25% of net income on housing... how feasible is that?

[TheHaitian]

Doing some late night posting, damn insomnia!

Seems recently this has taken over all finance boards/forums I visit : spend no more than 25% of net income on housing! And I always scratch my head and go WTF? Is that even feasible? Where do you want me to leave? the hoods?

And just like any recently converted Christian with a passion for the new life they have found, people spread it and defend it like it is their life mission and with a passion I think is a bit appalling : Dude I don't know you from nowhere, posting on a stupid forum, why do you care I spend way more than that on housing. Yes I will enjoy my cat food in retirement thank you very much....

Both time we applied for a mortgage (not that banks are always right) all they really cared about is that our total liabilities payments came to 35% or less our total gross income. And when we were renting in Boston  and also NY (having to provide paystubs and proof of work) all they cared about is that our rent was 30% or less our total gross income. Those two I understand and are financially sound to me...

25% of net on housing is ... I have only lived 2 places (Oneonta, NY and Windsor,VT) were that was even remotely possible, off course you could purchase a 4 bedrooms, 2 bath home downtown Oneonta or Windsor for 120-130k when I was there (not sure for now... yep just checked on Zillow still holds true); and some smaller or not as up to date homes for 50-100k ...

So I am not saying it is impossible but how feasible on an average scale is that? Off course I expect it to be more feasible if you are in your late 40's-50's and still in the original home you purchase 20-30 years ago vs a young couple in their late 20's just starting out.

Or maybe I am dead wrong and this should be encouraged? I am already in DC where it is not unheard off many young folks just starting out are living 2-3 in a 1 bedroom apartment just so they can afford the rent (no they are not couples, read 2 single beds in the 1 bedroom and someone else is sleeping in the living room)... But that is the price to pay if you want to live in the hip places like Dupont Circle, Foggy Bottom, Kalorama, Georgetown, etc.

But even 1 bedrooms or studios are renting for more than what 25% of our net income would cover in DC and that is not looking for anything fancy. Maybe an English basement? But I doubt they would let 3 adults and 1 baby move in...

[Apple]

My mortgage (PITI) is under 25% of net (after retirement contributions and health insurance, even less of a percentage if I don't count those).  I have a large house (just shy of 2300 sq feet) for two people.  It has a full basement and a decent yard.  No carport/garage (years ago the garage was converted to another bedroom), but I do have a nice driveway/parking area.

I'm comfortable with my mortgage, enough so that a slight increase wouldn't make me cringe too bad, but I really have no desire to ever spend more than 25% of net!

I think where you live has a lot to do with it.  There was one time I saw someone post a listing for a "house", and it was insanely expensive.  Everyone kept telling them it was a great price.  Then I started looking at it, and it wasn't even a SFH, it was half of a house.  WTF?  Did they realize it was only half a house?  Not even the whole thing.  Yes.  Yes they did.  No thank you...

ETA: bought my current house when I was 26, the house before that was purchased when I was 19.  Even the first house was under 25% net.

[MJ2.0]

It depends on where you live and how much you make. Me having much cheaper housing means I am either in the ghetto or in the middle of nowhere. Since I don't want to get shot or have a 2 hour commute each way, I will probably always pay more than 25% of my income for housing.

[suesinfl]

It is possible to live with housing under 25% of your net. I'm at 21%, but then I've lived here 25 years. It depends on if you let life style creep in or not. Also, as Apple said location plays a big part and how high the cost of living is.

[suesinfl]

On my salary, I couldn't afford a cardboard box under a bridge in a large city. Thankfully I'm rural, but only have a 15 min. commute. Now that's not saying everyone in this area is low income, but I believe the medium house is running $150-170K. Medium wages run about $60K, of course that is dependent on where you work and your profession.

