Mortgage vs. Income ... Gross or Net?

[cseca]

Curious...
When people calculate mortgages do you consider %-age from Gross or Net income?

For example:
Gross income is $4000
Net income is $2800
Monthly mortgage including taxes and stuff $1000
Do you think this household cost of owning a home is 25% or 36%?

 

[DawnM]

Dave Ramsey and other financial gurus say it should be the percentage of NET. They also highly recommend 25% or less on your net on a 15 year loan.

Dawn

 

[mistysue]

The catch to trying to use "net income" is that MOST people do not accurately assess their net income. Is your net actually $2800/month after you do your taxes at the end of the year? Do you get a refund (your true net is higher) or do you owe money? (meaning your true net is lower)

For budgeting you probably are better off using what you think your net is, but I know when I got my loan they considered my gross because net can be so inaccurate.

 

[Gr8t Fan]

Generally speaking, it is net income that is considered when figuring out %.

 

[clutter]

So lets say you make a $400 contribution to your 401k before the net number. Is your net $2,800 or $3,200?

 

[seashoreCM]

I'm sure that they use gross income for the "denominator".

But in figuring out your mortgage payment and housing expense the property tax is added in to the "numerator".

Then the result (the "ratio") is supposed to be no more than a third, maybet that is modernized now to be no more than a quarter.

A second ratio is also computed where other payments such as for student loans and credit cards is added to the numerator. In the past this ratio wasn't supposed to be more than 40%

 

[tlbwriter]

Net can be pretty misleading. Mine is artificially lower because of the amount I have taken out for FSA accounts. If you have too much deducted for taxes, or not enough, it will not be an accurate reflection of your actual available income.

 

[DawnM]

Actual net is all income minus what you pay in taxes.

If you make $50K for example and you pay $10K in taxes each year, then your annual income is $40K divided by 12.

Any payments you make monthly, whether you see them or not, is still considered net income.

For example, we have $600 taken out each month automatically for medical and life insurance. We also have $400 directly deposited to our money market account and $600 automatically deducted into our 401K. That $1400 is still part of net income because it is not taxes. It doesn't matter if it is taken out pre-tax or not.

Some may not do it this way, but most of the financial folks (Dave Ramsey, etc...) do calculate net this way.

Dawn

So lets say you make a $400 contribution to your 401k before the net number. Is your net $2,800 or $3,200?

 

[wishiwereindisney]

i would use net - in factoring net income it's gross minus federal and state and don't forget fica tax and medicare. these are not discretionary expenses.

 

[bettymae1121]

I agree, "net" is your income minus ONLY taxes (fed, state, and SS/Medicare)

I have about $270 taken out of each pay check for medical, dental, disability, flex spend and and 401k. That is part of my net pay, even though I never see the money, because I choose pay for those things. I could, if I wanted to, stop paying for those things and have a higher paycheck (I'd be crazy though!).

If you get a tax refund each year, add that to your "net" earnings as well. Conversly, subtract any tax payment you make each year if you owe.

As for DR, while a 15 year loan is a great goal to shoot for, I don't see a problem with a 30 year loan as long as it's paid off by the time you plan to retire. To have a mortgage payment only be 25% of your net income on a 15 year loan isn't possible in some parts of the country, even after the housing slump.

 

[blanq]

For my own comfort level, I use my net as defined by the money I take home in my paychecks. We typically receive fed/state income tax refunds, and I do not factor those into our net income. We put a couple of thousand a month into DH's 401K and my Deferred Comp plan. I do not consider that as money available for my use so ignore that in the equation. DH and I have never paid attention to the conventional wisdom when it comes to figuring out how much we should mortgage/how much our monthy payments should be.; our payments have always been far less than recommended. We are fairly conservative and do what we are comfortable with.

 

[Carol NJMB]

Curious...
When people calculate mortgages do you consider %-age from Gross or Net income?

For example:
Gross income is $4000
Net income is $2800
Monthly mortgage including taxes and stuff $1000
Do you think this household cost of owning a home is 25% or 36%?

"Lenders" qualify borrowers for a mortgage based on gross income - always. Using net would not present an equal platform for borrowers.

However, if you want to see how much income you have available each month to pay your bills, of course you should use net.