Who (in their right mind) pays half their income for housing?
Fannie Mae allows borrowers to spend up to 50% of their net income on their mortgage for a conventional loan. Really. Today! Granted, to borrow that much, you must have great credit, work history and little other ongoing debt. Here’s the problem:
Suppose Family A earns $52,000 a year. Assuming 25% income tax, they have a net income around $39,000. Divide by 12 months, and their monthly net income is $3250. If they spend one third on housing, their mortgage payment would be $1083. That will get them a loan of about $160,000. That’s not enough. So they stretch to half their income. They get a loan of $260,000. That leaves them $1625 a month to pay all their other bills. Now, they are headed for trouble; there is not enough cushion, IMHO.
If we double the income to $104,000 a year for Family B, their net monthly income goes up to $6500. A third of that allows a loan of $320,000 and spending half allows $510,000. (Taxes are higher; that’s why it isn’t just double the figures above). They have $3250 left every month for groceries, medical, daycare, transportation and home repairs.
You can easily see how a family earning $150,000 or $200,000 would still have lots of expendable income, even if they spend half their income on housing.
People at median income who spend 50% on housing are locked into being house-poor. But for people with large incomes, especially young, upwardly mobile ones, this may not be so risky. I still don’t recommend it; I’m financially conservative.
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Join the club. Most Massachusetts residents have been paying a little more than 50% of our net pay in rent each moth for years.
your representation is inaccurate. The 50% debt to income rule if from gross income, not net. With mortgage interest and real estate taxes being a benefit for most, not using gross income would be double dipping thereby reducing homeownership overall.
Also, it doesnt matter what a lender will approve a borrower for, they must be comfortable paying it. If not, then reduce the purchase search criteria or walk away and rent.
Most people can take what they pay in rent and increase it 25% and afford that as a mortgage. Whether or not they want to pay that much is another story.
I wonder which elected officials got paid off by the mortgage industry to push Fannie Mae to up the guideline to 50%? A limit of say, 40%, would have restrained home values and prevented the run-away train that has now crashed and burned.
Insane.
Dear "unknown"
I fact-checked this entry with a lender. He did not change my use of net income. I will re-check that on Tuesday. I will follow-up on this point.
However, I think it is very relevant how much credit is available. When tempted by easy credit, many people fail to protect their own interests and over-borrow. If everyone knew their payments and borrowed only what they could afford, we would not be in a credit crisis.
oh my, gross income it is. your article should also factor in the tax deductions and show how much a $1800 mortgage payment is equivalent to paying how much rent per month.
However, if one chose to blew the tax savings on 52" plasmas and sub-zero fridges, there's really no one to blame. You all think the bad credit/subprime/over their head borrowers got shafted this time? Wait till all the homeowners who maxed out on their helocs hit the 10 yr interest-only reset, it's miller time.
I believe Rona is correct... FannieMae allows for up to 36% of gross Income, which, after taxes is 50% of net income.
Using her example of Family A who earns $52,000 a year, their gross monthly income is $4,333.33/month. 36% of this is $1,560. Which is just about 50% of their net income.
If we stayed with the FNMA guidlines we would be in a lot better shape right now..... From the top of my head they are... PITI (Principal, Interest, Taxes and Insurance) can be no more than 33% of Gross Income, total debt service (add in car l and collage loand, Credit Cards) can not be more than 36% of gross income. And all income is verified before the loan is given (no more liar loans!)
While these guidlines can be tough, they are doable. How many people in forclosure today took out loans that met those guidlines? I would be willing to bet very few of them.
incorrect...
FNMA will allow 50% and HIGHER debt to income ratios based on gross income and total debt of piti and any other consumer debts.
noslen had it right, if we had any type of fiscal literacy and were not a society of consumpition, this would not be an issue.
Check out this article as an example...
http://money.cnn.com/2007/10/02/pf/100400117.moneymag/index.htm?postversion=2007100514
Rona makes some good points about FNMA and most of the posters here are right - a lot of people are stupid with their money buying 50" plasmas, bitching about gas then buying an SUV, having 12 credit cards.
But one thing has been left out - Mass. housing is *super* expensive. You can buy a 5 bed home in Texas for 300K. Try doing that up here - maybe you can get a run-down foreclosure 40 minutes outside the city for that amount.
Plus, these lenders are THIEVES, they don't give a sh*t. People in Mass that make big money don't have any clue how hard it is to afford to live here - I don't know if Rona truly gets that point. If you have to pay a lot to live here why not own then - at least there is something to show for it.
Why do people pay so much? Because housing is still high- and we need to live some where. Our family net income is 4,600 a month. Our morgage-(including taxes and insurance)- is 2,200 a month. We live in a decent- cheaper house.
We just make due with the other 2,400 a month. What else are we suppose to do?
We used to live in a rural part of our state and housing was much cheaper but there where no jobs that paid anything. Our morgage, taxes, and insurance were under 500 a month- and we couldn't afford to live. Plus we had to spend hundereds more in gas to get to work. (By the way we don't have a big screen T.V. and our vehicle is 12 years old!)
Uh - maybe because it's necessary?
Salaries in the Boston area do not go along with the high cost of housing. When I moved here years ago from Syracuse, NY, the rent was twice as high, but do you think the salaries were twice as high? NO.
Everything goes up now, EXCEPT wages. If you are a wage-earner with no other assets, and the median wage is about $45,000 - half below that, of course - what does one expect? Housing is now our biggest expense. It's just the way it is right now.
This blogger might want to review your comment before posting it.
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