[NastyWoman]

Well, with an average rent of $2,900 for a two bedroom apartment in my area and relative high state income tax I leave it to your imagination whether that is feasible or not.  Just for reference, going out 15 minutes won't get you to a rural area to help out either. You could dig up some threads on ehich Dark posted that people living in his town commuted several hours, one way, to get to work in the area I live in. Those commutes still exist today, for a reason...

[Deleted]

Jul 12, 2017 5:21:07 GMT -5 MJ2.0 said:

It depends on where you live and how much you make.

I agree.  In NNJ I was probably over 25% (certainly if you include property taxes) but that kept me in a decent neighborhood and a good school district.  I made good money, though, and in both cases it was a small household- DS, unemployed husband and me in the first one, then just DS and me after the divorce.  I was making over $100K and had employer health insurance, so what was left for other expenses (and savings) was a bigger chunk than many people would have in that scenario.  I also lived pretty modestly and while I was able to keep the house in good repair (at least after I divorced spendthrift husband), there was nothing in the budget for upgrades.

So- it can be done, but when DH and I moved to a LCOL area we were able to buy so much more house with less money that the ratio went way down.  That was far more comfortable.

[resolution]

The city-data page on my county is actually really interesting.  It looks like close to 1/3 of the homes in my county are owned outright without a mortgage, which would certainly make it easier. Rent is also pretty low compared with the median housing cost.

County owner-occupied with a mortgage or a loan houses and condos: 25,463

County owner-occupied free and clear houses and condos: 10,985

Renter-occupied apartments: 19,239 

Median monthly housing costs for homes and condos with a mortgage: $1,521

Median monthly housing costs for units without a mortgage: $438
Median contract rent in 2015 for apartments: $755 (lower quartile is $536, upper quartile is $975)

[giramomma]

It all depends. Not is it location, income, but also what you want your life to look like.

We don't live in a VHOCLA area, just because we knew our salaries would not keep up with housing. 14 years or so ago, DH was looking at potential jobs out in Boston, but they were paying like 40-50K/year. I said, no thank you.

So, we stayed put. We live in a MCOLA, but, to get a modest house (1800-2500 feet) in a nice neighborhood you'll need to spend over 200K. Our PITI is 12.5% or so of gross income and about 17% of net. We also had to put down 55% on our house to get there.

Our parameters our much different than most. We wanted a SAHP. We wanted a larger family (ie, more than two kids). We wanted to be able to send our kids to private school if that choice worked out to be the better one. We wanted to be able to retire early. And we have to do this on less than a gross of 6 figures, a year.

So, clearly, something had to give. We're not house people, so that seemed like a good place to cut back on our budget. We also have always believed in keeping our recurring monthly costs as low as possible. It just seemed like a prudent thing to do given our wants/situation.

[justme]

Mine is like 35% of net. If you add back in what I put into the hsa (and I use a fair bit of it vs investing) it goes down to almost 30%.

But I live downtown in a city in a two bedroom and am single. If I wanted to not live downtown I could have paid less or if I was married it'd be a small amount.

I'm also sending a decent amount to retirement and I always wonder whether that's supposed to be part of the net or not.

[zibazinski]

It was feasible in the late 70's. I did it. Even then my budget was tight.

[zibazinski]

My new house payment will be 25% but I put a lot down.

[gooddecisions]

When I bought my first home on my own for $165,000, I was only making $40k gross. So that is just under 25% of gross. I imagine it was closer to 40% net as I still managed to put 20% in my 401k.

A lot of people told me I was making a mistake. But it worked out fine. I had no car loan, no credit card debt, no student loan debt and could afford a bigger housing payment. Plus, I had a lot drive to move up and make more money and so I did.

[Deleted]

What constitutes "net" is tricky.  In my case, I take home less than 50% of gross.  Not only do I have income taxes, payroll taxes, and 7.5% mandatory pension contribution, but I have health insurance, a flex account, additional retirement savings, personal savings, professional dues, and who knows what else.  I could have Costco auto-deducted if I wanted to.  So "net" is very misleading.

