Will be buying my 1st home. Need advice/suggestions

[jeebuss31]

Hey guys 1st time posting on here. My wife and I are looking to buy our 1st house. I need some help budgeting since this will be our 1st home! (exciting!). Our goal is to not be house poor,but yet get the best house and still able to travel and buy things.

Currently, our yearly gross is $140,000 and our monthly take home pay combine is $6875.89(after tax,insurance,401k etc).
We have a student loan debt of $600.00 for the next 5 years(no other debt!) We don't have kids, but if we do, one of us will drop to part time and we can still gross around $113,000.

My question to you experience home owners, could we afford and not feel tied down to a mortgage payment between $2500 to $2700? The house price range i'm looking at are between $405k to $420k with 20% down payment.

Here is what I got after doing my math:
Take home= $6875.89
Mortgage= -$2600.00
Debt= -$600
Gas,clothing,food,entertainment= -$2000.00
Additional savings=-$500.00
Utlities,cable,phone=$ 400.00

This leaves us $775.00 a month to put away in our combine "using funds"account. We also going to inherit some furnishings from our parents(couch,bbq grill,lawnmower, etc) I feel like I'm forgetting some things, so I'm hoping you guys can provide feedback.

I apologize in advance if this was not in the correct forum.

EDIT- I live in the US

[billchrz]

Why don't you "pretend" that you already own the house and start putting away the amounts that you think that you will need into a savings account.

It's hard to say what to budget unless we know the area of the country that you live. For example, if you live in the northeast and have oil heat than $400/mo for utilities is very low. Also, I think that you could cut back on your $2000 gas, food, clothing, entertainment budget to $1000-$1500.

[jeebuss31]

We live in the midwest. And I agree with you on the gas,clothing,entertainment budget. I put $2000 as our higher end budget. We're closer to 1500.00, but it depends on the month. You can forget holidays,birthdays, etc etc. LOL although I wish we can.

[jeebuss31]

Originally Posted by ScrimpAndSave

$6,875 x .36 = $2,475

$2,475 - any monthly debt

That is max of what you should shoot for.

I was reading on bankrate.com and shouldn't it be gross income x.36?
Because if it is, our gross is $10,378($6875 is our net). So it would be 10,378 x.36= 3736 including mortgage and debt.

[jIM_Ohio]

The house price for midwest looks quite high unless you live in Chicago.

I live in Ohio and I have a HUGE house for less than 400k (352k in 2005).

The mortgage payment listed should include:
Property taxes
Principal
Interest
House Insurance for much less than $2600. What interest rate did you assume on the $2600? Mine is 5.75%, I put less than 20% down, and my monthly payment is less than $2600 including all 4 items above.

Here is what I would do:
1) make sure you are setting aside 15% of gross income for retirement- 401ks or IRAs.
2) make sure you are making the minimum payments on the debts (student loans?)- what is interest rate?
3) set aside money in a taxable account for purposes of house. This fund should have 3 components:

• an emergency fund for 3 months expenses
• a fund to furnish and close on the house
• a fund to create the down payment on the house

If 1+2+3 will take more than 5 years to accomplish, I would look for a 40-60 or other moderate mutual fund to hold most of the investment (EF should be in cash). If this takes more than 5 years you need to consider a few other factors

1) compare rent to cost of cheap condo
2) compare the cost of cheap condo to savings plan above (include new tax breaks in the comparison-condo will increase take home pay)
3) compare condo maintaince costs to house maitainance costs

You might find a condo gives you enough incentive to wait 10 years for house purchase (because you build equity in condo and gain tax writeoffs too), without huge maintaince costs until kids come or larger house is purchased.

[jeebuss31]

Hey guys, thanks for the feedbacks! You guys will save me a lot of money in the long run with these suggestions. Beers on me when the house is built .

Anyway, after looking into my budget further: Gas (for car), credit card bills (we pay off every month), groceries, car insurance (estimated at a high range)is $1500.00 combined.

We put away 5% individually for 401k and I work overtime, so our take home can flex between $6875 to $7300. So here are the numbers again:

Take home= $6875.00
Mortgage (plus real estate tax) = (-) ~$2500.00
Debt (loans) = (-) $600 Car loan falls off in 12/2009, will not consider a debt.
Gas (for car), credit card bills (we pay off every month), groceries, car insurance (estimated at a high range)= (-) $1500.00
Mad Money savings ($200.00 per person for our own personal spending or savings)= (-) $400.00
Utilities, cable, phone= (-) $600.00
Nest Egg savings (to put away into our nest egg savings, rainy day fund, etc.) (-) $700.00

This leaves us $575.00 extra money to fund around accounts or use it for the house.

What do you guys think? I understand the ratio of 28% front end and 36% back end. But is this the best formula to figure out what we can really afford?(because it's based on our gross income) Or do others prefer the take home method I used above?

