patrick.net

wuaname says

Yeah, thinking more about it, it definitely has to be based on NET, gross is meaningless..

To the contrary, gross is not meaningless because traditional mortgage lending is based on 28% and 36% of gross income, not net income. Net income is far harder to predict because different factors affect the effective tax rate.

If you read the government's reports on the failed HAMP program, the debt-to-income ratios are based on gross income, not net income -- HAMP goes for 31% of gross:

http://www.treasury.gov/initiatives/financial-stability/results/MHA-Reports/Documents/April%202011%20MHA%20Report%20FINAL.PDF

Incidentally, it is simply staggering how much debt some people were carrying. Before modification, 78.9% of gross income was the monthly payment required for all of their debt, of which 45.3% was for housing. After modification, it has gone to 62.1% and 31.0% respectively. With that much debt still on the table, it's no surprise that a lot of people potentially eligible HAMP either flunk out of HAMP or re-default after HAMP modifies their mortgages.

We pay about 6% of our gross. Our rent is $1750 a month.

It also depends on what phase of your life you are in.

When I was just out of school, I had no medical worries and few other expenses. Back then paying up to 25% seemed perfectly fine and I had plenty left over for my amusement.

These days with a kid and all I would never spend that much of my budget on rent.

About 13.6% of our gross income goes to rent. I really don't want to pay much more for housing, rent or mortgage, this amount gives us a lot of financial flexibility. We were paying even less but we moved into a bigger place when rents went down a couple years ago.

I figure around 8.3% of ours. Then again we sort of have an unusual situation as we're renting a pretty nice house for a lot less than what they go for because the landlord has not raised the rent in years. Otherwise it would be around 15%.

That is interesting, so many posted what percentage they pay but not what it should be.

It should be as close to zero as your living requirements permit. Don't pay any more than you must.

A different question might be "how much is too much"? According to mischaelsch the scale is

michaelsch says

10% for housing (does not matter rent or ownership) is normal.
15% is bearable.

20% is a severe drag on your recreation, self development, education , health, etc.

I'm constantly amazed at how rich patnet users are. If you say that $1750 per month is only 6% of your gross monthly income then you make $350,000 per year. That's among the top 1-3% for annual household income in the US.

I hesitate greatly to state my percentage and I only pay $875 per month.

Ok, so that's 22% of my gross income. I gross in the average range for household income in the US.

You have to live somewhere. My rent is below average in my area. Most households even in my area don't hit $75k per year let alone $350k per year.

It's easy for some to sit in an ivory tower and claim that no one should spend more than 10% of one's income in rent when one's income is far above average and/or you live where the cost of living is below average. Most Americans must spend a higher percentage if they want even basic housing. That's a fact and it's the way most are forced to live.

simchaland says

I’m constantly amazed at how rich patnet users are. If you say that $1750 per month is only 6% of your gross monthly income then you make $350,000 per year. That’s among the top 1-3% for annual household income in the US.

Actual payroll records of typical salaried employee by South Bay High Tech employers state otherwise. After 3 decades of working in SV, I dont even come close to $350K and nor do any of my long time friends/coworks.

How the hell do you guys do under 10% of your gross? You must be living in a dive.

My mortgage is 10.5% of my my gross. My mortgage is roughly 18K a year. And I live in the ghetto. I mean ghetto where there are prostitutes and illegal day laborers. The cars that make up the streets are 1990 Dodge Neons and 1980 Ford Rangers.

Even with good income, 220K a year, that only allows you to live in a 1 bedroom studio in a place like Alameda or share a room in Lafayette if you want to stay around the 10% of your gross mark.

We must have very wealthy people on this site.

eastbaydude says

Even with good income, 220K a year, that only allows you to live in a 1 bedroom studio in a place like Alameda

I don't know anything about the Alameda housing market, but are you sure? I found the first two things off Craigslist. Here's a 3/3 + office in Alameda for $2500/mo:
http://sfbay.craigslist.org/eby/apa/2441356175.html

Upstairs 1/1 unit in a duplex for $850/mo:
http://sfbay.craigslist.org/eby/apa/2441339304.html

You're saying a studio is $1800/mo?

thomas.wong1986 says

Actual payroll records of typical salaried employee by South Bay High Tech employers state otherwise. After 3 decades of working in SV, I dont even come close to $350K and nor do any of my long time friends/coworks.

