I really can afford that much?

[jk70]

So I will be looking into buying a house this summer. I know what I can afford as I owned a house before (although that's not the real reason I know how much I can afford) and I budget like crazy and can figure out my expenses, etc.

I hvae no debt whatsoever and fully fund Roth's each year (no 401K) and other investments.

Anyway, I was just checking what mortgage calculators online say I can afford (don't worry; like I said, I know what I can afford) but I was checking to say what they said. So I went to bankrate.com; a legitimate and well-known site. Here are the paramters I inputted:

- Annual Income: $102K
- Down Payment: $85k
- Rate: 4.75% for 30 years
- I added my annual taxes and insurance into the equation
- Everything else is zero b/c I have no other debts.

Bankrate tells me I can afford a $541,246 house

That's just crazy...I am looking at houses between 375 and 410 and this site tells me a crazy # like that. Buying a house for that much would juts squeeze that heck out of me.

[CarolinaKat]

Could you post a link so i can see what silly number i could 'afford'? It ought to be funny

[Peace77]

That's part of the reason that so many people get into trouble with their mortgage.
They believe what they bank says instead of figuring out their budget for themselves and including budget categories such as savings, retirement, home maintenance and repairs, appliance & furniture replacement.

A better way to figure what you can afford is: Income minus income taxes and charitable giving. Spend no more than 28% for housing.
Housing includes mortgage, property taxes, home insurance, utilities, and home maintenance & repairs.

The 28% will probably not work in a HCOL area. Then, adjustments will have to be made in other categories.

[jk70]

www.bankrate.com/calculators/mortgages/new-house-calculator.aspx

[Deleted]

Jan 25, 2011 10:29:41 GMT -5 Peace77 said:

That's part of the reason that so many people get into trouble with their mortgage.
They believe what they bank says instead of figuring out their budget for themselves

Exactly! I don't think some of these people even look at the monthly mortgage payment and do a rough calculation of if they can even afford just THAT! I don't think I'll ever understand why some people think that if they "qualify" for a certain amount, that entitles them to it. And you wonder why the foreclosure rate is so high?

ETA: I think the rule of thumb is to keep it no more than 3 times your annual income.

[daennera]

When I bought my house last year (AFTER the huge crash mind you) I was approved for a 200K house with a 30 year mortgage on a 35K salary.

I told the loan officer she was out of her damn mind. Apparently spending fully half of my take home income on a house was considered a good idea in somebody's book. Obviously somebody with the IQ equivalent to that of a spatula.

I ended up buying a 95K house on a 15 year mortgage, and I have a my DF's income helping to pay the mortgage that wasn't even factored into the loan process. (I'm the only one named on the house and loan).

I knew what we could afford, and I knew what we wanted to afford. We're now paying 25% less in mortgage/taxes/insurance than we were paying for rent for our last apartment. I figured the extra 25% could probably be used for repairs/maintenance.

Even recently I've heard of other people buying homes and being approved for way way too much money.

3x annual income is a good rule, so long as debts are kept to minimal levels. If you're making two car payments, two student loan payments, and credit card payments; you should probably adjust that figure a bit.

[cronewitch]

I can afford much more than the calculators think. Paying half my take home pay for a mortgage payment is easy for me. I don't have kids or support anyone but me and I have a roommate. I don't have other debt like car payments and my savings are taken from gross not take home pay. So if I for example earn 5K have 2K deductions so take home 3K I could afford 1,500 mortgage payment and have 1,500 for living plus about 800 from roommate. I could even pay extra on the mortgage if I felt like it.

I just refinanced so my payments are 612.47 but am putting 2K a month in the 401K so my take home pay is only 1,900. My expenses are very low, I am frugal.

[wodehouse]

I built a humongous Excel workbook that accounted for all sorts of budgeting factors when I bought a house last year (my 4th property, so I've been through this before). We'd been looking for almost two years after moving from out of state...took so long due to the dropping RE market here.

My mortgage was just under 13% of my gross income at time of purchase. With RE taxes and HOA (home owner association) this will be about 16.5% of my gross income this year. With utilities (present whether you buy or rent), and a reserve fund for those repairs that will *always* come up for a home owner (roof, air con, furnace, appliances, water heater, driveway repair, painting, etc, etc, ...and now a new one on me this week...gas fireplace repair/replacement) I'm at 22.5% of gross. This is pretty comfortable. I would be reluctant to go higher.

Those online or magazine "guides" would project that I could have spent (ie: qualified for) a lot more but then I know what my real budget and expenses are.

Anyway, figure that a lot of money may be going into home furnishings, decorating, landscaping, and put away a good reserve fund each year too.

