shopping, large $ purchases, rental cars, travel, etc. So I carry one like Visa or M/C that is good everywhere, unlike a Home Depot or a gas card. Remember that movie Reality Bites where the kids went around and charged everything they could (food, convenience store items) on that gas card?
Unless you are like a George Soros and can get 400% returns in any 12 month period, I think the statement "why not use their money for free" really has little value. You have to pay it back in full in a short time, so I'd rather just not deal with that. If you forget or are unable, the 18% interest, or "juice" kicks in from the original date.
What's wrong with having 1 or 2 credit cards and just pay it off when the monthly statement says its due (25-50 days usually)? What I view as unnecessary is taking advantage of the Circuit City promo for the camera, the Home Depot promo for the lawnmower, the Jewelry store promo for wifey's earrings, the Macy's promo for some new pimpin clothes, etc. etc.
There are folks out there that have 30, 50, even over 100 active credit card accounts.
|yeah I don't go overboard with it||ColnagoFE|
Nov 6, 2003 10:58 AM
|I think it is silly to have tons of credit all over the place, but if you're willing to put in the time keeping track of it you can basically use their money for a while interest free. I used a 2 year same as cash offer to buy a home theater system. Paid it off a few months before it was due (just in case). Then again it can be a hassle and probably isn't worth doing if you consider your time, postage, etc. Another issue...what do you do about these darn credit card companies who keep sending you unsolicited cards in the mail? I never accept them and cut them up as soon as I get them, but do they actually "apply for me"? Not that I have any problems with credit, but I wonder if those show up on my record as a potential liability or do you have to activate them to make that happen?|
Nov 6, 2003 11:43 AM
|those unsolicited mailings don't show up on your report.
however, you may find that some of those companies have inquired about your credit history prior to making the offer and that inquiry will be shown on your report (i guess for your info).
I just hate those solicitations because they leave me open to potential fraud if some crook gets a hold of them and says yes. there are plenty of people that have done this by stealing the victim's mail and applying for the credit card and waiting for the card to arrive and they steal the card as soon as it comes in the mail.
|also my AMEX pays me 2% cash back quarterly||ColnagoFE|
Nov 6, 2003 10:14 AM
|Assuming I pay off my balance in full each month (I do) then I'm making a bit of interest off of the money even. Other benefits are car insurance included when renting a car...and other minor stuff like that.|
Nov 5, 2003 8:17 PM
|Ours will be paid off at age 58. I had to start over a few times (divorce, etc.), so a 15 year mortgage can get us back to where we should be. Oh, and 5% interest rates didn't hurt at all.
Nov 6, 2003 6:58 AM
|That is now that we have just 1 income while the Mrs. stays home w/the kids.
I'll 2nd (or is that 3rd or 4th) that the lenders are willing to give you more of a mtg than you are comfortable with. Then the realators feed on this and show you houses priced at that level.
My wife and I stuck to our guns, knowing that the day would come when I was the only one working.
Nov 6, 2003 7:58 AM
|18% gross is a ratio I could live with.
The problem is housing is way too expensive in my area so unless I had huge home equity situation (I don't) or a huge downpayment, a ratio like that is virtually impossible.
The only other solution is to have a huge annual gross income, but I can't figure out how to do that and stay within the law.
|20% gross- first payment is always most expensive||filtersweep|
Nov 6, 2003 8:45 AM
|-But I just purchased six months ago as a first-time buyer- so my income hasn't had much of a chance to grow (while the mortgage remains constant). First payment is always the worst... 10-15 years from now people will think it is dirt cheap.
I could have borrowed twice the money and the bank would not have flinched.
One other thing to think about- as long as you are NOT "house poor"- it makes some sense to pay a higher percentage of gross income for a mortgage because to a certain degree, it is like putting aside a higher percentage of earnings into savings.... so I'm not so bothered by the actual percentage.
Nov 6, 2003 9:09 AM
|I hear ya, it is the same in my area (northern NJ). Due to a significant increase in R/E values here in the last 4 years, I'd have real trouble affording the house we live in if I was just entering the housing market. The appreciation is great for the balance sheet but does nothing for my P&L.
Thankfully the low-rate environment allowed me to refi, cut my ammo down to 20 years & keep the payment roughly the same so I'm happy with my retrenchment.
It sounds like you are taking an analytical approach to this big purchase, which is very wise. A higher ratio could be mitigated by other dynamics like: a lack of other current/projected debt, anticipated increases in salary level, financing via ARM or similar product like interest only for the 1st few years.
Good luck in this exciting (and stressful) endeavor. Keep us all posted. Isn't it good to have the bike rides to fall back on to clear your head now and then?
|32% of Gross||TimA|
Nov 6, 2003 9:08 AM
|And that's for renting a 2 bdrm apartment. For many people around me that's a low percentage. I'm moving out of California as soon as I can.|
|6% of gross||Turtleherder|
Nov 6, 2003 9:27 AM
|And that's making double payments on a 15 year loan. Can't wait until December 2004 when the whole things paid for. Did I mention it's cheap livin' in Iowa?|
|More than most here... it's SoCal...||No_sprint|
Nov 6, 2003 10:52 AM
|and so worth it. I won't even run the frightening numbers.|| |