That said, I grew up with it as 25% of gross if I remember correctly.  The other version is that you should buy a house that is no more than 2.5X your income.  Of course, I also grew up with the idea that there was something shameful about having to get a second mortgage on your home.  It meant you were overspending.  

I did use the guidelines involving gross when I bought my first house after the divorce.  It served me well.  It still does.  

[Miss Tequila]

I bought my house 2.5 years ago, put 20% down and my payment is under 10% of my net. 

I have an older home which means my property taxes are quite low compared to new construction (the house I built which I sold 6 years ago had property taxes just under $8k a year). The flipside is that there is cosmetic work that I want to have done that will eat up some of the property tax savings.  The big ones were done by the prior owner so I have an updated kitchen/bathroom. 

Life is all about choices.  I still spend my money just not on housing.  If you spend your money on housing then you are cutting back in other areas.  Life is short, do what makes you happy. 

[jeffreymo]

I think it's hard to envision for newlyweds and first-time homebuyers. I remember hearing the 25% message, but like alot of folks we didn't want to "settle" on a house that didn't check most of our boxes. Instead we decided to focus on the other message that we were hearing - that our incomes would grow and eventually our PITI payment would be very affordable. We are at that point now, 10 years later with PITI equalling 17.6% of our net.

I have a friend who did follow the 25% of net rule, and actually he probably went lower than that. His first house is now a rental and between income and equity in his 2 houses, he and his wife are way ahead of us. They did have to sacrifice by living in more cramped quarters in a lesser neighborhood for about 5 years.

[Miss Tequila]

Jul 12, 2017 8:03:13 GMT -5 @bamafan1954 said:

What constitutes "net" is tricky.  In my case, I take home less than 50% of gross.  Not only do I have income taxes, payroll taxes, and 7.5% mandatory pension contribution, but I have health insurance, a flex account, additional retirement savings, personal savings, professional dues, and who knows what else.  I could have Costco auto-deducted if I wanted to.  So "net" is very misleading.

That said, I grew up with it as 25% of gross if I remember correctly.  The other version is that you should buy a house that is no more than 2.5X your income.  Of course, I also grew up with the idea that there was something shameful about having to get a second mortgage on your home.  It meant you were overspending.  

I did use the guidelines involving gross when I bought my first house after the divorce.  It served me well.  It still does.  

good point.  I calculated it on my net but my net is 48.25% of my gross because of all of my deductions.  I could easily decrease the FSA, 401k and after tax withholdings if I wanted to. 

[steph08]

It depends where you live and the type of jobs that you have. 

We are fortunate - we are educated and employed in well-paying jobs for this area (until I got my new job last year, we made under 100k combined). 

Our PITI on a 1400 square foot 3 bed/2 bath on 1 acre is 20% of net. 

But we are pretty rural - it's 15 minutes to get to town for groceries or gas. And I drive 55 minutes to get to work. 

[movingforward]

Well, I close tomorrow on my new home . Everything (mortgage, taxes, insurance, HOA fees) will be about 32% of my gross income. It made me uneasy at first but I am a SINK with no debt so after running the numbers over and over again I am comfortable with it. Also, when I include the tax write off it really isn't that bad. I am supposed to receive a promotion and good raise in January (in fact, I am scheduled to talk with my CEO about this today). I definitely can't count on something that hasn't happened yet but even if it doesn't I will be okay.

I looked at homes in my area that would have been 25% of my income but I would have rather continued to rent as opposed to purchasing one of them. My rent was around 23% of my income and I had A LOT of extra spending money.

[resolution]

I had always heard the standard of 30% of gross for affordable housing. I am not sure where the 25% is coming from, unless they are Mr. Money Mustache or FIRE types. Which forums are pushing it?

[hoops902]

My new house will be right at 25% of take-home pay. We live in a MCOLA.  It's pretty feasible for just about anyone in this area to spend 25% or less on housing if you don't demand to live in the metro area and choose to live in one of the surrounding towns. Now that also means our transportation cost is higher than those living in the metro area...so there's certainly some balancing to be done there.

