Depending on who is approving your new home purchase or refinance, your housing debt to income ratio can range from a 28% to over 50% of your total income. The thing to remember is that the debt to income ratio is calculated on Before Tax Income. That figure does not take into consideration your Federal or State Income Tax Rate, Your Cost of Insurance or Your Contributions into Your Retirement Plan.
This illustration shows the Debt-to-Income ratio for an average, middle class family.
As you can see based on these figures this family is well within the range for being approved based on income alone. But lets look deeper into the possibilities this family could be facing after signing the mortgage and loan documents.
If they are in an average tax bracket with average benefits the take home pay for this family could be
$3240 per month. After the First Mortgage payment is paid they would have $1740 per month. Which means they are spending over 45% of their take home pay in mortgage payments alone.
What if they are like this couple from Florida that wrote the following on Edmunds.com? Thank you! We took delivery of our 2013 Odyssey EX-L, black with truffle leather (no nav. or rear ent.), from Crown Honda in Pinellas Park, Florida, last Saturday. We walked out paying only our first month’s lease payment: $408.88/mo, 36 months, 12,000 miles/year. Total we’ll be paying over entire lease is $14,719.68! Residual value $19,030 (give or take). I think we came out good on this deal! Their $1740 a month is now $1331 and they sill have to purchase insurance and fuel for the vehicle. With gas prices in the $3.50-$4.00 a gallon price range the average full tank of gas costs around $48.00. If that is the price per week this vehicle will add $211.00 a month to the budget.
Not mentioning utilities for the house, groceries, entertainment and emergencies that can pop up as a homeowner, I think you can see that budget deficits can be controlled in our own homes. I keep hearing people talk about the US Debt, the economy and other factors that honestly we personally have no direct control over. What if we start with us?
It seems easy to justify spending $50 for an evening meal when we don’t feel like cooking. What about the price of a night out? What about that insurance deductible due after a minor fender bender?
Thoughts? I’d love to hear them.