8

This is my financial situation and I hope that someone can guide me. I have been in the market for a house to buy. There is a house that I like and I wanted to know if I could afford it.

I have included all my details.

Gross Salary: Base salary: 109 K (bonus might be possible) Money Saved:

  1. 120K (Money Market + Checking)
  2. 29K CD
  3. 20K IRA
  4. 46K 401(k)

I have no debts. My car loan and student loans are all paid off.

The rent for a 1 BHK is about 1700. My expenses include the following:

  1. insurance(renters+ car)
  2. gas
  3. food
  4. utilities (gas, electricity, water, sewage)
  5. food and groceries
  6. internet
  7. cell phone

The expenses come to about 800 - 1000$ per month. Total: $2500 - $2700 per month

The house I'm interested in is listed at 490K. With the interest at 4.5 % and 20% down payment, the expected expenses potentially come to:

  1. Mortgage payments: 1986
  2. HOA: 120
  3. Home Insurance: 120
  4. Utilities: 150
  5. Food: 300
  6. internet: 80
  7. cell phone: 70
  8. maintenance: 408 (assuming 1% per month)
  9. property tax: 490 (can be paid from interest deductions refund)
  10. Tax Deduction: -650 per month approx

Total: 3074

I am not married, nor do I have any children. Assuming that I continue to put $1000 per month in my 401(k), these are the basic calculations per month:

  1. Gross Earnings: $9,083
  2. Marital status: (M/S) S
  3. Allowances: 1
  4. Federal tax withheld: $1,562
  5. FICA: $563
  6. FICA - health insurance: $132

Pre-Tax Deductions

  1. Miscellaneous: $0
  2. 401(k)/403(b)/457: (%) 11%
  3. 401(k)/403(b)/457: ($) $999

After-Tax Deductions

  1. Miscellaneous: $0
  2. Reimbursement: $0

Summary Gross pay $9,084
Total deductions $3,256
Take-home pay $5,827

Total Percentage with deductions: 52 %
Total percentage without deductions: 63 %

  • If you're comfortable with your current rent level, why not simply use a mortgage calculator to work out how big of a loan you can take out while keeping the same monthly repayments? I get a maximum loan of about $330K, assuming 4.5% interest and a 30 year repayment term. So time to convince them to knock 15% off the asking price of the house for you. – aroth Aug 13 '13 at 4:18
8

You are asking if getting a mortgage nearly 4X your income has the potential to make you "house poor".

$2500 Of your $9000 gross is not too much according to the bank, but the bank only looks at a few ratios, not your entire budget. Is this house appropriate for your needs? At 3X the median home price, are you reaching too high?

Note - this board has had multiple "budget" discussions recently. For many people, the mortgage is just where the trouble starts. The other house related budget items just multiply up to make things worse.

7

Assuming a good credit score with no issues like bankruptcy they look at 2 ratios: housing related debts and non-housing debts.

For you the housing debts are: principal and interest ($1986/month), property taxes ($490/month), Home Insurance ($120/month) and HOA fee ($120/month). Add these up ($2716/month). You want this to be below 28% of your gross, though some lenders use 33%. For you 109K/year is 9083/month or 29.9%. The 20% down payment saves you the PMI payments. Note that the deductions for interest and taxes already hidden in the ratio limits, so don't try to reduce the monthly impact by a expected deduction. Many lenders will require you to give them the money from taxes and insurance each month, they will forward the funds to the government of insurance policy when the bills are due.

The 2nd ratio is for the non-housing debts, which you claim to be zero. That should be less than 10%.

If they insist on keeping you below 28% you might need a lower rate or bigger down payment.

Your current income and budget have allowed you to accumulate significant savings, though you retirement balances seem low. The savings and CD balances show that you could increase your spending each month without severely impacting your financial health. Should you buy, can't be answered because that is an individual choice.

Keep in mind that home ownership also includes additional responsibilities that a renter can ask a landlord to fix and pay for. That is the stuff that is impossible to predict.

4

Considering your question,

I have been in the market for a house to buy. There is a house that I like and I wanted to know if I could afford it.

You state your Assets:

120K (Money Market + Checking)
29K CD
20K IRA
46K 401(k)
No debts (great)

Awesome!

Current Income:

$5800/month (net after taxes, etc)

Great job putting $1000/month into your 401k! That is $12,000/year saved for retirement. Excellent!

Current expenses:

rent $1700
insurance(renters+ car)
fuel
utilities (gas, electricity, water, sewage)
food and groceries $300 (see below)
internet $80
cell phone $70
Total: $800-1000/month
Total Essentials: $2700/month (less than 1/2 your net income)

Why do you want to buy a house for more than 4x your gross income, and 3x median house price (U.S.)? Are you planning on living in the house for at least 5-7 years? There is a risk that interest rates will rise, and that will affect your ability to sell the house.

Expected expenses:

Mortgage payments: 1986
Home Insurance: 120
property tax: 490 (amazing how much government costs)
PITI: $2596
HOA: 120
maintenance: 408 (assuming 1% per month)
Total: $3124

Adding your other essentials,

Utilities: 150
Food: 300
internet: 80
cell phone: 70
Total essentials: $3724

You are considering increasing your expenses by $1000-1200/month.

Looking at the amounts you quoted for direct housing expenses, you will have committed $2600/month to a mortgage payment. Adding your other estimated essentials, you will spend over $3700/month (leaving $2200/month for everything else).

You may have higher utilities for a house than an apartment, you are doing well with your food budget, and your cellphone is lower than many. You anticipate $650/month ($7800/year) tax savings (be careful, congress is looking for ways to increase tax revenue).

You want to keep your essential expenses under 50% (much more than 50% is difficult, and I am trying to get to 40%). You may live in an area where housing costs are an out-sized expense. But an option would be to save more, and a larger down payment could lower the monthly expenses below that 50% mark.

2

One thing you may want to consider if your budget is tight....do your own Escrow. You have to be disciplined, but I don't see that as a problem for you. Nice job on no car payment or student loans!

The banks almost always screw up escrow, and you can keep your monthly savings payment exactly what they need to be. Dump 610 in a savings account every month and you should be golden.

Here in Orange County, Florida taxes are due in April, you can get a discount of 1%/month if you pay early. November is the first time you can pay it. When you run your own escrow, as I do, I can pay when I want (at the end of November) and maximize my discount. Now your situation may differ, but probably 110% (not based upon research) of escrow accounts are goofed up.

  • Until my mortgage was below 60% loan to value, I was never able to pay the tax on my own. Has this changed? More important, if the OP's budget is that tight, how does this help? He still needs to make the payment when due. (I've never heard of the discount, but 1% /mo is great and worth taking advantage) – JoeTaxpayer Aug 15 '13 at 1:50
  • Perhaps that was a internal policy @JoeTaxpayer. When I purchased my current home, I paid a small fee to do my own escrow and did a refi last year, and paid no fee. The refi was under HARP so no appraisal was order and I was probably under water. – Pete B. Jan 28 '14 at 18:12
  • 2
    You did not tell us your age. For example, if you are 55 then you are way behind on your retirement savings and cannot afford this home. – Bob Jul 8 '17 at 13:19
  • I have the opposite experience. My mortgage servicer pays early to get the discount. – Freiheit Aug 10 '18 at 19:20

protected by Ganesh Sittampalam Aug 10 '18 at 19:01

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