Discussion in 'Budget Board' started by disneyofcourse, May 22, 2007.
Isn't there some kind of equation?
I was looking at the same thing yesterday. I am considering re-locating back to PA to be near my family. DD is very homesick suddenly.
If the link does not work, got to realtor dot com, and along the left side there is a section of tools. This is where I found it. .
If you Google Home Affordability Calculators, you will probably get some other sites, as well.
Most banks will not loan you more than 33% of your gross monthly income...meaning that your house payment can not exceed more than 33% of what you make...
Go to www.money.com and you will find calculators to help you figure that out...
Having said that...remember one thing...
This is a max percentage and in reality, it is way more house payment than most people can comfortably handle. By maxing out...many people find themselves "house poor" meaning they can handle the payment, but not much else. When emergencies pop up (and they will), they have to resort to credit cards and loans and begin a vicious cycle of spiraling debt. Don't flame me, I said "most people"
The rule of thumb used to be about 25% and IMHO...that is more realistic.
I'll get off my soapbox now...
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The general rule of thumb is between 25-30% of your monthly net income. Which is one week's paycheck or a week and a half.
Now, you can go higher than this number but you'd be sacrificing a lot of other things. So its better to be conservative.
I pay 55% Its a long story....
You need to factor in your total debt to income ratio too, usually no more than 40%; including the mortgage payment...trips up more than a few folks after they find their dream house...although there are sub-prime lenders out there who charge higher rates & have less stringent policies.
My suggestion (realtor hat on lol); if you are serious - talk to a mortgage broker & get a pre-approval (not just a pre-qualification). Puts you ahead of the pack when like offers are considered by seller.
Really lose rule of thumb is your purchase price should be no more than 2.5% of your gross annual income. But that's really lose and there's so much more.
Lenders look at several factors:
Your potential to have a large jump in income in a few years.
Take your gross annual income. Include wages, tips, and bonuses if you have a three year history of reicing them. If you only get normal wages, divide the yearly gross by 12, and that's your monthly gross. If you get tips, annual bonuses, or are self employed, take the past three years worth of income (as reported on your tax return) and divide by 36, that's your monthly gross.
Next, multiply the monthly gross by .30. The result is the amount you can afford to spend on the mortgage each month, including property taxes, and insurance. If you are spending more than that now in rent, saving, and paying all bills on time, you can raise that number to meet halfway between the current rent and estimated monthly payment.
Now look at all your other debts. Car payments, student loans, credit card monthly minimums, personal loans, etc. For some loans you'll also have to include childcare costs. Not counting any installment loans you've got less than six payments left on, add all those up, and add in the monthly mortgage number you cam up with earlier, and then divide by your monthly gross. You can't go over 40%, 42% if you've got compensating factors (we'll get to that in a minute.) If it's over 40%, then you need to lower your monthly proposed mortgage payment.
Several things can be counted as compensating factors. Overtime or bonuses that aren't guaranteed but is customary that you ahven't counted in your income, a large amount of cash left in the bank after closing, a monthly housing expense that's declining significantly, you are finishing graduate school which will have the potential to greatly increase your income over the next year or so, you have a history of working a seasonal p/t job (like Christmas help) and haven't counted that income, etc. Compensating factors can help an underwriter approve a loan that might not normally meet traditional underwriting guidelines.
I once wrote a loan for a couple--their monthly housing expense was dropping from $1100 to $800, and he had a trust that was worth more than the mortgage was. They had a 50% housing expense! The underwriter approved it because the housing was going down $300 a month, and the trustee wrote a letter and showed documentation that there was enough in the trust to keep the house out of foreclosure should the borrower have problems making the payments. It made sense. (the wife had income, but her redit was so bad that we couldn't put her on the loan--in reality they probably had about 35% of their monthly income going for housing.)
Without knowing the entire picture it's impossible to determine how much house you can afford. Please speak to a mortgage lender who can give you various scenarios that would work for you.
This has been hinted at, but you need to be clear that "How much can I afford?" and "How much will I be allowed to borrow?" are two totally different questions. Lenders can be quite predatory and will happily lend you far more than you can actually afford. You should run all the numbers yourself before your first meeting with the mortgage broker. Then don't allow the broker to talk you into any more than you've already determined you can afford.
I believe the rules of thumb used to be that housing should be no more than 28% of income and total debt shouldn't exceed 36% of income. The other rule is that the purchase price should not be more than 2.5 to 3 times your income (I think that's what ducklite meant - not 2.5% of income).
In recent years, many buyers and lenders alike have been ignoring these rules. People have been buying far too much house for their income and lenders have been making loans that are quite irresponsible, which is part of the reason the foreclosure rate has been rapidly rising.
Very good advice, although I must say that not all lenders are predatory. When I was originating mortgages I specialized in first time borrowers, and lost some business to other lenders because they were offering obscene loan products that in good conscious I wouldn't sell. Unfortunately several of the borrowers came back a few years later in deep doo-dah and asking if I could help them bailout.
That's the optimum, but as I stated previously, a 30/40 with compensating factors that makes sense isn't something that should be ruled out. It depends on the individulas circumstance.
Yes, my bad, sorry for confusion. Oops!
I genereally agree, of course there are always exceptions. Another loan I wrote was to a guy in his last year of residency who was an orthpaedic surgeon. He had an income of about $80K a year, minimal debt--no student loans!--and was expecting his income to more than triple over the next three years as he went into private pratice. His ratios were 40/45 when the loan was written, and he had almost a year PITI in the bank after closing, it made sense based on those circumstances.
Well, in figuring out my two home purchases, I worked backwards.
