How Much Home can I Afford?
[Sometimes a question and reply dovetails so neatly, we provide both on the same page, as we did here.]
Board: Buying or Selling a Home
First of all, let me just say this is the first place I thought of for posting this question. I admire and trust the smart people here, and I enjoy following along as I start on my quest to buy a home.
I am 30 years old, and I have decided that I want to buy a house that I can potentially start a family in and live in for the rest of my life. I have a serious, longtime girlfriend who I plan on asking to marry me in the next six months. I am not including her on the loan for various reasons. She will be able to contribute to the monthly payments, however.
My financial situation:
- I have no debt
- My credit score is 740
- I make 80k/year
- I have $75,000 immediately available for a down payment, which does NOT include my 401(k) money (I don't want to touch that money).
- My girlfriend actually makes a little bit more than me, but for this exercise let's say she can only contribute up to $1000/month to a mortgage payment, and $0 to the down payment. She has substantial loans to pay off, and she will also be moving to part-time once we have children in 5 years or so. I don't want to rely on her salary - it's a bonus for now and a means of paying off her loans.
Given that, and assuming 3-5% salary growth on my end, what would be your price range for a house?
We have found a house listed for $449,000 that we absolutely love, in a perfect location. The property taxes are $7k/year. The seller includes in his list price an offer for $10k in seller assist, which helps.
At a list price of 449k, if I assume a 15% down payment (67.5k), and a 4.75% interest rate, I am calculating around a $2,575 monthly payment, including taxes.
Of course, I would offer below list price, but I'm being conservative.
I have two questions:
1) Am I assuming a correct interest rate for right now, considering I'm below 20% down and may need PMI? I have not studied this, and feel like my rate may end up higher. The 30-yr rate is around 4.50% right now, but I believe that assumes 20% down and perfect credit.
2) Am I nuts and buying something too expensive? I've run the numbers, and we can do it. But how strapped will we be? Will we have money to support children someday and buy nice things for our nice house? Are we crazy?
The problem is - house prices in the area we're looking are high. I want a house that I can live in for 10+ years, and potentially forever. I don't want a town house or something too small that we'll grow out of. This house isn't excessive - it's 2500 sq feet and a very nice, reasonable size. But 400k+ is how much I have to pay to get what we want.
What do you all think? I'd love to hear your opinion, and appreciate you reading.
A Happy, Excited, and Nervous Prospective Home-Buyer
I was going to write up something even more involved, since I'm in a kinda similar situation and have a whole complex spreadsheet (yeah, yeah, everyone out there, I Have A Spreadsheet. I'm sure you're stunned) dealing with this, but....
Look, you won't get the loan unless your GF is on the app, and if she is you should wait til she's your wife, not your GF. Top front end ratio virtually any lender will consider is 28%, as noted by others before. (FWIW to others on this thread, they'll do back end ratios of 45%. Yes, they will. Don't get me started on this...). Anyway, at 80K gross your front end ratio is 1,866.67. That needs to cover principal AND interest AND PMI AND property taxes AND Homeowner's insurance AND homeowner's association dues, if any. Let's assume there's no HOA, so it's just PITI.
Let's assume you get a 4.5% mortgage, which may well be kinda optimistic. You already said property taxes are ~7K, so that uses up $583.33 right there. You've got a whopping 1283.33 left. On a 449K house I'd be pretty shocked if your insurance didn't run you at least another $100/month (probably considerably more, but let's just use $100/month for now). This leaves you with 1,183.33 left. We'll assume you sink 67,500 into a down payment (again, this will likely be less, because even ignoring the reserve requirement you will have some closing costs on that purchase, but hey, let's be generous). At 15% or more down but less than 20%, PMI rates are .0032 (give or take), at 20% or more there will be no PMI. So, plugging this into a real quick excel sheet and solving for max house, we get 301,044.04 for HOUSE cost (with a mortgage of just ~233.5K). IOW, basically just north of 300K is max you should be looking at. Which, quite frankly, sounds about right even before the math. Of course at that level of house the property taxes would be slightly lower as well as homeowner's insurance, but you can always build a spreadsheet for that and refine it if you wanna crunch numbers.
Main point is, no way in heck are you qualifying for a 350K+ loan, unless the GF is involved in the app, and that opens up a whole slew of issues that have nothing to do with math. You're gonna propose? Do it, then get married (and weddings also usually cost money, ya know). It's a first house so you gotta buy "stuff" to maintain it, as duly noted. Properly maintaining a house costs money. 2,500 sq ft will require more utility costs than a 1,500 sq ft or less apartment will. And so on.
Look, you've saved a nice chunk of change and that's good. GF has "substantial loans to pay off"? If those are student loans, understood. If that's consumer debt...well, that's a relationship warning sign, jus' sayin'.
It ain't like the housing market is zooming back north in the immediate future, apparently. Rates my go back up over time, but the housing market is still in a rough time. As Dave Donhoff said, there's lots of houses out there, and there will be plenty more. We saw a "dream house" several months ago but were not in a position to buy yet; it's gone but there's plenty more awfully pretty places as well.
My first suggestion would be propose to the GF, THEN get married, THEN look to buy a house. Don't assume 3% to 5% raises. Make sure you and GF are on the same page financially. Commit to buying a house together. Get a pad of paper or an excel spreadsheet and budget it out, including an assumption of kid(s) in the future. You say you've run the numbers, but are you properly accounting for all house costs? What is your guys current "stuff" budget now? You putting stuff aside in retirement accounts. What about Future Kid's college? Will you and GF both continue to work full time after future kid is born, and have you even discussed that yet? You're talking about a house you want to live in for over a decade, that means talking about stuff likely to happen in the next decade, right?
On a non-numbers related issue, it sounds like you'll have LOTS of moving parts in your life in the next 6-18 months. I humbly submit that adding "new homeownership" on top of that may be a little tricky.
On a numbers related note, a 450K house on ~160K combined, predictable income makes a lot more sense than a 450K house on 80K income and "up to" $1K-kinda-sorta-maybe coming in per month.