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And yet again, rather than an "hmm, maybe I need to reconsider my assumptions" response
we get a non sequitur plea to the extenuating and/or previously unstated.
It's tiresome.
Some will say a higher % and some will use GROSS ...but they are wrong.
Especially if you ever hope to own a home or retire
Actually GROSS would be the "correct" method to use because you can apply that rule to everyone; not net.
By your logic my wife and I cannot afford our house because it comes to way more than 30% of our net.
BUT we are sending 30% of our gross income towards a 401k and 403b to max them.
Net income or take home pay can be manipulated.... Based on deductions, retirement contributions, healthcare costs, etc. Some people don' withhold enough and get a tax refund and some withold too much and owe money.
GROSS INCOME is the one "true" number that everyone can go by and don't have to make "exceptions".
Actually GROSS would be the "correct" method to use because...
Nope.
At the lower end of the spectrum the difference between gross and net is nominal
and rather uniform across the board absent OTHER factors going on in the lives of
any one person earning $X vs any other.
Sometimes those other factors will be elective (like 401K and IRA) but not at these
lower levels for whom any other deduction from wages are based in their other CHOICES
they have made (like Court ordered garnishments).
It isn't until you get far above this income level that the gross will even marginally make
better sense as a gauge and into a population who will mostly be homeowners not renters.
The 1/3 of gross is a banker/lender rule of thumb first filter qualifier for debt...
and by some landlords as a filter for affordability to pay their rent. It is not a number
or a standard that is in the best interests of the tenant or borrower and as such should
NOT be presented as any sort of gauge for "doing OK".
At the lower end of the spectrum the difference between gross and net is nominal
and rather uniform across the board absent OTHER factors going on in the lives of
any one person earning $X vs any other.
Sometimes those other factors will be elective (like 401K and IRA) but not at these
lower levels for whom any other deduction from wages are based in their other CHOICES
they have made (like Court ordered garnishments).
It isn't until you get far above this income level that the gross will even marginally make
better sense as a gauge and into a population who will mostly be homeowners not renters.
The 1/3 of gross is a banker/lender rule of thumb first filter qualifier for debt...
and by some landlords as a filter for affordability to pay their rent. It is not a number
or a standard that is in the best interests of the tenant or borrower and as such should
NOT be presented as any sort of gauge for "doing OK".
Your whole reasoning is the proof that "Gross Income" is the best method to use.
Not use "net" income when you are in this income bracket, and once you get to this income bracket you can use "gross".
A simple to follow rule: housing expenses (wether rent or mortgage) should not be more than 30% of your gross that can be applied to the population as a whole vs breaking it down by "income" bracket.
And low income might have 401k/IRA, etc. Being fiscally smart/prudent is not only reserved to high income earners.
Not to knock the person who posted that, but you also might ask what type of house or what neighborhood you get for $600. Even in a relatively low cost area like Northeast Ohio, you can get a house for $600 but you are likely not getting much of a house or neighborhood for that price. Either that or you're living in a rural area.
On another note, what is the logic in basing housing affordability on your gross income? What sense does that make? A person could have a rent that is only 10% of their gross yet have the rest of their net eaten up by other debt payments. Basing affordability on income without other expenses factored into the equation is a recipe for failure. It's why mortgage companies will say a person can afford x amount, but they can't _really_ afford it.
That's actually why there are two ratios people use. Most mortgage lenders use both the front-end ratio (the one you described with expense as a percentage of gross income) and the back-end(which includes other debt payments).
(But I have no credit card debt or student loan debt - and my car is paid off).
And even though I may not have a lot of money, I do contribute money out of my gross pay to a 401K and invest a little into stocks.
My 15-year-mortgage payment takes up around 33% of my paycheck. However, car and home insurance, retirement savings, and HSA are already deducted from my paychecks, so it is a much smaller percentage of my gross (less than 20%).
Of my mortgage payment, all but $700 or so goes to principle, and the rest goes to taxes and interest, mostly taxes. Therefore, I can kind of say that my house is essentially being rented for about $700/month, and due to the way the amortization works the 'rent' goes down every month. This is a single digit percentage of my gross and around 15% of my monthly paychecks. This is why owning makes more sense than renting for me.
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