General Question

boettiger's avatar

Housing as a percent of income?

Asked by boettiger (123points) August 3rd, 2008

Finance experts say that your mortgage should ideally be 30% of total income. One might assume that since you can only make a mortgage payment with NET income (not gross), that they mean 30% of NET income (after-taxes). Is this correct? And is it just the mortgage or “Housing” (which would include property taxes and homeowners insurance?

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7 Answers

SuperMouse's avatar

Mortgage lenders figure your debt to income ratio using your net income. The figure they use includes principal, interest, taxes and insurance, if there are homeowners association dues, those will be included as well.

I remember hearing once upon a time that debt to income ratios on FHA/VA loans are figured using net income, I’m not sure if that is true anymore.

gooch's avatar

Yes you guys are both correct it is on net income with all associated bills insurance,taxes, home association dues, etc.

Mizuki's avatar

Banks calculate income on Gross Income, and for folks on SSI Banks calculate income multiplied by 125% since taxes are not taken out. For Sure, Gross, never Net. There are 2 ratios, front (excluding housing payement) and back including housing. Ratios are not in stone and one can have a higher ratio and be approved with compensating factors such as financial reserves + 6 mo, or low LTV, or others…...good question.

boettiger's avatar

@Mizuki – Interesting that some say it is NET and others say it is GROSS. Hmmm… That’s why I asked.

gooch's avatar

The difference is banks go off gross but financial gurus go off of net. It gives you more of a buffer or budget. Budgets are net based not gross based.

allengreen's avatar

The ratio’s for Fannie and Fredie are 28/36 with some exception.

Mizuki's avatar

It is gross since everyone has different write offs, so everyone would have a different net.

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