(sarcasm)

But you have to make over $100k per year because patnet users insist that all high tech professionals make over $100k per year, even the entry level high tech workers. Heck, they keep telling me that most people in the South Bay, Peninsula, and San Francisco make over $100k per year. They say that earning above $100k per year is the norm in the Bay Area.

That's why house prices will never fall. Most people in the Bay Area make well over $100k per year no matter what industry.

And the Tooth Fairy owns a house in the fortress made entirely out of the teeth she collects from children. It's absolutely craptastic! It's a real "fixer upper" and she's only asking $1.5mil in a highly desireable school district. In the contract she even includes a few hundred Oral-B toothbrushes and a couple hundred tubes of Tom's of Maine Tarter Control Toothpaste assuring all prospective buyers that it's enough maintenance equipment to prevent house decay and lost equity for at least 5 years.

(/sarcasm)

simchaland says

I’m constantly amazed at how rich patnet users are. If you say that $1750 per month is only 6% of your gross monthly income then you make $350,000 per year. That’s among the top 1-3% for annual household income in the US.

Yes, that's what we make (actually slightly higher than that). Ours is a dual income household and me and my wife both are blessed with high income careers. (She's a finance controller for a $200M company, and I run my own software company).

But we have worked hard for that. We both have relatively high education levels (She's an MBA with a CPA, and I have a Masters in CS), but even with that, it's only been the last few years that we have seen our careers take off.

eastbaydude says

How the hell do you guys do under 10% of your gross? You must be living in a dive.

$1750 = a 2400 sqft townhouse in a family friendly neighbourhood.

Keeping it under has more to do with our income than the rents (which are high enough in the DC area).

eastbaydude says

How the hell do you guys do under 10% of your gross? You must be living in a dive.

Its going to be different situations for different people. While we do pretty well financially, the main reason our rent is so cheap is because we have been renting the same house for over 8 years and share it with housemates. I'm sure most couples wouldn't be capable of dealing with that but its worked out great for us: Big 4 bedroom house in a nice neighborhood, cheap rent, and a big back yard. The housemates are hardly ever home anyway so its almost like having it to ourselves.

kapone says

Yes, that’s what we make (actually slightly higher than that). Ours is a dual income household and me and my wife both are blessed with high income careers. (She’s a finance controller for a $200M company, and I run my own software company).
But we have worked hard for that. We both have relatively high education levels (She’s an MBA with a CPA, and I have a Masters in CS), but even with that, it’s only been the last few years that we have seen our careers take off.

My comment wasn't meant to put you on the defensive. It was meant to show that for most people spending only 10% of their income on rent isn't possible. I get the feeling in this thread that most of the people who responded make significantly more than your average American. If you make average income and you live in an expensive area, your financial reality is quite different than what most posters here seem to manage.

Of course you worked hard. I have too. I earned a Master of Arts in Counseling Psychology with a specialization in Transpersonal Psychology. It was a three year degree for a full time student. I did it in 3 years with high honors while working full time. In my third year while I was writing my thesis I was a full time student, worked full time at my paying job, and worked 25ish hours per week as a psychotherapist trainee at a local mental health clinic where I received a very generous stipend of $100 per month for my work. I have earned my 3000 hours of supervised experience as a registered intern plus continuing education credits necessary to sit for two grueling exams in order to become fully licensed.

In my profession in California, once licensed, the average annual income is around $50-60k per year. We work very hard to get where we are and most don't make what most people holding a masters degree make let alone what most people make who hold a masters and a professional license. We are paid less than teachers even in the expensive Bay Area.

I will grant you that you and your wife have worked hard. And I'm happy for you that you are rewarded for your hard work. Let's not forget that income is not necessarily an indication of how hard you worked or how hard you are working now relative to others. Even when people make "all the right choices" and work very hard, often the income they earn doesn't reflect it.

