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Debt to Income for Mortgages, Historically 28 % after tax ?

One weeks' wages on housing, three weeks' wages spent elsewhere
was the tradition before income tax.

Several financial advisers recommend reverting to an old standard known as the 28/36 rule. Using that rule, households should spend no more than 28 percent of their gross income on housing costs -- including mortgage payments, property taxes and insurance -- and less than 36 percent on all debt. The total includes obligations like car payments, student loans, credit cards and medical debt.

There is some debate about whether you should base your calculations on gross income or take-home pay. While some advisers said using gross income was reasonable enough, Mr. Birkofer said he told his clients to apply it to net pay.

"I want people to have more than a house, I want them to have a life, too," Mr. Birkofer said. "The application of the 28/36 rule can be an eye opener and a 'go slow' or 'reform now' sign." The original maxim of a week's pay for a month's rent was also based on take-home pay, given that it predates the federal income tax system, which formally started in 1913, said Danilo Pelletiere, research director at the National Low Income Housing Coalition.

Many people are spending much more than that. According to the Census Bureau's American Community Survey in 2007, the latest available, 38 percent of homeowners with mortgages spend more than 30 percent of their monthly gross income on all housing costs.

And a swath of homeowners was even more thinly stretched. In 2007, nearly 9.17 million homeowners, or about 12 percent of all owners, spent more than half of their gross income on housing costs, according to tabulations of Census data by the Joint Center for Housing Studies of Harvard University.

With Eyes Bigger Than Their Wallets, Homebuyers Are Forced to Revisit Old Rules
Published: March 21, 2009
Many borrowers have opted to spend far more than a third of their income on mortgage payments, a move that has led to an increase in foreclosures.


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