First time home buyer needs advice!

[Adoc86]

My fiance and I are starting to look at homes and are in need of some advice in terms of what we can afford. My parents suggested that we take out a loan based solely on one of our salaries, just as a precaution in case one of us ever gets laid off. We plan on basing it off of mine - I make $51,000/yr, I have a student loan with a balance of $19,200 and a monthly payment of $245. I also have a bill (dental - invisalign) with a balance of $4200 and a monthly payment of $275. Car insurance is $123/mo. So $643 in regular monthly payments going out - at least until about April 2013, when the dental bill will be paid in full. After health insurance, retirement, life insurance and taxes come out I clear $1358 per check. I also work a lot of overtime - varies per pay period, and have a part-time job to keep me busy (only $8/hr). But I want to base it mainly on the $1358 per check, since the other income is variable and may change at any time. I am a federal employee and will receive a promotion in October 2012 to $63,000 then in October 2013 to apprx $74,000. However we would like to shop for a home right now. Credit is 720.

My fiance makes $36,000/year.

We found a home we really like that is a short sale for $189,000. My lender says that I should go for it and that my mortgage would be $1500.00/mo. including HOA, taxes & insurance. What are your thoughts?

[mcfroggin]

Originally Posted by Adoc86

My fiance and I are starting to look at homes and are in need of some advice in terms of what we can afford. My parents suggested that we take out a loan based solely on one of our salaries, just as a precaution in case one of us ever gets laid off. We plan on basing it off of mine - I make $51,000/yr, I have a student loan with a balance of $19,200 and a monthly payment of $245. I also have a bill (dental - invisalign) with a balance of $4200 and a monthly payment of $275. Car insurance is $123/mo. So $643 in regular monthly payments going out - at least until about April 2013, when the dental bill will be paid in full. After health insurance, retirement, life insurance and taxes come out I clear $1358 per check. I also work a lot of overtime - varies per pay period, and have a part-time job to keep me busy (only $8/hr). But I want to base it mainly on the $1358 per check, since the other income is variable and may change at any time. I am a federal employee and will receive a promotion in October 2012 to $63,000 then in October 2013 to apprx $74,000. However we would like to shop for a home right now. Credit is 720.

My fiance makes $36,000/year.

We found a home we really like that is a short sale for $189,000. My lender says that I should go for it and that my mortgage would be $1500.00/mo. including HOA, taxes & insurance. What are your thoughts?

You want to afford a house on just your salary - $1358. The house costs $1500/month. Seems like the finances don't work out. What question do you want answered?

Short sales often require "work" to clean them up. There could be extra costs that you are not planning for.

If you are trying to get a house off of your salary alone, a $189K home is out of your price range.

[cptacek]

You are going to get a guaranteed 23% raise your first year and a guaranteed 17% raise your second? What do you do?

-edit-
Ok, you didn't say it was your first year. But still, guaranteed raises two years in a row?

[disneysteve]

When buying a home, you should follow a few rules of thumb.

1. Have at least a 6 month emergency fund in place.
2. Have a 20% down payment.
3. Spend no more than 3 times your annual income.
4. Get a mortgage with a monthly payment of no more than 28% of your monthly income.

If you follow those 4 rules, you should generally be in good shape.

[bjl584]

Originally Posted by Adoc86

My fiance and I are starting to look at homes and are in need of some advice in terms of what we can afford. My parents suggested that we take out a loan based solely on one of our salaries, just as a precaution in case one of us ever gets laid off. We plan on basing it off of mine - I make $51,000/yr, I have a student loan with a balance of $19,200 and a monthly payment of $245. I also have a bill (dental - invisalign) with a balance of $4200 and a monthly payment of $275. Car insurance is $123/mo. So $643 in regular monthly payments going out - at least until about April 2013, when the dental bill will be paid in full. After health insurance, retirement, life insurance and taxes come out I clear $1358 per check. I also work a lot of overtime - varies per pay period, and have a part-time job to keep me busy (only $8/hr). But I want to base it mainly on the $1358 per check, since the other income is variable and may change at any time. I am a federal employee and will receive a promotion in October 2012 to $63,000 then in October 2013 to apprx $74,000. However we would like to shop for a home right now. Credit is 720.

My fiance makes $36,000/year.

We found a home we really like that is a short sale for $189,000. My lender says that I should go for it and that my mortgage would be $1500.00/mo. including HOA, taxes & insurance. What are your thoughts?

You made no mention of how much you haved saved for a downpayment. It should be 20%. So, on the $189,000 home you are looking at you will need a minimum of $37,800 to put down.

Plus, you should have a minimum of a 6 month emergency fund in place. Being a homeowner requires that you have extra money on hand for the increased expenses that come with owning a home.

Mortgage payments should represent no more than 28% of your monthly income, and overall mortgage shouldn't be more than 3 times your annual income.

Those are guidelines, but I wouldn't stray too far from them. Also, I wouldn't factor in overtime or future income levels in your buying decision. Base your decision on what you make and what you have at the time that the buy your home.

