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Old 07-25-2010, 06:25 PM
 
32 posts, read 146,746 times
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Hi,

28% is a frequently used number for calculating front end ratios (home price/gross income). This probably has a lot of assumptions that may not be accurate for me or any individual. Does anyone know anything about the assumptions?

Also, regarding the Price to annual rent ratios, no website/blog actually considers the price/sq.ft in calculating the ratio. You would probably be ok renting 1600sq.ft. home, but won't be buying a 1600 sq.ft home. Any insight into this?

These ratios are general rules of thumb. I am trying to find some detailed information about the assumptions.

Please let me know.

Thanks.
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Old 07-26-2010, 09:20 AM
 
Location: Laguna Niguel, CA
768 posts, read 4,037,266 times
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31% is more commonly used than 28% - 28% used to be FHA's old standard for the housing ratio, it is now 31%, which is also what a lot of lenders offering conforming mortgages use as well. This is just the ideal housing ratio which a loan will get approved, but with the aid of automated underwriting (a computer program that analyzes risk for mortgage transactions) it's not uncommon for a housing ratio in the upper 30's/low 40's to get approved if there are strong compensating factors (reserves available after closing, healthy credit scores, and/or more than the minimum down payment).
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Old 07-26-2010, 09:28 AM
 
32 posts, read 146,746 times
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Hi, I wasn't aware of the new ratio of 31%. However, what is the basis of such a thing? The ratio, in my opinion, should be based on net income.

a. Say two people contribute to 401(K) and one contributes 5% and another 20%. Their net income varies and they would not be able to afford the same house in the same way.

b. Someone who has kids will have less disposable income than the one who doesn't.


My question is: What are the assumptions underlying the 31% or 28% number?

Thanks.


Quote:
Originally Posted by ShanetheMortgageMan View Post
31% is more commonly used than 28% - 28% used to be FHA's old standard for the housing ratio, it is now 31%, which is also what a lot of lenders offering conforming mortgages use as well. This is just the ideal housing ratio which a loan will get approved, but with the aid of automated underwriting (a computer program that analyzes risk for mortgage transactions) it's not uncommon for a housing ratio in the upper 30's/low 40's to get approved if there are strong compensating factors (reserves available after closing, healthy credit scores, and/or more than the minimum down payment).
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Old 07-26-2010, 09:42 AM
 
Location: Plano, Texas
1,676 posts, read 6,472,062 times
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Lenders use the gross income for the borrowers, before any deductions. For debts, they only look at those debts that report to the credit agencies such as other mortgages, installment loans, revolving debt, student loans, signature loans, etc... They do not take into account cell phone bills, groceries, etc...
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Old 07-26-2010, 10:00 AM
 
28,441 posts, read 71,127,233 times
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Default Historically this is one of those "horseshoes" type ratios...

I'm sure that it would be better for their to be a more multi-dimensional way to state qualifications, but that opens up a political can of worms. Instead of allowing the computer models to accept the fact that people with the burden of expenses that go along with child rearing ( or elder care, or non-employer paid health care, or hundreds of other legitimate costs) the rule makers set a target and put a sand box around it. If you "ring it" your approval is a lock, if you splash the sandbox by a percentage point or so and in the ball park in the other major categories, you still "win"...

I think the fear is that any hard and fast rule will be gamed - low difficulty to setup just the right info to get bums approved if their story checks out.

Similarly I don't think you will find too many university researchers that give much effort to studies of the magic ratio of rent to income. The market does a decent enough job of setting that by itself. The Section 8 stuff is back in the political pandora's box, where landlords DO definitely know that given the size of the potential renter pool and the amount of folks that can get a voucher there are limits to what can be rented profitably...over improve a place and you cannot expect to get the rent to be justified.
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Old 07-26-2010, 10:08 AM
 
8,065 posts, read 7,320,760 times
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I think you mean the Gross Rent Multiplier (GRM). You should be able to find a lot of resources online to explain it. The normal range is 8 to 12. Back in 2001 and 2002, you could find a lot of homes in my immediate area in that range.

The alternative is to calculate the cap rate for the property which requires more information.
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Old 07-26-2010, 10:13 AM
 
32 posts, read 146,746 times
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GRM is new term to me. But NO. Not GRM.
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