[Deleted]

I did 2 calculations, both of which were a joke. I bought my previous house as a single mother, put down $100K and borrowed $250K. A co-worker in a similar situation said the bank was willing to loan him $350K. This calculator came out with $382K. No way I would have borrowed that. To cronewitch's point- the mortgage I got took up half my take-home pay (after maxing out my 401(k) ) but it was manageable because my income was pretty decent and half of my THP left enough to live on. It was just DS and me, and we had modest expenses in the other categories. No single guideline works for everyone.

I put my current figures in and they claim I could have borrowed about 4X my annual income, which would result in before-tax housing costs about $3,000/month higher. Well, that would cut out a lot of retirement saving and fun stuff. It is good to live in a LCOL area.

[swamp]

Jan 25, 2011 10:25:19 GMT -5 CarolinaKat said:

Could you post a link so i can see what silly number i could 'afford'? It ought to be funny

According to those calculators, I can afford a $650,000 mortgage. Um, yeah, I don't think that's happening...........

[jennml]

If I'd gone with the 3X gross rule, I supposedly could have afforded a ~$240,000 house. Thankfully, I went by what I felt comfortable paying monthly. I did not want to be house poor. The place I purchased came out to $125,000 (10% down)...everytime I send that payment I smile.

[shanendoah]

When we were buying our first house we started working with a mortgage guy at our bank, a guy who only worked with people who had good credit. In the midst of the process, DH (then DF) changed job - to a better paying, more hours, benefits job - which dropped our credit rating and placed us in a higher risk category. That meant we had to change mortgage guys to one who specialized in higher risk clients. And guess what, the new guy tried telling us we could afford $100k more house than the guy who worked with good credit clients did.
Now, we also already knew what we could afford, and had picked out our house (new construction) by this time, but it boggled our minds. And I still think, no wonder people are struggling with their houses. It appeared that our bank was setting up higher risk borrowers to fail. (This guy also pulled a bait and switch on us, regarding loan terms, at escrow that we missed. We had to threaten lawsuits when we sold our home, and removed all of our business from that bank.)

[kdamron]

When ExDH and I were still married (before the RE bust) and making about 90K combined Wells Fargo (who had our mortgage at the time) sent us a prequalification letter for 350K. BWAHAHAHAHAHAHAHAHA...

Totally insane!

[Deleted]

I can afford a $1M house. BOOYAHHH!

These calculators are just computers. It's garbage in/garbage out. Obviously, if you think that your income/expenses are rock-solid, then you CAN afford what these computers tell you that you can afford.

But most people have unexpected expnses or dips in incomes. So it's up to you to make the adjustments.

[The J]

I went with about 2.75x my gross. At the time I had the ex's income as well, but I didn't count it. Good thing too. My place would be an incredibly tight stretch on my own, so I have a roommate now, which helps out a lot.

[runewell]

They aren't telling you what you can afford, they're telling you how much you can borrow. Big difference.

[runewell]

Evidently I could sell my house and buy one worth $512K. But I'll stick with the one I have which is less than half that.

They ask you to enter in the homeowners insurance and taxes, and I did, but I'd have to go back and change them now that I'd be buying over twice the house.

[WannabeWealthy]

Jan 25, 2011 11:07:13 GMT -5 cronewitch said:

I just refinanced so my payments are 612.47 but am putting 2K a month in the 401K so my take home pay is only 1,900. My expenses are very low, I am frugal.

You can't put 2k/month into 401k. That's way over $16,500 for the year.

[soon2bmomof3]

I just refinanced so my payments are 612.47 but am putting 2K a month in the 401K so my take home pay is only 1,900. My expenses are very low, I am frugal.



You can't put 2k/month into 401k. That's way over $16,500 for the year.

Read more: notmsnmoney.proboards.com/index.cgi?board=finance&action=display&thread=2263#ixzz1C4hR663E

Maybe she's putting in $2k until she maxes it out.

My company lets you put in as much as 40% and that's how mine is set at until I max it out, then it goes to 0%.

[shanendoah]

Jan 25, 2011 13:49:54 GMT -5 WannabeWealthy said:

Jan 25, 2011 11:07:13 GMT -5 cronewitch said:

I just refinanced so my payments are 612.47 but am putting 2K a month in the 401K so my take home pay is only 1,900. My expenses are very low, I am frugal.

You can't put 2k/month into 401k. That's way over $16,500 for the year.

If you're over a certain age, which based on other posts, I think cronewitch is, you can play catch up, allowing you to contribute up to $5,500 more a year. That puts the total at $22,000, which means at $2k/month, she won't max out until November.

[cronewitch]

Jan 25, 2011 14:03:33 GMT -5 shanendoah said:

Jan 25, 2011 13:49:54 GMT -5 WannabeWealthy said:

You can't put 2k/month into 401k. That's way over $16,500 for the year.

If you're over a certain age, which based on other posts, I think cronewitch is, you can play catch up, allowing you to contribute up to $5,500 more a year. That puts the total at $22,000, which means at $2k/month, she won't max out until November.

