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I am 23 years old and will graduate from college in the next few months. I have always lived in an apartment so it's been a dream to live in a home one day and a personal goal to own a home before I am married.

I'd like to know what home-buying costs to consider prior to speaking to a realtor when asking to see homes in the future and what amount of loan I'd be approved for. The amount approved plus my own expenses can help me narrow down the price range of homes I should look for.

Here's some relevant information about me:

  • Accepted a full-time offer as a quantitative analyst for January 2021. My base salary will be 70k.

  • Will also continue to work 15 hours a week at my sister's business, making $10 an hour. I believe that comes out to $7800 per year.

  • Have a $39,333 auto loan - certainly not the smartest decision I made.

  • Possess 20,795 in student loans.

  • Currently have 25k saved up for a downpayment. Intend to have 25k more by the time I am closing. The expected downpayment will be 50k.

Given these factors:

  • How much of a loan will I be approved for? A ballpark would be appreciated.
  • What are some initial home-buying costs to keep in mind?
  • I live in Dallas, TX. How can I figure out how much my monthly home payment will be? I understand there are factors like taxes, HOA fees, and of course, the actual amount of the home to take into account.

I have tried to cover everything I could think of. If there is anything I have forgotten, please let me know.

Thank you for any and all the advice y'all offer.

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  • To calculate this you'll probably need to state your minimum monthly payments for your loans that show up on your credit report .(Car loan, student loan, etc.) And you'll also need to state your monthly take home income.
    – TTT
    Nov 3, 2020 at 6:09
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    Welcome new user, great question. Just a comment unrelated to your question specifically. I would suggest there is a let us say 95% chance, that, you definitely won't be able to keep a "fun side job" when you have a position as a quant. Food for thought!
    – Fattie
    Nov 3, 2020 at 12:54
  • Possess 20,795 in student loans - you're wording here is a bit odd and comes off (to me, at least) as ambiguous. Have you loaned 20,975 to other people who will be paying this back to you, or do you owe 20,795? Either way, what is the typical monthly income/payment? If loaned, is it to one person, or spread across multiple receipients?
    – yoozer8
    Nov 3, 2020 at 16:51
  • It is highly recommended to not buy a house fresh out of school - start work and see what sort of income you can actually maintain before you burden yourself with more debt. For example, will you really want to work 15 hours a week for $10 an hour after getting a career-goal job with a pay rate of ~$40 / hour (if you never work overtime)? It is quite likely this will soon be exhausting and unrewarding for you, so you don't want to have to count on that income to make your mortgage payments! Nov 5, 2020 at 18:18
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    Also keep in mind: "What the bank approves me for" is different from "What can I actually afford". Make sure you consider both aspects, because many banks will happily lend you into a life of obligation that you regret. Nov 5, 2020 at 18:20

3 Answers 3

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Visit a mortgage broker or go to a loan officer at a bank and they'll be more than happy to prequalify you for a loan. That will tell you what they estimate you can borrow and will be vastly more accurate than what appears below. You can plug the numbers into a prequalification calculator and get another estimate-- they're doing the same calculations behind the scenes that I walk through below.

Assuming you want a qualified mortgage (you do), your debt-to-income ratio (also known as the back-end ratio which I'll discuss later) can't exceed 43% (the CFPB is moving away from this rule toward alternate ways of assessing ability to pay but that's deep in the regulatory weeds). I'd generally consider it insane to have a debt-to-income ratio of 43%-- lenders prefer that not to exceed 36%. I'll use the 36% figure below. For a student just out of school that is used to living on ramen and buying $50 used couches off of Craigslist, you might be able to justify a higher debt-to-income ratio).

Banks also want your housing ratio (also known as the front-end ratio which will be discussed later) not to exceed 28%. In your case, because of your car loan, it's going to be the back-end ratio that will almost certainly be the limiting factor.

