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How Much Home can I Afford?

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June 15, 2011 – Comments (12)

[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

Author: chopsueycp

Hello all,

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.


Sincerely,
A Happy, Excited, and Nervous Prospective Home-Buyer

 

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Author: synchronicityII

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.

-synchronicity 

12 Comments – Post Your Own

#1) On June 15, 2011 at 11:21 AM, russiangambit (29.40) wrote:

The question actually should be what is the smallest/ cheapest house I can live in that is not in a crime area and in good school district. You dont' buy the most expensive car justeebcause you can afford it. You buy the one that is the least expensive while it still suits your needs. Well, at least, I do. House shouldn't be any different. Plus, smaller house is cheaper to maintain.

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#2) On June 15, 2011 at 11:42 AM, catoismymotor (< 20) wrote:

I believe russiangambit is very wise. 

If you are not careful your possessions end up possessing you. 

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#3) On June 15, 2011 at 11:43 AM, Jbay76 (< 20) wrote:

Interestingly enough, I am in somewhat similar shoes, with a few exceptions as I am married and have completed a somewhat inclusive spreadsheet covering P/I, HOA, Taxes, home insurance, home warranty, and max. renovation costs allowed if at all.  We will be using a conventional loan that requires 5% DP, no PMI, and are looking for a home that will not cost us more than what we pay in rent now.  So, we are essentially looking at homes around 45% of what we qualify for.  And yes, like russiangambit said....community, crime rate in area, commute to work and general quality of life all play factors as well as the numbers.  If we can't find something that works for us, oh well.  We continue to rent.

I honestly think that in today's society, it is very hard to be a single income family. 

My 0.02$

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#4) On June 15, 2011 at 11:45 AM, Jbay76 (< 20) wrote:

I should say we are looking for homes whose total monthly cost will not exceed what we spend monthly in rent.  The total cost of the ome will obviously be more thatn what one months' worth of rent will be :P

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#5) On June 15, 2011 at 11:52 AM, chk999 (99.97) wrote:

Slightly contrarian view. Don't be afraid to stretch a little. We will have inflation, so if you can survive the first few years, you will pay off the rest of the loan with inflated dollars. Rates are still low and you can lock in a 30 year fixed at something reasonable.

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#6) On June 15, 2011 at 11:53 AM, cizastro (< 20) wrote:

I'm with RussianGambit on this one as well.  I made the mistake of buying that first home near the top of the bubble.  While the payments were doable, it made life a little stressful.  At the time, I had a $2300 mortgage payment and was making $34k a year while my girlfriend made around 40k.  We had a little of money left over to save, but not much. 

 I'd definitely recommend going with a home that suits your needs in a practicality standpoint, but is also as cheap as you can find (and in a good area).  You can always fix things along the way and make the home exactly what you want.  

 I'm in the process of losing my first home to foreclosure (it was a business decision and I wanted to give our family a better life), but I had enough savings built up to buy another home before losing the first.  We purchased a home in a very nice neighborhood, but it needed a little work.  While we still have the luxury of staying in the first home, we're slowly fixing things in the other home to make it exactly what we want.  Our house payment is roughly $1300 less per month (what could you do with an extra $1300 a month?) and our salaries have increased since the original purchase of the first home.

 If I had a time machine, I would definitely do what RussianGambit says and I would've gone for the cheapest place I could find in a good area.  It takes a little extra time to get things how you want it, but when you're saving a large chunk of money per month (things that could go towards your future child's education/vacations/etc) you'll realize how important that really is.  

Good luck!

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#7) On June 15, 2011 at 1:48 PM, Melaschasm (53.74) wrote:

Russiangambit has the best answer.  Unfortunately not many people will follow his advice.

Some general rules of thumb I have heard:

The house price should be no more than 3 times your annual income (80k times three = $240k house).

Your payment, including taxes and insurance should be no more than 1/3 your take home pay, and preferably no more than 25%.

You should have 10% set aside for unexpected home repairs.  

Under normal circumstances, 20% down is needed.  Buying next year, when we may have the sweet spot of low prices and low rates might be worth going ahead with less than 20% down.

Try not to make big life decisions when you are in the middle of major life changes.  In other words avoid buying a house when you are getting married, having a first child, starting a new job, or whatever else.  When you are already in a stressful situation you are less likely to make an optimal home purchase decision.

Never tell your real estate agent the truth about how much you can afford to pay for a house.  If you say you can pay up to 240k, you will not be shown high quality options for less than 240k.  I recommend starting out by listing the qualities you want, and a price preference half of what you can afford.  If you spend a few months looking and can't find anything close to what you want, then increase your max spend to a little at a time until you find the right price range.