Some people keep claiming that income is only a function of how hard you work. That has never been true. And it's not a failing if someone who works very hard doesn't earn over the average income. Also let's not forget that low wage workers do work just as hard for their money as higher wage earners. The income hierarchy has more to do with what society thinks should be the value of your labor and that doesn't necessarily have anything to do with how hard you toiled to get where you are or how hard you work now.

corntrollio says

eastbaydude says

Even with good income, 220K a year, that only allows you to live in a 1 bedroom studio in a place like Alameda

I don’t know anything about the Alameda housing market, but are you sure? I found the first two things off Craigslist. Here’s a 3/3 + office in Alameda for $2500/mo:

http://sfbay.craigslist.org/eby/apa/2441356175.html
Upstairs 1/1 unit in a duplex for $850/mo:

http://sfbay.craigslist.org/eby/apa/2441339304.html
You’re saying a studio is $1800/mo?

your first example requires a person to make $300,000 a year gross @ the 10% debt-to-income benchmark

your second example, requires a family to make 100K a year to live in a part of town known for "un-warranted" (real estate speak) inlaw converted units. That place probably has no more than 800 sq feet of living space and no parking. How is a family of 3 or 4 who makes 100K average income live in a small 1 unit apartment. And that area has no or little street parking available.

simchaland says

I will grant you that you and your wife have worked hard. And I’m happy for you that you are rewarded for your hard work. Let’s not forget that income is not necessarily an indication of how hard you worked or how hard you are working now relative to others. Even when people make “all the right choices” and work very hard, often the income they earn doesn’t reflect it.

Indeed. I find myself in an income range that is in between you two (more than $60k, less than $350k), and I definitely have and continue to work hard. At the same time I must say that it doesn't seem right that I get paid so disproportionately more than the (extremely hard working) immigrant who cuts the grass for the rich people. It's hard to make peace with that. I'm not sure there is much I can do about it aside from being aware.

Certainly the percentage that you spend on hosing is strongly dependent on the amount you make (among other important factors..location, kids, etc). I just ran through a mental list of people I know (and roughly what their rent/pay is)...for this group ~20% seems to be more "normal".... (granted a sampling of "ten people I know" isn't exactly representative of the national average..)

From Wikipedia entry on affordable housing:
http://en.wikipedia.org/wiki/Affordable_housing

"In the United States and Canada, a commonly accepted guideline for housing affordability is a housing cost that does not exceed 30% of a household's gross income. Housing costs considered in this guideline generally include taxes and insurance for owners, and usually include utility costs. When the monthly carrying costs of a home exceed 30–35% of household income, then the housing is considered unaffordable for that household."

My apologies if it came out as if I was trying to say we work harder than anybody else. I was merely trying to post another example of what people are paying (in this case, us) in rent.

If we look at just the rent (and not our percentage) it certainly aint low for a 3/2/1 townhouse. We're 32 miles from DC and it's an ~hour commute on average. It's not as if that rent gets us something within a 10-15 minute commute.

It's about lifestyle and your entire cash outlay each month. I spend about $2500/mo for a 2b/2bth in a nice neighborhood off Michigan Ave. in Chicago. I was lucky to sign a two yr lease at the bottom of the rental market here. My same apt. is now being rented for $3200 a month. I live close to work and haven't owned a car since I was in High School. I walk about 9 months of the year and take a $7 cab ride the other 3 months. What I'm getting at is it's not so much what you pay on rent or mortgage as it is what you pay to live. What do you pay on your home, car, food, entertainment, etc. For some people like me, paying a bit more in rent makes sense. I save $750 + per month by not owning a car ($300+ on car payment, $275 on parking, insurance, gas). I have friends that pay $1200 a month renting a place in a less desirable part of the city or in the suburbs and they can't believe what I'm paying on rent. They don't think about the money they are wasting on there 1 or 2 cars each month. To each their own. As for me, I'm all about spending as little as possible to enjoy the lifestyle I want.

eastbaydude says

your first example requires a person to...

your second example, requires a family to...

The point was not to suggest you don't need a decent income to put only 10% of your gross income towards rent in Alameda, but rather to point out that your original estimate was way off. $1800+/mo gets you more than a 1BR studio in Alameda.

simchaland says

Some people keep claiming that income is only a function of how hard you work. That has never been true.

I think that some people underestimate how much luck is involved with their income level.

I am sure that Paris Hilton feels that she has worked very hard to get where she is. In fact, if I cared to spend the time searching for it I could probably find a quote that says a much.