Debt-to-Income Ratio (Back-end Ratio)

This is just your total monthly debt payments divided by your total gross monthly income. Using 36% as the figure, that means

(monthly debt payments)/ (monthly gross income) <= 36%
monthly debt payments <= 0.36 * monthly gross income

You've given an annual gross income of ~78,000 (rounding to make the math prettier) which works out to a monthly gross income of ~6,000. 36% of that is $2,160. That has to service all your recurring monthly obligations (car loans, student loans, mortgage, property taxes, home owner's insurance, and HOA fees). So we can start subtracting.

If you've got a ~40,000 car loan and I guess that it's 5 years at 4.5% interest, that would mean you've got a monthly payment of ~750. If you've got a ~20,000 student loan and I guess that it's 20 years at 4.5% interest, that would work out to a monthly payment of ~125. I'm using a loan calculator to estimate payments, you can use the actual payment amounts

  2,160
-   750
-   125
= 1,285

Property taxes, home owner's insurance, and HOA fees will obviously be different based on the house and the area. Since we're just doing an estimate, we can use national averages. Average monthly property taxes are $190 and average monthly home owner's insurance is $100 which is $290 total. I'm going to change that to $285 because it makes the math pretty. HOA fees would add to that if you look at a house with an HOA. Subtract that from what is left and you get ~1,000

   1,285
-    285
=  1,000

OK, so the bank would probably be reasonably comfortable if you were paying $1,000 a month on your mortgage loan. What sort of loan amount would that translate to? Going back to our loan calculator, a $220,000 loan at 3.5% for 30 years would have a payment of $987.90 so that's roughly the ballpark you'd be looking at. I'm making a (hopefully slightly pessimistic) guess about the rate, taking today's average rates in the low 3's and adding a bit to account for extra risk because you don't have much history for your current income.

If you've got a down payment of $50,000, that would mean you could look at houses up to about $270,000.

Housing Ratio (Front-end Ratio)

The other ratio you'll see discussed a lot is the housing ratio or front-end ratio. That's the ratio of your housing expenses to your gross income. Banks like that to be under 28%.

(monthly housing expenses)/ (monthly gross income) <= 28%
monthly housing expenses <= 0.28 * monthly gross income

If we use the values from the previous calculation

monthly housing expenses <= 0.28 * 6,000
                         <= 1,680

Subtract the $290 for home owner's insurance and property taxes and you're left with $1,390 for your mortgage loan. Plugging that into the calculator (still 30 years at 3.5%) with a loan amount of $300,000 gives you a payment of $1,347.13.

The bank will take the lower of the two values from these, so they'd probably prequalify you for something in the $220,000 range. If you didn't have that car loan, your front-end ratio would become the limiting factor and you'd qualify for a ~$300,000 loan.

If you wanted to go for a debt-to-income ratio closer to 43%, you'd get a lot closer to the $300,000 loan. The bank might let you do that but I wouldn't want to borrow at the upper limit of what the bank allows. You want to be able to put aside some money for retirement (particularly while you're young and don't have kids to support). Say that's 15% of your income. Taxes are going to be ballpark 30% (federal income taxes, state income taxes, payroll taxes, sales taxes). If you're paying 43% of your income on debt, that only leaves 13% of your income for living (food, utilities, entertainment, home repairs, etc.) which isn't a whole lot. If you're that "house rich, cash poor", it's pretty easy to get into a tight spot financially if you have a couple of unexpected expenses where you're running up credit card debt to replace a broken water heater or to fix the car.

If you know that the car loan is going to be paid off in a few years (and you'll drive that car until it falls apart) and you're accustomed to a spartan college lifestyle and you're not planning on spending a lot on entertainment, you might decide that the benefits of a more expensive house are worth the short-term pain and the chance that you'd be living without much of a financial cushion for a while. Speaking frankly, though, (and this is not intended as a slight particularly since you called it out) for a college student that bought a $40k car, I'd tend to be suspicious of any plan that involved significant lifestyle sacrifices for a period of years to work out. If you buy a cheaper house now, you can always upgrade in a few years when the car is paid off, you've got a raise or two at work, and you've got a longer history of prudent financial decisions under your belt.