That is right the limit is 22K so I skip a couple so I pay all my income tax withholding in December. I only put half in 401K last year and might stop short this year since I have enough in the 401K. I don't want my RMD to be too large.

[beergut]

$1 million loan!!! ;D

Ridiculous.

[jkapp]

Jan 25, 2011 10:29:41 GMT -5 Peace77 said:

That's part of the reason that so many people get into trouble with their mortgage.
They believe what they bank says instead of figuring out their budget for themselves and including budget categories such as savings, retirement, home maintenance and repairs, appliance & furniture replacement.

A better way to figure what you can afford is: Income minus income taxes and charitable giving. Spend no more than 28% for housing.
Housing includes mortgage, property taxes, home insurance, utilities, and home maintenance & repairs.

The 28% will probably not work in a HCOL area. Then, adjustments will have to be made in other categories.

Do you figure property taxes into that percentage though? Because without property tax my house payment is 23% of my net pay...but if you include property tax it is 33%

[jkapp]

Jan 25, 2011 10:54:07 GMT -5 @daennera said:

When I bought my house last year (AFTER the huge crash mind you) I was approved for a 200K house with a 30 year mortgage on a 35K salary.

I told the loan officer she was out of her damn mind. Apparently spending fully half of my take home income on a house was considered a good idea in somebody's book. Obviously somebody with the IQ equivalent to that of a spatula.

I ended up buying a 95K house on a 15 year mortgage, and I have a my DF's income helping to pay the mortgage that wasn't even factored into the loan process. (I'm the only one named on the house and loan).

I knew what we could afford, and I knew what we wanted to afford. We're now paying 25% less in mortgage/taxes/insurance than we were paying for rent for our last apartment. I figured the extra 25% could probably be used for repairs/maintenance.

Even recently I've heard of other people buying homes and being approved for way way too much money.

3x annual income is a good rule, so long as debts are kept to minimal levels. If you're making two car payments, two student loan payments, and credit card payments; you should probably adjust that figure a bit.

I had the same thing in 2009...I was approved up to $250k - but since I like to eat and have heat in winter I didn't think buying a house for that price was the best idea. So I bought my $150k house, 20% down, 30 yr fixed and my mortgage payment is only $25 more than what my rent payment was.

Of course, that property tax payment is a big kick in the nuts every year but...

[stats45]

You kind of have to work backwards to even get the calculators to work as expected. It doesn't make sense to put a number for taxes and insurance net of knowing what you are going to pay for the home.

I agree though that the default percent chosen (for these calculators, most banks, public policy with FHA loans) is much too high. It encourages investment in residential property rather than other investments that would probably have a higher rate of return for most people.

[Deleted]

Jan 25, 2011 20:30:12 GMT -5 @patstab said:

Why would you want to buy a $400k house? Why not buy something more reasonable, just a nice house that you can pay off quickly with an $85k down payment. You are doing well but a $102k salary isn't that high to take on debt like that. I would buy more reasonable and pay it off quick as possible.

Well, that was our reasoning when we moved to KS. Back in NJ, a liveable house in a decent school district was horribly expensive. I saw no reason to spend the same amount when we moved, so we spent half that and got twice the house.

But some people like the wide expanse of green lawn, the circular drive, the impressive mansion- we just saw large monthly payments, property taxes and maintenance costs. And then you have to get "window treatments" and decorate all those rooms since it wouldn'' do to just our old furniture into them. It just makes this "I'm rich and you're not" statement, I guess. We're very happy that we didn't go that route and have lots of money left to do other things.

[Frugal Nurse]

Back when we bought our house, and DH and I were making a combined total of about $40K, the loan officer told us to let him know how much we needed and he'd get us a no-doc loan for the amount, since DH's credit score is in the 800's. He said we could go into the $300K range if we anted. I'm really glad we were smart about it and stuck in the under $150K range

[mrsgords]

Our bank approved us for $330k when we were looking to buy 3.5 years ago. We bought for half that. I can't imagine having a $330k house! Of course, we live in a very low COL area. Our house would easily sell for $300k and above on the coasts.

[The J]

Jan 25, 2011 20:30:12 GMT -5 @patstab said:

Why would you want to buy a $400k house? Why not buy something more reasonable, just a nice house that you can pay off quickly with an $85k down payment. You are doing well but a $102k salary isn't that high to take on debt like that. I would buy more reasonable and pay it off quick as possible.

It depends on where you live. Where I am, a nice 2br condo is $200k+ A nice house (3/2) with even 1/4 acre starts at closer to $300k. If I wanted to live closer to where I work, I would easily get into the $400k+ range

[DVM gone riding]

The calculator can't be that bad, maybe it is the numbers you are using. For me it said about the house I bought or less! And I make more now then when I bought the house. I could have done with less house but certainly can afford what I have.