Now most people around the kapone income level do work hard, but hard work does not always = more money. And, having more money does not always mean hard work was required to get there.

kapone says

My apologies if it came out as if I was trying to say we work harder than anybody else.

Understood, I did not get the impression that you were saying otherwise.

swebb says

When the monthly carrying costs of a home exceed 30–35% of household income, then the housing is considered unaffordable for that household.”

It's funny then that they set the HAMP "target" payment at 31% of gross income. Seems like setting people up for a fall (once again).

swebb says

Certainly the percentage that you spend on hosing is strongly dependent on the amount you make

Yeah, those who chimed in with around 10% are certainly well off. I doubt there are many people making $50k a year who only spend $415 a month total on housing. I'd say in general if you're under 30% you're in good shape, assuming you have some semblance of financial self-control in the rest of your life.

Back in the day we'd regularly underwrite people to 55% DTI. That's gross. And often they'd request exceptions (the underwriters) and get them, to exceed 55%. I've seen an approved loan go to closing above 70% DTI on gross income. Absolute madness.

Which is of course why that company no longer exists.

Schizlor says

It’s funny then that they set the HAMP “target” payment at 31% of gross income.

Schizlor says

Back in the day we’d regularly underwrite people to 55% DTI. That’s gross. And often they’d request exceptions (the underwriters) and get them, to exceed 55%. I’ve seen an approved loan go to closing above 70% DTI on gross income. Absolute madness.

In both cases, see my post above on the significant amount of debt most people successfully in HAMP have:

http://patrick.net/?p=803664&c=744211#comment-743898

The typical *successfully modified* person in HAMP had a 45% housing debt to income ratio. Think about all the people who flunked out of HAMP! -- all those people who re-defaulted or otherwise failed to meet the standards.

70% DTI is absurd -- that could be more around 100% of net in many cases! 55% is already ridiculous.

kapone says

My apologies if it came out as if I was trying to say we work harder than anybody else. I was merely trying to post another example of what people are paying (in this case, us) in rent.

I understood that. No need to apologize. The issue around here is that there are people who insist that income is only based on how hard you work. I didn't think it was your issue, so I hope I haven't offended you.

And yes, I lived in Baltimore, MD. Your rent is very reasonable and I'm sure it doesn't get you very close to where you work. The Baltimore/DC area is an expensive place to live.

Schizlor says

Back in the day we’d regularly underwrite people to 55% DTI. That’s gross. And often they’d request exceptions (the underwriters) and get them, to exceed 55%. I’ve seen an approved loan go to closing above 70% DTI on gross income. Absolute madness.

While I am not near 350K/year, my wife and I have an income well above average (we work hard too).

This type of thing is why people making much less than us priced us out of the housing market.

We avg about 10k/month gross, and our rent is 1775. We are young(30), and I would like this ratio to be half of what it is now by the time i'm 40. Id like to be in the 10-12% range.

People bragging while anonymous... beats me.

simchaland says

But you have to make over $100k per year because patnet users insist that all high tech professionals make over $100k per year, even the entry level high tech workers. Heck, they keep telling me that most people in the South Bay, Peninsula, and San Francisco make over $100k per year. They say that earning above $100k per year is the norm in the Bay Area.

Yes, $100K after 15 - 20 plus years of experience. The only ones coming close to $200K plus are sales people working and living in the field. But since they are living outside of CA, their living costs are much lower and location is not critical to job. They make salary and variable commission based on sales.

thomas.wong1986 says

Yes, $100K after 15 - 20 plus years of experience.

i was lucky. started working during the dot com bubble and was making six figures 3rd year of full time work. $92k in my second year of work. those were the days.

I was going to chime in but then realized that some posts sound like (Bay Arean) Boasting Opportunities. Besides it is transientory anyway. We're a few mouse clicks away from heading Detroit-way.

Sybrib says

I was going to chime in but then realized that some posts sound like (Bay Arean) Boasting Opportunities. Besides it is transientory anyway. We’re a few mouse clicks away from heading Detroit-way.

where are the people paying 50% or more of their paycheck to rent or mortgage?

they are conspicuously missing.

MyPunanyIsBiggerThanYourPunany says

Sybrib says

I was going to chime in but then realized that some posts sound like (Bay Arean) Boasting Opportunities. Besides it is transientory anyway. We’re a few mouse clicks away from heading Detroit-way.

where are the people paying 50% or more of their paycheck to rent or mortgage?
they are conspicuously missing.