[jIM_Ohio]

Originally Posted by jeebuss31

:

Take home= $6875.00
Mortgage (plus real estate tax) = (-) ~$2500.00
Debt (loans) = (-) $600 Car loan falls off in 12/2009, will not consider a debt.
Gas (for car), credit card bills (we pay off every month), groceries, car insurance (estimated at a high range)= (-) $1500.00
Mad Money savings ($200.00 per person for our own personal spending or savings)= (-) $400.00
Utilities, cable, phone= (-) $600.00
Nest Egg savings (to put away into our nest egg savings, rainy day fund, etc.) (-) $700.00

This leaves us $575.00 extra money to fund around accounts or use it for the house.

What do you guys think? I understand the ratio of 28% front end and 36% back end. But is this the best formula to figure out what we can really afford?(because it's based on our gross income) Or do others prefer the take home method I used above?

I think you need to reanalyze the situation with what you have presently. I would not worry about the budget of a house you will purchase in 5-15 years. I would emphasize the "how to get into house with least investment but most financial stability".

You do not have a $2500 house payment now do you? what is that payment on current residence now?

If renting and cost is $1100/month, you should be setting aside the other $1400 for the house.
5% to retirement accounts is not enough, think 10 or 15% long term. The more money put in earlier the better.

$575/month added to the house fund makes sense.
When you pay off the student loan in 6 years, add that $600 into mortgage savings too.

You should put a timeline on things, create a spreadsheet to track "if thens".

Price out a house you want, maybe 300k. Go new house hunting in places where you may want to live and see what houses cost new. 300k would mean a $75,000 down payment.

For example, have one example where you put 15% to retirement starting now. 15% of gross pay, then figure out how much is left for house savings and list how long it takes to get to $75000 with deposits only. If 15% to retirement allows only $500/month towards house savings, then $75,000/$500=150 months=12.5 years. Remember to factor in another $600 in 6 years when student loans are paid off, that would make (6 years*12 months)72*500=36000; 39000 left. 39000/1100=36 months (3 years)=9 years to get money in cash.

Then use the timeframe with no interest to find an investment timeframe. More than 7 years suggest stocks are an option. Run the $500 deposits into a mutual fund which returns 10%. The see that $500 compounded each month gives $85,000 in 9 years. So that situation would have a 9 year window depending on risks taken, with a $7200/year cushion coming from student loans in cash. Take the 15% retirement contribution and compound this out for 15 years as well.

Then repeat same analysis with retirement at 10%. Then again with 5%.

Then repeat all of above with tax implications of a mortgage post move. Because the mortgage interest is deductable, make sure you factor more take home pay into calculations once you get the house.

Then repeat the above analysis with a mortgage at less than 20% down. Maybe 15%, maybe 10%.

The results will show the following-
saving 5% for retirement gets you house sooner, but you will need to work longer to get a similar retirement account balance and it will also take significantly more investment (in dollars) from you.

saving 15% more for retirement delays getting into house maybe 2-3 years, but the overall investment you put forward (in dollars you earn) is much less. Because

• By investing early for retirement, compounding kicks in over a larger amount of time on a larger initial amount of money
• By delaying house purchase around 2 years, you gain some investment options (equities) which will also compound and provide more down payment for you with less money actually set aside.
• By lowering down payment you get tax advantages sooner and could use these tax advantages to pay down mortgage to 20% if needed.

[jeebuss31]

Originally Posted by jIM_Ohio

I think you need to reanalyze the situation with what you have presently. I would not worry about the budget of a house you will purchase in 5-15 years. I would emphasize the "how to get into house with least investment but most financial stability".

You do not have a $2500 house payment now do you? what is that payment on current residence now?

If renting and cost is $1100/month, you should be setting aside the other $1400 for the house.
5% to retirement accounts is not enough, think 10 or 15% long term. The more money put in earlier the better.

$575/month added to the house fund makes sense.
When you pay off the student loan in 6 years, add that $600 into mortgage savings too.

You should put a timeline on things, create a spreadsheet to track "if thens".

Price out a house you want, maybe 300k. Go new house hunting in places where you may want to live and see what houses cost new. 300k would mean a $75,000 down payment.

For example, have one example where you put 15% to retirement starting now. 15% of gross pay, then figure out how much is left for house savings and list how long it takes to get to $75000 with deposits only. If 15% to retirement allows only $500/month towards house savings, then $75,000/$500=150 months=12.5 years. Remember to factor in another $600 in 6 years when student loans are paid off, that would make (6 years*12 months)72*500=36000; 39000 left. 39000/1100=36 months (3 years)=9 years to get money in cash.

Then use the timeframe with no interest to find an investment timeframe. More than 7 years suggest stocks are an option. Run the $500 deposits into a mutual fund which returns 10%. The see that $500 compounded each month gives $85,000 in 9 years. So that situation would have a 9 year window depending on risks taken, with a $7200/year cushion coming from student loans in cash. Take the 15% retirement contribution and compound this out for 15 years as well.

Then repeat same analysis with retirement at 10%. Then again with 5%.

Then repeat all of above with tax implications of a mortgage post move. Because the mortgage interest is deductable, make sure you factor more take home pay into calculations once you get the house.

Then repeat the above analysis with a mortgage at less than 20% down. Maybe 15%, maybe 10%.

