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April 08, 2010


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One question about the monthly debt payments. I pay off my credit cards every month, but are my monthly charges considered debt, or is debt the balance you carry? I guess it boils down to lender's definition of debt vs. my definition of debt (if I pay off my credit card in full each month, I do not consider that debt).

CPA --

Yes, I think it does depend on your definition. Technically, anything you owe is debt, so even a balance paid off monthly is debt for a few days. That said, personally I don't count credit card debt that I pay off each month as "debt".

CPA - I don't think it really matters that much. When calculating DTI, the bank would use the "miminum monthly payment" amount for for credit card balance which is usually pretty low for someone paying off their balance every month.

If you want to make sure its not included at all just pay your balance in full the day you fill out any forms so you can truthfully say zero balance, and pay your balance in full the day before the closing date (not payment due date)on your card so it reports zero balance to the credit agencies for that month. I did this when applying for a commercial lease just to make all the ratios/numbers as high as possible.

@CPA and @FMF:

First, let me disclaimer that I am an "average Joe." This is only my opinion, but... for the purpose of calculating DTI, what you charge monthly will be considered your monthly debt, regardless of whether you pay it off or not.

Think about it this way: What is reported to your credit report? If you charge on credit and pay it off every month, your credit report will still show that you've used your credit card, which boosts your credit utilization, which boosts your credit score. Ultimately, your credit report will used to calculate your DTI. Even if you pay off fully every month, your credit report will show that you have used debt. The lender, in turn, will use that in your DTI.

I am happy to report that my wife and I decided to buy a house that we would very comfortably afford and only what we NEEDED.

Our front-end DTI ratio is 13.6%, way short of the "suggested" 28% to 33%. If I lose my job or ability to work, our front-end DTI ratio would be 33.8% based on my wife's income solely (smaller of our two incomes). This assumes, of course, my complete loss of income, my inability to work a part-time job, and no disability benefits.

I like the 25% rule. I am going to apply that from now on to all housing costs whether renting or buying a home.

I think that one of the best points about the story in Boston was the cost of commuting (note that the time spent commuting isn't even a cost in this equation). A study at Brookings concluded that most people who live further away from work don't save money, but they do trade time commuting for square footage. Distance from work seemed to have little impact on individuals combined transportation and housing expenses.

Good lessons learned in this article. Particularly about buying what you NEED instead of "as much house as you can afford", and how having a shorter commute really helps.

In terms of how much to spend on a house, too many people purchase based on the amount for which they have been approved. Not smart. My philosophy is that for most folks, unless you are in the upper tier of earners, buy what you need - not what you would ideally want.

For example: instead of a $500,000 new 4 bedroom McMansion, purchasing a $350,000 20-year old 3 bedroom house just might be enough. Is that extra $150,000 really getting you what you need? Couldn't that be used elsewhere in your life - retirement savings, kids college, emergency funds, etc? What if you lose your job or have health problems, could you cover the costs? What about the increased taxes, utilities, etc?

With respect to commuting: I have had jobs where I have commuted as little as 5 minutes to work (literally walking distance), all the way to 90 minutes to work each way. I can tell you that unless you absolutely have to, or it is significantly better for your career to do so in terms of short-term experience or compensation, do NOT commute this distance. There is a big price to pay in terms of your free time, your health, and your time to spend with family or hobbies.

Living within one's means and having the time to do things you enjoy makes life more balanced.

I bought my house before I was married, actually about 5 months after I graduated from college. At that time, my front end ratio was right at 30%.

Now that I am married the ratio is 11%, for the following reasons:

- Refinanced 1st mortgage to a lower rate (savings of $100 per month).
- paid of 2nd mortgage that was used to purchase home (savings of $125 per month).

- My income has increased
- My wife works

My current front-end DTI for renting, in the city of Chicago, is 8%. This has been allowing me to save more than 40% of my income until I do decide to "upgrade" my apartment, or live on my own, as I currently have 2 room mates.

I was aware of these ratios and had computed them myself when we bought our house in 2004. We were well under the limits then, but we're at 8%/16% now. And I feel like our budget is maxed out, although we're pretty good savers. I can't imagine paying over a third of my income for debt.

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