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  • Just a note - property tax and homeowners insurance in Texas is generally much higher than the national average. Double or even triple the numbers that Justin has listed above to get a better estimate.
    – Istanari
    Nov 3, 2020 at 14:47
  • The OP doesn't mention it, but if they are a US Military Veteran, they might be able to qualify for a VA loan, which will have some similar and some different aspects. I was able to 100% finance my house is Vegas this way, but with fewer debts, longer work history, and somewhat higher income. The mortgage broker/realtor will be able to help with this, too. Also, saving $25k on a $8k/year salary means they are waiting months into '21 before looking, so interest rates and housing markets will change and may alter things drastically. Nov 4, 2020 at 22:51
  • Getting an idea now of the process is fine, but with as much as could happen between now and then, it's just a guess and the OP should expect to have to go through the process 100% when they actually get around to realistically looking for a house. Nov 4, 2020 at 22:52
  • @computercarguy - Sure. There are quite a few things that the mortgage broker will take into account other than this analysis. But there aren't a whole lot of 23 year old military vets that are graduating college and taking a civilian job. That's the age you'd normally expect someone who went straight to college from high school to graduate. Nov 4, 2020 at 22:58
  • @JustinCave, not necessarily. I joined the Army Reserves in high school, then went to Boot camp the summer right after HS graduation, then right into college. If finances wouldn't have gotten in the way, I would have graduated college at 23-24 and had only 1-2 years left on my enlistment. This is a somewhat common thing with the Reserves. Nov 4, 2020 at 23:03
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You are "fighting two battles" when obtaining a home loan. They are debt to income ratio and income. Your income is healthy given that you are young and single. However, many lenders will not give you credit for the part time job. They reason you could quit anytime, and it might be wise to do so if it jeopardizes your full time job. While that may not apply to your situation, you will likely fall victim of lender policy. Still though, 70K is far above the national household income level. Good job!

You don't give details about your loans (like monthly payment amounts) but your debt to income ratio has to be under a certain number that will vary by lender and may adversely effect your rate. One website claims that debt-to-income ratio is the #1 reason that mortgage applications are rejected. A high number for debt to income, which is the total of all your loan payments is 35% but some lenders will go higher.

So I will assume your take home pay is around $4500 (without the part time job). If you had no other payments you could probably qualify for a mortgage of 300K if you had 50K to put down on a 30 year mortgage. Obviously this would be less depending on your payments.

If you use a credit card for rewards and pay it off every month, some lenders may count this toward your debt-to-income ratio. IMHO that is silly, but I am not a loan officer.

You may not want to buy as much house as you can afford as it might limit you to other business opportunities, like taking advantage of the 401K match at your employer.

BTW, if it was me, by tomorrow I would have 1K in an emergency fund, no student loan, and a 37K car loan. Also I would consider that I am three years, or so, away from buying a home. Because besides paying off my consumer debt and saving for a down payment, I would also want to have an emergency fund.

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Justin Cave has a good answer and Pete B.'s is decent, but there's a bit more to this that hasn't been said yet.

As Justin Cave mentioned, there's a lot of mortgage calculators out there that'll help you figure out some of the pure math of the mortgage, but that's only skimming the surface of what you'll need to know about the process, so I won't go into that.

Car Loan

Pete suggests to get rid of the student loans and pay off a little of the car loan. The problem with that is student loans are considered very differently on credit than other debt. Car loans are secured debt, until they aren't. If you get in a car wreck and it's totaled, your insurance will pay some (if you aren't at fault), but likely not all, of the loan. The remaining debt becomes unsecured, so it's not a good kind of debt to have when looking at a mortgage. Mortgage lenders know this, and will handle it accordingly.

Student loans aren't secured debt and they aren't unsecured debt. Like medical bills, they are in a class by themselves. They affect your credit less, good and bad, so are a better thing to have than other debt. Miss a couple of payments on your car, and your credit can drop substantially. Miss a couple of payments on your student loan and your student loan company has many, legally defined ways to work with you to keep you from screwing yourself and for the student loan company from screwing you. Other loans don't have these protections. And your credit isn't as drastically affected.

I'd suggest paying off the car before you pay off your student loans. I'd also suggest keeping at least 6 months of your after-mortgage expenses for an emergency fund. As an off-the-cuff number, I'd suggest dropping $20k of your savings on your car loan, while keeping the rest for your emergency fund.

