Financial Planning for Generation X & Y Women
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Expert Q&A Archive

Recommended housing expense ratio?
Is spending 28% of your gross income for housing the recommended limit one should spend on housing cost, and is that amount adjusted to account for different local real estate markets?
Shauna L. Roberts:
expert info »
The 28% housing expense ratio used to be a guideline for qualifying for a Mortgage. Those guidelines have changed over the years. They are now very flexible. With compensating factors such as a good credit history, large down payment, or reserves (retained assets after the closing), the housing expense ratio can be much higher than 28%.

You have to make sure that when you purchase a home that you are going to be comfortable making those payments. A good way to test that is to find out what a payment will be based on your price range and your down payment and put that amount (minus your current housing expense) aside for several months.
Lisa A. Arcangeli:
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Thank you for your question. 28% is the typical qualifying ratio (percentage of housing debt to gross
income) but there are many different ratios being used in the mortgage industry. Depending on the program, many programs allow a higher ratio and some programs only look at the debt-to-income ratio [The debt-to-income ratio is basically the percentage of your take home pay that goes to pay non-mortgage debt. See the chapter on “Credit in a Money World” in the Wi$e Up curriculum]

Even though the historical data on ratios and payment history are reliable as an indication that borrowers should be able to meet their housing obligation, if they are within the ratios, it is more important that a buyer/borrower look at their own budget, spending habits, short- and long-term obligations and what they are willing to sacrifice for a home to determine what payment best fits their budget. Some buyers/borrowers may have several children or may pay child care expenses and may want a lower ratio to be comfortable. Others may not have children and don't spend much on entertainment or may be able to work overtime when needed and are comfortable with a higher housing ratio.

My advice is to look at your spending habits, create a budget (if you don't already have one) and determine the dollar amount you would feel comfortable paying every month that allows you to save money and not rely on credit cards. Then go to a lender to have them help you determine what that monthly payment would translate into for a loan amount and go from there.
Michael A. Masiello:
expert info »
It depends on how much debt, i.e. debt to income ratio the person has. Is the 28% just debt or expenses of a house, etc? Preferably less would be better, 20% is more manageable. Another factor is job stability, marital status etc. If the person is in California or other high price area, they may not get much house.
Concern is being house poor. Credit rating/risk of the buyer is a part of the equation. Mortgage and details also could have a large part of the decision.
Gary Silverman, CFP®:
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Like any number of this kind, it is a thumb-rule. If you have an area of the country where real estate is very expensive but food is not, then you can have a higher % for real estate and a lower one for food. Most of the time, however, if real estate is expensive then everything else is equally expensive so the thumb rule still applies.
Bettye J. Banks:
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25-33% is the accepted range, though some programs allow higher than 33%. 28% is probably O.K., but my favorite answer to just about any financial wellness and credit question is, "It depends!" It depends on her non-mortgage debt-to-income ratio, her normal living expenses, her savings, and other factors that could make the 28% figure work, or NOT work.
Does she have a fixed-rate mortgage? An Adjustable Rate Mortgage could cause a huge problem for her if mortgage rates increase. Right now it [the current rates] would work in her favor, so this could be a good time to fix the loan at the current rates.
Laura Rogers:
expert info »
Yes, 28% of your gross income is a reasonable amount for your principal, interest, taxes and insurance cost of your home. However the most important question is what is your total debt [to income] ratio? Your total debt ratio, sometimes referred to as your back ratio, includes your housing cost and other installment debt such as student loans, car payment, child support, credit card payments, etc. If your total debt is more than 43% or so, you may be getting in over your head. Lenders will approve you with a higher debt ratio if you have good credit, but that doesn't mean you should [take out a loan that will cause you to be spending 28% of your gross income for housing].

Compare what you are paying now for rent or take the increased amount you'd pay based on an estimated future payment and put it aside in a savings account. See what your comfort zone is with that money taken out each month or week. The ratios are not adjusted for area.