I picked a monthly payment that I figured I could handle, subtracted the taxes and insurance I was likely to pay, and what was left was the mortgage payment. I pluged that into a mortgage calculator a long with the interest rate I figured I could qualify for (I have excellent credit), which told me what my loan amount would be. I added in my down payment amount, and that was the home price I could afford. In my case, the trick was finding a home in my price range, not easy in my area!
Now, to figure out what I felt I could afford a month meant that I had to write out a budget and track my monthly expenses, not forgeting bills that crop up once or twic a year. So that should be your first step. And try to base the budget on living in your new home, that can be tough since utilies can vary so much. Factor in your new commute to work, are you going to spend more on gasoline, or less?
Another factor is your down payment. If you have 30K saved, you most likely won't want to put the full 30k down, maybe only put down 25k, leaving 5k in savings. You'll need some cash on hand for moving expenses, items for the new house (do you have any idea how many runs to Target I made the week before and after my last move? Me either, because I lost count after trip #8!) deposits on new utilities, minor home repairs, eating out while the kitchen is still packed up, well, you get the idea. Put all of your savings towards the house and you have no cushion towards expenses like these, or any other emergency that comes along about the same time.
Absoutely! I certainly didn't mean to imply that they were. No offense intended.
About the 2.5 to 3 times your annual used to make sense, but not anymore. There is not a single house (or townhouse or condo with 2 or more bedrooms) anywhere near where I live that I could buy for 2.5 times my income.
Another piece to this puzzle is income. People who have upper level incomes can generally stretch the debt-to-income ratios, as they've got more disposable income.
A person making $40K a year buying a home worth $120K is genrally going to have a much more difficult time making ends meet than a person making $300K buying a home worth $900K. While certainly some costs--such as insurance and taxes--will be higher, controllable expenses such as clothing, food, and transportation can be fixed at the same point for both buyers, leaving the higher income buyer a lot more "wiggle room" in the budget.
When we bought a house we qualified for a price of several hundred thousand. I wrote down all the bills took our take home pay subtracted the bills and then with the remaining amount figure out how much we can afford to pay. This is how you have to base your house payment on.I told the bank what I am willing to pay for a house payment. Don't let the bank talk you into more than you can afford or in a few years you will be selling it because you can't make ends meet. We can afford to take vacations, take my kids to the store and not charge their clothes, put them in sports, ect. There is a lot to consider. Things are a little tighter with gas prices, but we can buy groceries and gas not on credit. Enjoy life, don't strap yourself to the point where you are so stressed.
True. Additionally, there is the question of how much you are putting down. I bought a fairly expensive house, but was able to put down over 30% because of the appreciation of my old house.
This is exactly what we did starting out. I kept track of everything on a spreadsheet and did tons of research on expected cost of taxes, insurance, etc. By keeping track of all of our expenses we had a starting idea of what we could afford. We also spoke to other homeowners to find out unexpeced expenses for the age house we planned to purchase (first time was new construction third time was older home).
This is a very good point and something to keep in mind when looking at houses. For example, when we bought our home it was 30 years old. It still had the original furnace and central AC, so we knew those would need replacing in the short term. The roof was at the end of its useful life, so we knew we'd be putting a new one on soon. The house had the original windows and siding. Stuff like that. The advantage to those things, though, is we got the house cheaper than comparables in the neighborhood which had already been upgraded. That kept our mortgage amount lower and we were able to repair/replace things as the need arose and funds became available.
And you got to pick the colors and items that you wanted.
A couple of other things to keep in mind, depending on the home, you might need to spend money immediately on things like window coverings. Even the least expensive cut to fit blinds from Home Depot could end up costing hundreds. And if you've got large or odd sized windows, even basic blinds could run you over $1000.
Both times we've bought homes we've spent $1000 or more at Home Depot and Target in the first week or so we were there. Lawn care items, garbage cans, paint, hoses, ladders, it all adds up quickly.
Be sure to have enough cash after you close to pay for things like this.
Absolutely! When we bought our current home we had 23 scared1: ) windows to cover. I went to JCPenney's and bought what I could afford. In the years since we have been slowly replacing the window coverings with made-to-order hardwood blinds at about $200/pc. It's a significant expense, but one that's worth while.
You also have to take into account your age and earning potential. When we bought our current home it was a stretch - a comfortable stretch - but a stretch just the same. We sat down a projected our income over the next 5, 10, 15, 20 years and made sure the mortgage would become more and more comfortable - it has. We also went into the home with the idea that we couldn't afford a custom paint job or a deck/fence, new furniture right away. We have saved and purchased as money has become available.
The bottom line is to find your comfort level. All the mortgage calculators in the world won't tell you what *you* can afford - only you can do that.
Good luck, and realize ahead of time that this is a major life change and one you will most likely be nervous about for at least a few months!
Mortgage companies don't really take into consideration how many children, pets, etc. that you have or will have. You have to do that. When we purchased this, our third home, nine years ago--we were told we could qualify for far more house than we what were comfortable. The mortgage company was not aware of our church/charitable giving habits, the fact that we knew we wanted a large family, and...(sh-h-h) our Disney habit! For each child you have, you need to think about medical expenses, braces, sports, clothing, etc,. WDW tickets (for us--always having two hotel rooms and two rental cars) We had to think ahead ourselves and tell the mortgage company what we were comfortable spending. Five years ago we had a lay-off where we were given no severence pay and went 5 months w/out a paycheck. When DH landed a new job--it was about 1/3 less pay than the previous job. We were so thankful we had under bought our home at that point because we could STILL afford to live here.
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