[YLTL_Dan]

Originally Posted by Adoc86

My lender says that I should go for it

You've received a lot of good information on this forum, but you did not receive good information from your lender. Just remember, all your lender cares about is you buying a house now so he can make some money off of it. Ask a car salesman if you need a new car....

You and your Fiance are making great money and doing well. Use this opportunity while you don't have a large house payment to practice financial prudence and pay off your debt. What happens if you get in financial trouble and can't pay off your invisalign - are they going to repo your teeth?

Seriously though, you'll always be able to find a good deal on a house. It's a very exciting time for you right now, and it sounds like you're pretty set on buying one, but if you can hold off that would be optimal. Based on your numbers, it sounds like you're only assuming a 5% down payment. You should save for a 20% down payment so you don't have to pay PMI.

Home ownership is very expensive and it could pay big time dividends if you rent a cheaper apartment now, live off your income, and save all of her income. You guys could even be crazy enough to do this for five years and buy a house for cash...

[artwest]

You and your fiancee should not be buying a house together. It would be okay if you bought a house and then added your fiancee's name to the title after you are marred.

In order for your dream house not to become a nightmare you should meet to following criteria before you buy your house.

1) Be debt free. With your income, you should be able to pay off everything in a couple of years or less.

2) Have a 3-6 month Emergency Fund.

3) Put at least 20% down on the house.

4) Get a 15 year fixed mortgage with the monthly payments not more than 25% of your net monthly income.

[disneysteve]

Originally Posted by artwest

1) Be debt free.

This is certainly ideal but I can't say it is a necessity. I sure wasn't. I had 100K in student loans when we bought our house. But we bought based on our income at that time and were very conservative in what we spent - less than 2 times our annual income. That gave us a payment that we could comfortably afford even with the student loan payments to make.

So I think you need to look at the total picture. As we've said, 28% to the house. The other piece of that rule is 36% to total debt payments. If you can stay within those guidelines and live frugally, you'll be fine.

[MonkeyMama]

Your parents gave you wise advice.

My first home cost $260k and my salary was probably less than $51k. But, um, we didn't have any debt, my take-home was much higher than that, and we put 20% down. I'd say it was easily a home we could afford on only one income, because we saved 100% of my spouse's income at the time. Might sound like a stretch to some, but we didn't have any other bills to speak of, and home was a huge tax break.

I share because income and house value alone doesn't look like much of a stretch, to me. BUT, the mortgage payment you come up with sounds like zero down, little down, and/or higher than average interest rates. If you can put 20% down and get a great interest rate, then I would go for it. It sounds like you should wait to save up for a decent down payment. As others have said, at $1500/month clearly you can not afford it on your income alone. IF you wait the mortgage loan you have to take on should decrease, and maybe your income will increase in that time. (Or, don't spend money you don't have - wait until you have these raises in hand). Sounds like you could raise your FICO score a bit more, too.

[riverwed070707]

I agree with the others. The payment on the house (crossing my fingers that figure at least includes taxes and insurance!) is over half of your monthly take home. You don't want to tie up so much mony into one bill. The guaranteed raises are nice, but you can't plan to buy something now based on what you may make in the future -- things can happen, especially with governement jobs.

You're parents gave you great advice. If you ignore the advice on this forum to wait, you should at least plan to purchase a home with a payment (principle, taxes and insurance) under $1000. Having a bigger downpayment will help get you closer to this number.

What are you spending in rent? I think the best thing you could do right now is put away the money you would expect to be spending on a house payment (above your current rent) into savings and live like you already have that budget. That will help you know how it feels to be without that extra money, but also help you save for your dp. How much are you currently saving a month?

[Adoc86]

cptacek - until you reach your grade limit most government employees know exactly when their grade increases are and how much their salary will be increasing. So yes, it might sound weird but I will receive 3 raises in 3 years - exactly to the day. I work in investigations.

artwest - we aren't buying it together - that is why I want to base it only off my salary. His name will be added later.

I think you guys are right. We have decided to wait and save some more money for about a year. My fiance can cover our rent completely, so I'll be able to save about $2100 a month, not including my other job and overtime (which is often over an extra $1,000 a month). While it would be nice to be completely debt free, I don't think that this is realistic for most people and I am expecting to still have my student loan when we eventually do buy a house. I could throw some big payments that way, but then less money would be going toward a down payment and 6 mo. savings. Once my invisalign is paid off I will only have a $250 payment for the student loan and no other debts, so I don't think that would hinder us too much. We ourselves only have 5% to put down, but both of our parents offered to help us get to the 20% - though the loan pre-approval was only calculated with 5%, since we were just trying to get a quick, general idea. This is certainly not something we want to rush in to.

We live in the Baltimore/Washington area, so finding a decent house under $225 is pretty challenging, even in this economic climate. Most that are in our ideal budget need A LOT of work or are in horrible neighborhoods.

I appreciate your guys' help though, thanks a lot!