We also probably won't stay in this house all that long. It's a stepping stone to a bigger house later, so that we can save some money, build some equity, and sock away some cash by only spending 25% on housing.

[midjd]

And just like any recently converted Christian with a passion for the new life they have found, people spread it and defend it like it is their life mission and with a passion I think is a bit appalling : Dude I don't know you from nowhere, posting on a stupid forum, why do you care I spend way more than that on housing. Yes I will enjoy my cat food in retirement thank you very much....

So you're cheating on us with another money board and you want sympathy?! 

As others have said, it's COLA-specific, but of course spending 40-50% of net on housing leaves a lot less for other expenses.

I don't think the <25% of net guideline is unreasonable for the majority of adults. Remember the county-by-county electoral map that's almost all red... a whole lot of the US population lives in rural or suburban areas, which are typically LCOLA. 

[hoops902]

Jul 12, 2017 8:31:42 GMT -5 deminmaine said:

25% of gross was the traditional advice given for the comfortable limit, going waaay back to when I was a kid.  (I always wondered why they used gross, because net is what people actually carve up to live on- but the gross figure is useful for the banks in calculating mortgage allowances I guess)  Back then banks would typically allow up to 30% depending on other circumstances, but recommended 25%.

I like gross calculation to be honest, only because net can be largely under the control of the person. If I wanted to, I could massively increase my net starting tomorrow by changing things withheld by my employer (daycare costs, 401k, HSA, etc). My net pay could be with me having no extra money to save, very little in the way of a medical safety net, not include some rather large expenses like daycare...or it could be a lower number that already has some massive expenses built into it.

I do like to budget myself on net, because it keeps those things "off the table" so to speak. In terms of affordability though, I do like the gross calculation better. That's probably just because I'm frugal though and like to find ways to make it seem like I have the least money possible so that I'm always spending less and focusing on finances.

[jeffreymo]

Jul 12, 2017 8:49:50 GMT -5 hoops902 said:

Jul 12, 2017 8:31:42 GMT -5 deminmaine said:

25% of gross was the traditional advice given for the comfortable limit, going waaay back to when I was a kid.  (I always wondered why they used gross, because net is what people actually carve up to live on- but the gross figure is useful for the banks in calculating mortgage allowances I guess)  Back then banks would typically allow up to 30% depending on other circumstances, but recommended 25%.

I like gross calculation to be honest, only because net can be largely under the control of the person. If I wanted to, I could massively increase my net starting tomorrow by changing things withheld by my employer (daycare costs, 401k, HSA, etc). My net pay could be with me having no extra money to save, very little in the way of a medical safety net, not include some rather large expenses like daycare...or it could be a lower number that already has some massive expenses built into it.

I do like to budget myself on net, because it keeps those things "off the table" so to speak. In terms of affordability though, I do like the gross calculation better. That's probably just because I'm frugal though and like to find ways to make it seem like I have the least money possible so that I'm always spending less and focusing on finances.

Yes, I wish someone would just declare that the standard for all person to person comparisons. In my opinion, net should only be used to examine ones own budget.

[giramomma]

Jul 12, 2017 8:06:06 GMT -5 jeffreymo said:

I think it's hard to envision for newlyweds and first-time homebuyers. I remember hearing the 25% message, but like alot of folks we didn't want to "settle" on a house that didn't check most of our boxes. Instead we decided to focus on the other message that we were hearing - that our incomes would grow and eventually our PITI payment would be very affordable. We are at that point now, 10 years later with PITI equalling 17.6% of our net.

I have a friend who did follow the 25% of net rule, and actually he probably went lower than that. His first house is now a rental and between income and equity in his 2 houses, he and his wife are way ahead of us. They did have to sacrifice by living in more cramped quarters in a lesser neighborhood for about 5 years.