Most may not have Internet access or they are working 2+ jobs to make ends meet. Where I work many people have two jobs in order to make ends meet. This is common in the "rich" Bay Area. They may not be interested or have the time to surf online let alone to post.

simchaland says

Some people keep claiming that income is only a function of how hard you work. That has never been true. And it’s not a failing if someone who works very hard doesn’t earn over the average income. Also let’s not forget that low wage workers do work just as hard for their money as higher wage earners.

Totally agree. I spent years working in retail because when I moved to California after college there were zero jobs due to the dot-com implosion. I was making $8 an hour. In that job I was a salesperson selling high end hardware. I had to know about 50 different finishes, know 15 different brand with all their models inside and out, know the dimensions of locks, certain types of keys, keep track of 100's of orders, and all kinds of other things. It was definitely hard work but you felt like you did an honest day's work. I was living paycheck to paycheck.

I now make an above average income. But I still drive the same old truck I had in high school and hardly ever buy fancy gadgets. I know what its like to work hard for not a lot of money and appreciate every penny.

Ideally? Zero.

simchaland says

MyPunanyIsBiggerThanYourPunany says

Sybrib says

I was going to chime in but then realized that some posts sound like (Bay Arean) Boasting Opportunities. Besides it is transientory anyway. We’re a few mouse clicks away from heading Detroit-way.

where are the people paying 50% or more of their paycheck to rent or mortgage?

they are conspicuously missing.

Most may not have Internet access or they are working 2+ jobs to make ends meet. Where I work many people have two jobs in order to make ends meet. This is common in the “rich” Bay Area. They may not be interested or have the time to surf online let alone to post.
I’m a proud Gemorran

Also, quite frankly I don't think the people who made the choice to spend 50%+ of their income on housing are interested or perhaps even aware of Pnet. There may be some here, but for the most part I think that Pnet attracts users interested in living within their means.

To address the original question of this thread, my understanding is that under 30% of gross, on housing, is "living within your means". However, I do agree with others, that have posted, saying that it is ideally as low as possible.

corntrollio says

Think about all the people who flunked out of HAMP!

This is a majority percentage I think.

corntrollio says

70% DTI is absurd — that could be more around 100% of net in many cases!

The funny thing was the approval was granted by Fannie Mae's DU (desktop underwriter) system. Sometimes our proprietary underwriting engine would not render a decision (approve, decline, or "manual underwrite required") but default to running the loan through the DU system instead. You could request DU process it manually, but sometimes our system would just default to that. You should have seen the look on the manager's face when the loan came back, "DU: Approve". She took it to the UW, who refused to sign off on it. I believe the DTI was 72%. The UW took it to the branch manager for approval. Her decision was, "Well....if DU approved it..." and they closed the loan.

I'l love to know how that one worked out for the borrower. I'm guessing you're correct in that they were probably pushing 100% DTI on net income.

This was the trend during the bubble. If someone wasn't comfortable signing off on something, they'd pass it up the chain until someone was willing to "back" the decision to approve it. It was a lot like the nazi trials, where anyone asking for an explanation got the, "I don't know, I was just doing what they told me to." Branch managers pushed for numbers (approvals) from underwriters, and they were encouraged to take loans (physical files) home with them (illegal in many instances) and to decision them off the clock (under veiled threat of being laid off for non-performance). It really was just an assembly line. If they could find any tiny shred of justificaiton for approving a loan, they would do it. ("Well, I have a DU approval, so who am I to decline this?")

It was all about, "Do I have a defensible reason for approving this loan if someone comes asking about it later?" not, "Do I have a justifable reason for approving this loan?"

FP says

People bragging while anonymous… beats me.

What's worse, bragging anonymously on line or actually bragging to people you know?

I pay 8 percent of income to rent and over 40% a month to pay down a 15k credit card bill. I'm wacking it down by $1500-$2000 a month. I'm happy that it came together. I had some business start up cost for equipment and insurances( what a scam) and to tide me over before the checks started rolling in. I feel fortunate to have been abile to pull it together. I was Zero debt just three years ago. I'd like to never use that thing again. great thread BTW