Does the 25% Gross Mortgage Rule Still Apply in 2024?

So Steph’s question says regarding the 25% gross mortgage rule listed. I believe Dave Ramsey and maybe other content creators have recommended 25% net pay. Do you find that variance from net to gross ever being a concern when deciding on a future mortgage? And I mean, I’d go so far as to say, why did you guys choose gross as you start to think about your rules? Yeah, so for those of you who don’t know, let me catch you up if this is the first time interacting with us, first time you’ve heard this. We actually have some rules that we want you to think about when it comes to buying a home, and specifically when it comes to buying your first home. We have tons of resources out there. If you go to moneyguy.com/resource, you can check out all the home buying stuff that we have out there. Well, one of the things that we say is when you add up the cost of your housing, when you look at the principal, interest, taxes, and insurance that you’re paying, it cannot exceed 25% of your gross income. If the payment is more than that, we would argue that you’re buying more house than you can afford. Now, we are unique in the fact that we say our 25%, we are saying 25% of gross income. A lot of financial folks out there might say 25% of net. Why do we stick with gross instead of a net calculation? I like using gross for our rules because they take away the variance or manipulation that can happen with the number. Because think about the fact you do have input on what your savings rate is to your employer plan, on which health insurance plan you choose with your employer, how much taxes you have withheld. I mean, what if you were playing some crazy game with yourself that you’re like, well, if I just over withhold on taxes, I know I get this big refund and it also lowers how much I have to save for my future. Yeah, in the short term, it could feel really good, but I think 20, 30 years in the future, like maybe that arbitrage I was setting up for myself was working against me in ways. So, always the manipulation is a big part of it where I fall in on this 25% rule, because I still stand by this 25%, but I recognize how hard it is for younger people right now to catch up with buying their first house or even paying rent these days, because we just came through an inflationary period and wages have not had a chance to catch up to all the increases in just housing cost of living and everything else. So, I always try to figure out where’s some grace points or flex points that we can give our audience. And one of the things, and I don’t want to change rules because I know we will get through this moment in time where we’ve like I said, coming through inflation, a high inflation period. But here’s where I think there is some additional flex is it because where I see the 25% rule have the most struggle is in some of these cities that are just the cost of living is crazy. You know, think about the West Coast, the East Coast, you know, New York, San Francisco, and other areas. But the good news about those areas that do have a higher cost of living, a lot of times they have infrastructure like public transportation. And we all know that when we do 238 on your automobile, that’s where you get to put 20% down, don’t finance longer than 3 years, and make sure it’s not exceeding 8% of your gross income. And there’s some other key rules in there too, but I’m just for time purposes. That 8%, if you don’t have a car payment, maybe we can give you a little bit of flexibility on your housing to push that up beyond 25% for only a moment in time. But I say that be sparingly with it and also don’t get yourself in a hard situation, especially if you think you’re going to be moving in the next few years. If you’re buying a house because housing needs to be, and that’s why I go look at our housing checklist that we also have, it probably needs to be a 7-year decision at this point just because of what’s happened with inflation and in our experience, and we’ve seen people from all different walks of life and all different incomes and all different places in their career. If they’ve adhered to this 25% housing rule, they’ve not gotten themselves in trouble. There’s enough wiggle room inside the rest of their budget with what they’re saving, what they’re paying in taxes, all these other things, that 25% of gross is still conservative enough that allows them to be in a house that they want to be in or be in a living situation they want to be in and still have enough left over. Now, there’s nothing that says you cannot be more conservative. If you want to do 25% net, great, that still falls into less than 25%. Aggressive, if you want to include utilities in your principal, interest, taxes, and interest, great, that’s still going to drive the number down. So, there’s nothing that says you can’t be less than 25%, but we want to set that high watermark that if you start to approach where your housing is more than that 25% of gross, that is the danger, Will Robinson. That is the area where you need to be thinking, “Uh-oh, I’m getting into dangerous territory.” Anything below that or better than that is great, no problems at all.