We were like this. Except we weren't able to keep our first house. It was a pity, because we had less than a 50K mortgage, and the rental income would have been nice, right about now. I didn't want to cash in stocks, though, for the downpayment on this house.

Our first place was a small condo (850 feet) in an iffy neighborhood. We put 20% down. It never seemed like a "sacrifice" to us, though.  We were just thrilled we could own, and not have to rent a crap apartment in a crap neighborhood. So, it was still a step up.

DH and I were raised quite differently. We were taught that we only deserved what we were currently earning. And there was no shame in that. So, if our salaries only supported a house in hoochie-ville, well, that's what we deserved. My parents didn't grow up with much..they weren't working poor, but they weren't lower middle class, either. I grew up lower middle class..By the time I left the house, my parents were solid middle class.

I'm glad I wasn't taught to count on future earnings. I've been working at my position for 13 years now, and gotten 3 raises...two 1% raises and one 2% raises. Clearly, if we overbought, we'd be in some pretty big trouble right about now...

[emma1420]

If I don't include property taxes and insurance my mortgage is less than 25% of my net. If I don't it's 35% of my net.

But, as others have noted, I'm not sure net if the best judge.  And for me personally as a SINK it's going to be much more difficult for me to stay under 25% of net.  I'm in reasonably LCOLA and in decent areas it's tough to find a 3/2 house for under 250k.  

[Tiny]

How much of a difference is there between 35% of GROSS income and 25% NET income?  Are people getting their undies in a bunch over a small amount?  

I get 'gross income' that's the total amount I'm compensated (and I often think of it as a "funny money" number - since I obviously do NOT have that much money to spend each year - and it really doesn't indicate how much disposable income I might have...) 

How do you calculate Net income - is it just after payroll taxes and SOME payroll deductions? Or does it exclude 401K, FSA, HSA, and whatever other "voluntary" deductions you can take?

I'm pretty sure there's no standard (everyone across the country pays the same) deduction amount for the various types of healthcare plans available thru employers (depends on how much the employer contributes).

I'm pretty sure that the amount on my "check" - how much $$ I have to spend is very different from every one else who has the same Gross Income as I do...

I would think the whole 25% of Net Income rule of thumb is simply to try to get people to EXAMINE their income and how they spend money - so they don't get into financial trouble (or get disappointed when they go for a mortgage).

 

[The Walk of the Penguin Mich]

When I first moved to Boston, my housing was 50% of my income.  By the time I left 5 years later, it was closer to 35%.  When I left KY, it was less than 20% of my income.  I had an opportunity to buy a house for a great price, which would have given me a mortgage of 25% of my income, but I as in a major debt paying off mode (I paid off about $40k in CC debt) and wanted it gone.  Buying a house would have delayed that goal.

Sadly, the house that I was interested in in 2002 sold  again for 100% more in 2010.  Damn CC debt.  I knew it was a hell of a deal at the time.

[quince]

In a MCOLA, we had a 15 year mortgage that was very very easily under 25% of our monthly net. 

Here? Our rent is 20% of gross, but closer to 45% of net. We're fine, because it is pretty high and if we couldn't live on 55% of net we'd be pretty big spenders. Housing is high as hell out here, but while grocery costs are higher than the MCOLA we lived in, not 3 or 4 x as high like housing. Electronics, clothing, are pretty on par with the MCOLA. Childcare is more, but not the same multiple as housing.


I think strict percentages like this are good for simplifying, but treating them as actual rules is pretty stupid. Like saying you will NEED 70-80 whatever percent of your preretirement income in retirement. Wouldn't that depend on how much you are actually spending? I doubt someone who makes 200K actually needs ~ 100K more in retirement than someone who makes 30K. 

If you net 5 million a year, feel free to spend 3 million on housing, especially if it is a rental that you can get out of within a year.  You can probably scrape by on what you've got left over.

[Lizard Queen]

I would think net under this scenario would mean any mandatory deductions and not discretionary savings.