30% Housing Costs: Net or Gross?

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Mon, Mar 2 - 3:22 pm EDT | 5 years ago by
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I received this question via email, regarding the “30% rule” when making your mortgage or rent payment:How much of your income should go to mortgage payments?

I know that you’re supposed to stay around 30% of your income for housing costs per month. Is that 30% of net or gross, and is that only for the housing, or do they recommend staying under 30% for housing and all utilities?

This is an interesting question without a straightforward answer. “They” say many things, but from what I can tell from talking with some other financial types and consulting my common sense, the basic rule is 30% of your pre-tax (or gross) earnings, and that doesn’t include utitilies.

That said, here is what I, personally, think:

Try to keep your housing payment to 28% of your net monthly income.

Many mortgage lenders, if you want the best mortgage interest rate, have what is known as the 28/36 qualifying ratio. This means that your mortgage payment should only be 28% of your monthly income and no more than 36% of your monthly income should go to total debt (mortgage + other obligations). I suspect that this is even more common in the current economic climate.

I think that you would be wise to keep your housing payment — mortgage or rent — to 28% of your net income, rather than relying on your pre-tax income. (Our mortgage payment is 25% of our net income.) It might get you qualified, but you want to be able to afford the home without being “house poor” . I would even go so far as to include PMI and property taxes in the category of “mortgage payment”. We’ve done this, and our total housing expenses (including utilities and maintenance) is less than 30% of our monthly income.

What do you think is a reasonable percentage of your monthly income to make for housing?

image source: sxc.hu

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  • http://weakonomics.com the weakonomist

    Yeah you want to keep it as a % of net. What I’ve always told people is if your payment on a 30 year fixed is more than 30% of your “take-home” pay then it’s too much house for you. I call it the 30-30 rule.

    Your total liabilities should not be any more than 40% of your “take-home” pay in my opinion. So this would include cars, credit cards, etc.

    You can survive at 50% for a short period of time. But that is not sustainable long term, especially if there is a layoff.

  • Miranda Marquit

    Thanks for sharing, weakonomist. You make an excellent point about 50% of your income being taken up with debt obligations. After a while, this rate just isn’t sustainable. You want to keep it down, just in case something happens. The more of your income that is taken up in debt, the more trouble you’ll be in if something unexpected happens.

  • http://www.fiscalfizzle.com Wojciech Kulicki

    I would agree that 28% is a good maximum for your total payment (including taxes, insurance, etc.). As recently as one year ago, you could still find mortgage companies giving loans with debt-to-income as high as 50% (this is the amount if you include all your loans and revolving debt payments). That would leave almost nothing to live on.

    Especially in this economic climate, it’s important to look ahead and consider what would happen if job situations change.

  • Jim

    We need a return to old fashioned values when it comes to money. 28% with at least 20% down should be a rule of thumb. Cut up the credit cards, pay off principal early, have a substantial emergency fund, and don’t buy what you can’t afford. My grandfather bought the one and only house he ever owned in the middle of the great depression with cash when he was in his late 20′s. No help from FDR or the government. He was nothing more than factory worker with a third grade education, but extremely frugal and could make a dollar last longer than anyone I have ever known. Who could imagine that happening today?

  • Miranda Marquit

    I agree that we definitely need to rethink the way we handle money in our society. I think that 20% down is a bit harsh for the homebuying, though. The important thing is to live within your means and avoid buying what you can’t afford. If you can get a modest house with 5% down, and make the payments — keeping it to less than 30% of your income — I think that’s perfectly acceptable. But then, I’m biased, since I got a FHA loan and put 5% down (our payments are 25% of our income).

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  • http://www.monogamoney.com Hannah

    I totally agree! Here’s one reason: for some people, the difference between gross and net pay is larger than others. I live in NYC, so I pay high city and state taxes, in addition to high health care costs. As a result, 28% of my pretax income is almost 50% of my take home pay.

    Here’s a post I wrote about this a while back:

    http://monogamoney.wordpress.com/2008/12/06/how-much-should-you-spend-on-your-first-home/

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  • Miranda Marquit

    You make a good point! Affordability depends on where you live as well.

  • Wilderflower

    While appreciate what has been written, for those of us low to average middle-class earners (30-50k) who live in NYC, spending only 28% of one’s net income on rent is extremely difficult, if not impossible, when one is single and lives alone.

    I’m lucky to be at 30% of my gross, for the time being.