Debt to Income Ratio

Co-op board members like myself are looking for your total monthly outlay for your apartment (mortgage, maintenance, and insurance) to not outweigh more than 30% of your gross monthly income.

That didn't really address kaiser's point. The government's definition of "gross income" and actual gross income aren't really the same thing at all.

GROSS income.

The final grand total tallied up on your December 31st paystub.

That's not the amount on your tax return. So you agree that the other co-op board is doing the wrong thing if they're looking at the number on the tax return?

(A real analysis would presumably be more complex than this: total income on paystub + other sources of income on tax return = gross income. For most people where this is complicated, presumably there's an accountant who could do a quick summary of income for the year, though.)

I'm not going to say a given co-op board is doing the "right" thing or the "wrong" thing. Each board has its own criteria. Some boards look only at salaries. Some also include bonuses. Others don't care what you make, as long as you have 5 times the apartment's value in liquid assets.

Co-op board is going to use the AGI on your tax returns.

If that AGI is far from your gross (for example, you're a freelancer, as I am, so you run a lot of expenses through your business, or you're a heavy saver, so your retirement is a substantial chunk off the top) then that is something that the brokers (or the seller, if you're not using a broker) attempt to explain to the board.

ali r.
DG Neary Realty

Focusing on AGI seems really dumb. It essentially means they think it is smarter to save money outside your 401(k) or pay after-tax dollars for health care or transportation, or anything else. If I paid for all of my metrocards on a post-tax basis, it would look like I was $1200 a year richer according to this metric; in reality, I would be ~$500 poorer due to increased tax burden. That's obviously not a huge swing, but the same analysis applies to any income that can be removed from the AGI. Even just the metrocard example represents something like 1% of the amount under discussion for two adults making $350K. Throw in 401(k), child care and flex medical spending, and it's probably not that hard to get to ~15%*, which seems like a pretty big error.

* And that's without counting the spread between the benefit of pre-tax and post-tax dollars for the 401(k), because there's perhaps reasonable arguments to be made about various types of saving.

Just give them what they're asking for. Don't question their methodology.

Words like "dumb" don't inform the discussion or change the situation. It is what it is. The thinking goes, they want to see the money actually available to you without gymnastics. Yes, you can raid a 401K, but boards tend to ignore those funds since they hardly want someone to be in a position to have to turn their financial planning upside down just to make ends meet. Boards like 401K savings which show maturity of an idividual, financial discipline, etc, but beyond that the amount is not terribly relevant since it is not deemed liquid and accessible for all intents and purposes. Similarly, if you have compensation taken out for metrocards and health care, you can't divert those funds to pay the mortgage readily. Nor would it be wise to be in a position to have to do so. You can view it as penalizing you for being prudent and wise in terms of taking advantage of tax benefits, and you would have a point. But in the end a board asks simply how much do you have on the table to spend each month and how will a purchase impact that. They don't care deeply about what you have under the mattress, in the cupboards, etc--they want to know you have enough right in front of you to meet expenses the apartment will generate.

I suggest you not tell a board during an interview that it is behaving dumbly, even if you feel it is.

Gross income is defined as an individual's total personal income before taking taxes or deductions into account. That's salary before deductions & taxes, plus dividends/interest before deductions & taxes, plus any "freelance" income (or self-employed income) before deductions & taxes.

That's the definition.

Once you get into AGI territory, you're taking deductions into account, which is not "gross income", according to Generally Accepted Accounting Principles. The board can use whatever number it wants to calculate debt-to-income, whether or not it follows GAAP.

I would just make full copies of your tax returns, and let 'em have at it.

"I suggest you not tell a board during an interview that it is behaving dumbly, even if you feel it is."

Oh please do!

These interviews can really get boring and we're always looking for something to dig our teeth into.

TIA!

I'm not currently considering buying a coop, so I don't think I need to worry about the reprecussions of calling the process dumb. But the fact is that looking at AGI is either dumb or lazy, since it treats income spent in silly ways as real while excluding income that is spent intelligently.

Kylewest: The point is not what the *balance* of the 401(k) is, but rather that if you put the same money in a taxable account it would look like your income increased by $16.5K per year. And it's even worse with other payroll deductions, because there's no discussion about the pros and cons of paying for child care with pre-tax and after-tax dollars. If two couples have identical incomes, but one of them pays for their child care with pre-tax dollars and the other with post-tax dollars, a co-op board looking at AGI is going to think that the second couple has $6K per year less to spend on housing when in reality they have ~$3K more.

Isle_of_Lucy: Pre-tax deductions don't even appear on your 1040, generally, so if all a board is looking at is tax returns they're not able to compute gross income according to your definition (which I agree should be the correct one). I agree they can use whatever criteria they want, but I continue to maintain that it is dumb to use AGI rather than your definition.

jordyn: exactly. Board doesn't care especially if you'll have enough money to live in your retirement (unless you are nearing that age). So you are quite correct that deferring income and putting money into a 401K would potentially hurt you in the eyes of a board if you were on the borderline financially of their standards; instead taking the money as income, paying tax on it, and investing it in a regular mutual fund would be more attractive to a board insofar as it would be money you could immediately access without penalty. If you are 35 applying for a coop and I'm on the board, I don't especially care how you will be surviving at 65. I just want to know you can pay your mortage for 30 years, pay the maintenance along with expected increases over time, and handle special assessments.

Let me add something: If all your money is going to be needed to meet the mortgage, mainenance, and special assessments, and it will be impossible for you to save anything as a result, a board won't like that either. People cutting it that close to the bone will have a harder time in some coops.

Now you're just getting silly.

As long as your monthly carrying costs don't exceed 30% of your gross income (or whatever percentage you choose to use), I as a board member don't give a rat's ass what you do with the rest of your money.

And I've never heard any other board member raising a concern, either.

jordyn wrote: "Pre-tax deductions don't even appear on your 1040"

Yes they do. Lines 23 through 35 on page one of the 1040.

Re: Yes they do. Lines 23 through 35 on page one of the 1040.

No they dont. 401k, FSA, etc are esentially salary reduction. They ONLY show up in "Social Security Wages" on your W2.

Unless, Lucy, you've been doing your taxes incorrectly all these years OR you are self-employed.

What West34 said. Pre-tax payroll deductions administered by your employer are just removed from the salary reported on your W-2, so if you also put them in the itemized deductions as well, you'd be double-counting.

You don't need to trust anyone on this, though: just compare the total wages paid on your last paystub with what shows up on your W-2. You'll see the W-2 number is quite a bit lower. Now add back in the deductions and...voila! everything will match.

West34, those items don't show up on my W2 because I'm self-employed. Deductions from my "gross income" do indeed get reported on lines 23 through 35 on page one of the 1040. These include SEP-IRA, self-employment tax, and company health insurance premiums.

This is getting ridiculous. First, West34 *already* noted that it's different for self-employed people. Second, in the general case you don't even get a W-2 when you're self employed, so suggesting that payroll deductions do or don't show up for self-employed people on their W-2 is like arguing about whether your electric car runs on diesel or regular gas.

Sorry jordyn, didn't West's other response.

What percent of coop boards use AGI versus Gross income?

@hvr - 19%

@jordyn:

" If two couples have identical incomes, but one of them pays for their child care with pre-tax dollars and the other with post-tax dollars"

how do u pay for ur kids with pre-tax income?

http://www.investopedia.com/articles/pf/12/fsa.asp