Credit Cards

You don't mention credit card debt, but I'm going to assume you have some. That's definitely unsecured debt, so pay that off even before paying off the car.

Besides looking better on your mortgage application, credit card debt can have a drastic negative effect on your credit score. Getting rid of it avoids getting hit multiple times on your application for debt. Yes, it's not supposed to affect you multiple times, but it does. It affects your credit score, your debt to income ratio, and having lots of credit card debt makes it look like you are willing to continue to increase your credit card debt beyond what's financially feasible for you. Mortgage lenders will tell you they don't think like this, but they do even if it's unconsciously. It may even be part of their company policy.

Age

At 23, you likely don't have good credit. This is simply because of the short time you've had credit. This isn't "ageism", it's just a fact. I'm in my early 40's and my credit is negatively impacted because of my relative short credit history. Your credit history is a combination of what credit you've had in the past and paid off, as well as what credit you are currently still paying on. When I got my mortgage earlier this year, I only had a car loan of 2-3 years on my report, so I was hampered by that. I have a whole long 20+ year history of student and personal loans that've been paid off, but that didn't work for me as much as the short car loan worked against me.

If I would do it again, I'd actually keep a couple hundred on a few of the student loans and pay off the car, similar to what I advised you earlier. I'd had the student loans so long and they had dogged me for so long when I was under and unemployed that I just wanted them gone, so I didn't think about the credit implications. I also didn't know the full credit implications until afterwards, though.

Because you are just out of college, you'll also likely have to give the broker a copy of your $70k job offer as proof of your potential earnings, if you aren't working at the job by then. They get tons of people who try to tell them how much they are going to be making, only to not get the job they were hoping for.

Another thing to think about is that you'll likely need to meet a minimum steady job requirement. I had to wait a few months to get my loan approved, since I had left a job to move 2000 miles and had trouble finding another job at the new location (long story). My mortgage company only needed 1 year steady employment before they would give me a loan. Some companies need 2 or more years. This doesn't mean staying at one job through all that, but it does mean having a job with little to no gaps during that time. They may also have an upper limit built into the job requirement too, so that you aren't job hopping every month.

Credit History

If you don't already have an account, go to Credit Karma's website to find out approximately what your credit history looks like. I'm not affiliated with them in any way, I just know it was indispensable to know what to expect when I was looking at a mortgage or even a car loan. They give you Experian and TransUnion credit scores, as well as access to a lot of other information about your credit, including history. It also keeps track of your credit scores, as long as you keep logging in regularly. It'll help you figure out what's helping and hurting your score. The site also includes a lot of good generic and general advice to help. Aaaaand it includes a bunch of ads for credit cards and other junk. I'd stay away from all that and just stick to the free info.

There are other sites that will do something similar, but this is the one I've used. I can't comment on how any other site works.

You checking your history won't affect your score. It used to, a handful of years ago, but things changed and now there are "soft" and "hard" hits on your credit.

A soft hit is you checking your credit, a credit card company's prequalification credit check, or a loan officer doing an initial query on your score. These soft hits don't affect your credit score at all. You could check your score 5 times a week, and it wouldn't matter.

A hard hit is what a loan officer does when they officially get your full credit history for the purposes of giving you a loan. You can do this 1-2 times with a mortgage or 3-5 times with a car loan before they start affecting your credit. They fall off your credit history after 12-15 months, as opposed to the 7 years most other things take. These hard hits usually don't affect your credit much, unless you have a very large number of them. Just 1-2 won't affect your score, but 3-5 will take 1-5 points off and more than that will start costing you even more points.

Veteran's Benefits

As a US Army Reserve Veteran, I was able to get a VA loan. This allowed me to get 100% financing as well as a few other (minor) perks. I still overpaid my first month by quite a bit in lieu of a down payment, but that wasn't required by the lender.

Getting a VA loan requires more paperwork to verify your status as a Vet, and you'll need something other than a Dishonorable Discharge to get into the program, but it's worth it. Not only does it save you money, but the VA office will likely hook you up with a realtor that understands the VA loan process and can make all of it easier. I got a wonderful realtor that explained things to me, including telling me things I should be asking, things to avoid agreeing to, and so much more I didn't know about as a first time home buyer.

