One of the guidelines Carmen Wong Ulrich, author of Generation Debt, insisted on the Rachel Ray show was that housing costs be less than 30% of take home pay (that’s pay after taxes). By housing costs, she meant rent, mortgage, utilities, maintenance, property taxes, insurance.
Once upon a time, long, long ago (i.e. a decade back when the hubby and I purchased our home), 30% was flaunted as the rule to follow. We dutifully did the calculation, even asking the current owners what their monthly utility costs were.
Even today, the National Association of Realtors considers a house affordable if the mortgage principal and interest payments are less than 25% of the family’s monthly income. This is an organization that makes money if homes are sold (and the higher priced the better) yet even they are insisting that your home mortgage P&I remain less than 25%.
So are we following these guidelines? A quick look at the NAR affordability index would say that the average person was. The median single family home price in 2006 was $221,900 with monthly P&I of $1,131. Compare that to the median monthly family income of $4,801 ($57,612 annually) and everything looks groovy at 23.6%.
Or is that quick look deceiving?
You see the affordability index assumes that there’s a 20% down payment. How many people do you know with a 20% payment? Not many. The estimates are that approximately 33% of all mortgages are non-traditional. So lets say the family only had the 10% down payment that so many first time buyers have. P&I would creep up to 26.5%, an unaffordable level (according to NAR).
Should you stick to the 30% or even the 25% guideline? Well, if the National Association of Realtors says that you should and they would benefit most financially if you didn’t, then I think you should seriously consider it.