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Correction: RE mortgage ratios

Email|Link|Comments (3) Posted by Rona Fischman October 10, 2007 11:34 AM

Last week, I wrote about the difference in buying power for consumers who spend 50 percent of their income for housing costs, instead of the 33 percent that is conventional wisdom.

I made a mistake. I calculated the ratios based on net income, not gross.

In response to a comment, I also confirmed that people with big down payments and excellent credit can borrow more than 50 percent for housing costs, still! These are conventional loans, not “Alt-A” or subprime loans.

Here’s what changes if gross income is used.

Family A earns $52,000 a year. If they borrow a third of their income, they can borrow $180,000 instead of $160,000. Going up to fifty percent, their borrowing power increases to $285,000 from $260,000. If they borrow half their income, they have $2167, minus taxes, to pay all their other bills.

At double that income, Family B, can borrow $399,000 using a third of their income. Spending half allows $608,000 loan. They have $4334 left every month other bills.

My error makes a significant difference in regard to buying power. However, my so-called “Family A” is still out on a limb, while the family with the higher income is sitting prettier.

I apologize for the error, as does my fact checker. I won’t fire him, this time. Thank you for calling attention to the mistake.

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3 comments so far...

BUTBUTBUT.... I know its customary to use GROSS income instead of NET income, but that doesn't make monetary sense: one does not have at one's disposal to spend the entire GROSS amount. So basing affordability on GROSS is deceiving.

they should change the calcs from Gross to net...

Posted by Michele St. Pierre October 10, 07 04:36 PM

Thank you for confirming this.
There is enough negative information out there without adding to it with incorrect information.

Also, downpayment does and does not play a factor. Credit and assets are the overwhelming criteria. I have recently seen 100% financing with a total debt ratio of 55% with 700+ credit scores.
While this seems like a lot, the monthly payment prior to tax benefits was only slighlty higher than the rent that they were paying and more importantly, the buyer is comfortable with the situation.

Once you go over the Fannie Mae loan limit, the 45% debt ratio is much harder to exceed. Ironic ? The more you borrow, the more you make, the harder it is to get it even though you have more disposable income.

Gross income will be used because of the possible tax benefits. It is possible to receive more money in your paycheck by properly managing your tax deductions and your mortgage together. Agian, we are back to fiscal literacy and financial management that, on a whole, does not exist with US consumers.

Posted by unknown October 10, 07 07:27 PM

Good luck. I monitor your accounts regularly

Posted by twiter August 30, 09 01:17 PM