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#8) On June 15, 2011 at 1:52 PM, TDRH (99.49) wrote:

$7K a year in property tax - not to mention HOA fees, insurance, maintenance etc.   At 2500 square feet, I calculate the price to be $179.60 per square foot.  I did not see where you were thinking of buying, but that seems a little steep compared to what we pay in Texas.   

Sounds like you have a good job, but banking on it for that % of income and the contributions of a girlfriend seem to be risky to me.

 For two people it seems excessive, if you were raising kids and had access to good public schools, maybe it could be validated vs the cost of private schools, but personally I would have trouble sleeping at night owing that much money.

 

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#9) On June 15, 2011 at 1:55 PM, engstocker (< 20) wrote:

I would never by a house that is more than triple my income. For your 80k x 3 =240,000 max.

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#10) On June 15, 2011 at 2:12 PM, devoish (96.28) wrote:

Please envision me speaking with heartfelt passion, waving hands and reddened complexion.

What are you? Nuckin futs? Between the two of you, you command $160,000/year in income. If you can live on just half that, and lots of couples are comfortable on 1/4 of that and you could be too, in five years you could pay cash for that house and not be a 30year debt slave. And frankly, with interest rates at all time lows housing prices are at all time highs. Five years from now when interest rates are 8% people at your income level will be borrowing to buy houses that cost $325,000 including the house you are looking at now. But you'll be paying cash and keeping 6 figures in your pocket because you waited and saved. Get some advice from someone who is not on the other end of that mortgage.

3.25% income increases? More nutso thinking. Paychecks haven't gone up in ten years, tea partiers are slamming public paychecks downward, what makes you think you are the exception? NY City has 1200 less teachers that can buy that house this morning and will take your job for less and thats the way its going for your paycheck too.

You got $75k right now? Thats the most I would pay for a house. When you have $449, then pay $449.

Thinking like that neither you nor your GF are qualified to buy a house right now. Its not like there won't be another "dream house" on the same block in two years. And think about this; if interest rates go to 12% then people at your income level will only be able to pay $225 for that house, and there's only ten percent of the country at your income level and most of them already own a home.

My advice is to sit back, relax, and don't be in debt - be rich instead.

Course, thats just me.

Best wishes,

Steven

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#11) On June 15, 2011 at 2:29 PM, mm5525 (< 20) wrote:

Some words of caution from a fomer mortgage broker for over a decade: First, I think in this job environment it's highly dangerous to assume a raise! Be careful there. Perhaps you work in the IT sector, to where that might be more plausible, but still, be careful. Those property taxes alone sound like you're in Cali or perhaps NY, so perhaps you are in the IT sector. Those salary raise projections are a little too rosy, and remind me of some sort of government projection from an economist who has never worked in the real world. Just saying...

I would recommend buying a home far less in cost. Live in it for a few years, and then buy the home of your dreams. After all, if home values continue to go down, you would be able to get a home cheaper than now and use your starter home as a rental property, which creates tons of tax advantages for you, as well as income to help qualify for the new mortgage.

NEVER, NEVER, NEVER put anyone you are not legally tied to on your mortgage loan, especially a girlfriend! Too many risks, and there's no reward in your case since she has debt, which would make it far harder to qualify (plus they use the worst of the two credit scores). If you two break up, she is stuck on your mortgage to where it will be impossible for her to get her own mortgage unless you refinance your existing loan to take her off of it.  

You will get a much better deal if you avoid PMI entirely by putting 20% down. When PMI is on your loan, it's difficult to get it off. You have to literally harass the lender over and over and order a PMI appraisal to get it off. That's dangerous to do in this stagnant home value environment. Better to put 20% down on something you can afford. Plus, if you put 20% down, you can waive your escrows and simply pay the principal and interest on your loan and pay the taxes/HOA/insurance as they come due, which will give you more liquidity month to month (yet having to plan for those expenses as they come due).

I had no intention of being a landlord, but it's simply how it worked out for me. I bought a starter home, satisfied the owner-occupancy requirement from the lender (just a year in most cases), and then found the home of my dreams thereafter at an incredible price. Now I enjoy great rental income.

I was taught in investing to 'look down before you look up'  30-year-olds can be quite happy in a starter home for a few years and upgrade thereafter. This can free up your cash flow for other endeavors as well. Never good to be a slave to a massive mortgage payment.

Best of luck!

 

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#12) On June 18, 2011 at 10:43 PM, RaiseMyDiv (58.70) wrote:

My advice would be to look for a house the is equal to or less than 2 times (maybe 3 times if you don't want to be that conservative) your annual salary. I wouldn't consider your girlfriend's contributions. At this point, things are for certain. You never know what may lay ahead years from now. I would just start out small.

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