General Question

boettiger's avatar

Mortgage payment as a percentage of gross income?

Asked by boettiger (117 points ) December 28th, 2008

In the 28/36 calculation for figuring out how much of a mortgage payment one can afford should be, the 28% stands for 28% of your gross monthly income. Does this payment calculation included escrowed taxes or is it purely P & I ?

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8 Answers

bythebay's avatar

The 28% is simply a guideline that should include PITI (principal, interest, taxes & insurance), but in some cases- you can exceed that 28% with excellent credit. It can also be affected when you take into consideration the LTV (Loan To Value ratio). It’s a great time to buy if it’s feasible for you. Good luck!

Mizuki's avatar

The 28% (front end ratio) excludes housing. So if your bills exceed 28% (not including housing) if could be an issue. By bills I mean every obligation that is on your credit report. The 36% includes housing and Tax and Insurance.
The 36% referred as the “back end ratio” includes PITI.

Boettinger—housing prices will fall another 20–40% in the next 18 months based on ARM and MTA loans that will be resetting, so if you need to Refi, do it now, if you are purchasing, wait 18 months or be upside down for a long long time.

bythebay's avatar

Good Grief. Your Front End/26 is your housing expense, all of it. Your back end is your other debt. This number is your monthly housing expense divided by your monthly income (before taxes). PITI or:

P: Principal of the mortgage payment
I: Interest of the mortgage payment
T: Taxes
I: Insurance: both property and mortgage insurance
(and any condo, coop or Home Owner’s Assoc. fees)

Back Ratio/36: this number is the combined total of both your housing expense and your debt payments divided by your monthly income. The debt number includes your credit card payments, any car or boat loans, any personal loans, and any child support or alimony owed.

It doesn’t’t include household expenses like food, utilities and clothing.

When the ARM products reset, there will be loans that default as some people will not be able to afford the new/higher payment. However, nobody…not the brilliant Mizuki, not Allen Greenspan (the real one or the Fluther one) and not even Ben Bernanke can predict the decline in housing prices.

If you are refinancing because you’re concerned about your value, then by all means refinance now. However, if you are not concerned with your value and can afford to wait, there is a very strong argument for waiting as rates might very well go lower.

boettiger's avatar

@Mizuki, while I appreciate your response, I know of no person on Earth whose bills total less than 28% of their gross income. You are incorrect here.

Mizuki's avatar

I stand corrected, as I reversed the answer and should not type in the middle of the night…..los siento

Mizuki's avatar

Great time to buy——bythebay——http://www.bloomberg.com/apps/news?pid=20601103&sid=aWHDbpTQArBQ&refer=us

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