You don't mention being a Veteran, but I thought I would just in case and for others reading this Answer. I also mentioned it in a comment on Justin Cave's Answer, but I thought I'd also mention it here.

Points

There's a point system when it comes to mortgages. It affects your interest rate and your monthly payment. I don't fully understand it, but your credit, down payment, and mortgage broker may all affect those points, which will have long term effects on your mortgage. I don't understand it all, so that's all I'll say about it. I just wanted you to know about it, since it was a surprise to me and is something to ask about when you talk to a mortgage broker.

Mortgage Broker

They can be your best friend and your worst enemy, and at the same time. Fortunately, I got a good one that worked with me and helped me get over some obstacles. It's their job to tell you sometimes bad news. Try not to take it personally, even if it hurts. There were things my broker said that surprised me, so just try to understand that they are working on a business deal that can cost you and them a lot of time and money, especially if something goes wrong. I'm not saying that they won't try to put you through a hard time or try to take advantage of you, but most are trying to make sure they don't have to foreclose on you.

These people will also let you know what your closing costs are as well as a dozen other things. Your realtor will help with some of this, including what the seller is willing to pay. This can get complicated quickly, so don't assume that an online mortgage calculator will tell you everything you need to save for.

I forgot to mention that with a typical mortgage, you're looking at 10-20% for a down payment, although you might qualify for a first time buyer loan and only need 3%.

Timing

As I mentioned in a comment on Justin Cave's Answer (I wasn't intending to write an answer when I made those comments), you're probably not going to be getting a mortgage very soon. I'd guess at least 6 months, just based on your saving's plan. You may have to wait even longer, based on employment requirements and what job(s) you've had in the past.

The housing market can go through a huge change in that short time, especially with the current pandemic. The market may bottom out and you get a great deal on a house with great interest rate, or the prices and interest might be inflated to cover losses during the pandemic. So whatever specific information you get about your situation in the next few weeks could be drastically different than in a few months. And it could easily go either way.

Your job may even evaporate in the coming months. This pandemic has caused a lot of uncertainty, and with you being a "new hire", they may get rid of you first or the whole company may just shut down until the virus gets under control. You might get lucky and start working from home like some us, but that's not a guarantee, either.

Don't assume anything, just keep doing good things for your credit and your down payment. That's always good advice, even if the mortgage goalposts move beyond what you can handle. Eventually, it'll move the other way and then you'll be in a good position to get what you want. And yes, I closed on my house shortly after the start of this pandemic. In fact, I didn't even find my house until after my city locked down. I had the paperwork started before then, but I hadn't found a house I wanted.

Other info

I've written extensively about spending habits on another Question, so I won't add it here. This is pretty long as it is.

Paying off debt and living within means vs. long term planning

Realize that getting a house isn't a fun or easy thing. You'll likely be searching for paperwork for weeks on end, maybe more. I know it took me quite a while the first time I applied for a mortgage. That was about a year before I tried it again earlier this year. (Part of that long story I mentioned earlier.) Even though I had most of the paperwork located the first time, I still had to get a whole bunch more the 2nd time. Some of it was duplicate/updated info, such as insurance, bank account status, employment status, and probably several other things.

Also, realize that no matter how good a house you get, there's likely a bunch of repairs that need done. Some of these will be done, or at least paid for, by the seller. Your realtor should be able to help you figure this out. That said, don't put all of your savings into the down payment. I've spent several thousand dollars doing repairs, upgrades, cleaning, replacements, and more. About half of what I've done could be considered unnecessary, but they make the house more of a home to me.

Just understand that there'll be things that you want to change and spend money on when you get into the place, so save money for that time. And don't spend "too much" on that stuff. I've wore down my emergency fund because of getting too enthusiastic with my changes. I also have a dozen partially completed projects started and need to complete them before I start new ones, let alone spend more on future projects. I'm suggesting balance to your down payment and your savings for after closing on the house.

Good luck!

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