The results will show the following-
saving 5% for retirement gets you house sooner, but you will need to work longer to get a similar retirement account balance and it will also take significantly more investment (in dollars) from you.

saving 15% more for retirement delays getting into house maybe 2-3 years, but the overall investment you put forward (in dollars you earn) is much less. Because

• By investing early for retirement, compounding kicks in over a larger amount of time on a larger initial amount of money
• By delaying house purchase around 2 years, you gain some investment options (equities) which will also compound and provide more down payment for you with less money actually set aside.
• By lowering down payment you get tax advantages sooner and could use these tax advantages to pay down mortgage to 20% if needed.

Hey Jim,
I want to personally take the time and thank you for writing this up. I'm sure it took a lot of your time and I do appreciate it. With that being said, maybe there are some things I wasn't being specific.

Currently, I have 5% deducted from my pay and my company matches it. My wife (higher income of the two) also has 5% deduct from her paycheck and company matches. So you can say that we both have 10% and combine at 20%.

Right now, we live in a townhouse. We pay 900.00 a month(so we set aside a lot). As of today, we have $78,000 combine cash, so if we decided to go with an 318,000 loan, we can pay 20% down(no time to wait). The house would be $396,000.

Base on the feedbacks here and our families, we shouldn't have issues living comfortable now. But we're planning to have a kid in 3 years so by then, if there's no issues with the new built home, we should have ($700.00nest savings x 36months= $25,200). And that won't include our 2 other accounts: mad money account and combine funds account which include leftover from paying mortgage,debt, bills, and other payments.

My concern and I think you've address this. What happens if one of us drops to part time? We could still gross 113k-120k,but with all the savings we've accrued, could we still travel and do things? I wouldn't consider dropping part time until the kid is 2 or so. So that could be a total of 6 years of saving.

We've both been blessed with great families who will donated some of there furnitures,bbq grill etc etc.

Again, being a 1st time home buyer thank you for your patiences. I know this process can be frustrating.

[maat55]

Your house payment should not exceed 28% of your take home pay and be on no more than an 20 year fixed. You should be investing no less than 10% of your gross pay and you should have an emergency fund of 3 to 6 months expenses.

Your leaning, appears to be of an high consumption lifestyle. This will rob you of financial peace, throughout your life. Think about it, before you you get into that rut.

[jIM_Ohio]

Originally Posted by jeebuss31

Hey Jim,
I want to personally take the time and thank you for writing this up. I'm sure it took a lot of your time and I do appreciate it. With that being said, maybe there are some things I wasn't being specific.

Currently, I have 5% deducted from my pay and my company matches it. My wife (higher income of the two) also has 5% deduct from her paycheck and company matches. So you can say that we both have 10% and combine at 20%.

Right now, we live in a townhouse. We pay 900.00 a month(so we set aside a lot). As of today, we have $78,000 combine cash, so if we decided to go with an 318,000 loan, we can pay 20% down(no time to wait). The house would be $396,000.

Base on the feedbacks here and our families, we shouldn't have issues living comfortable now. But we're planning to have a kid in 3 years so by then, if there's no issues with the new built home, we should have ($700.00nest savings x 36months= $25,200). And that won't include our 2 other accounts: mad money account and combine funds account which include leftover from paying mortgage,debt, bills, and other payments.

My concern and I think you've address this. What happens if one of us drops to part time? We could still gross 113k-120k,but with all the savings we've accrued, could we still travel and do things? I wouldn't consider dropping part time until the kid is 2 or so. So that could be a total of 6 years of saving.

We've both been blessed with great families who will donated some of there furnitures,bbq grill etc etc.

Again, being a 1st time home buyer thank you for your patiences. I know this process can be frustrating.

FYI 10% of x+ 10% of y is still 10% of (x+y); you are not saving 20% in 401ks. Just 10%. Look to increase 401k savings.

I don't think I understand the question- you have the money for the house, but need to figure out the budget? Or you need to save more to get into house? Or something else?

Here is what you need to plan for
a) make sure you have 3X monthly expenses in savings account.
b) when you close, make sure you have around 5k in "extras accounted for- paint, vacuum, cleaning, lawn care (mower), fertilizer, pest control, leaky roof whatever
c) get around 3-12 months expenses in a moderate account. This is for larger purchases (new roof, new driveway, new hot water heater) which occur randomly once every 10 years. If you are thinking of kids and want money to subsidize part time work, then increase this with more contributions (but only increase after d is taken care of).
d) get retirement savings up to 15% of gross pay combined. If you get 5%, plus 5% matching, you need to find another 5%- which is around 6k for you- and set this aside in 401k or Roth IRAs. If you do not have a Roth, I would start one now (5k max per spouse per year).

Get in general habit of spending less than you earn. You are doing this already if you have amassed that kind of savings, I think you could do better.

You can look at ratios forward backwards and sideways. Having cash on hand trumps the ratios. If your back end ratio is 45%, but you have 12 months expenses in the bank, that might be better than 35% with only 2-3 months expenses in the bank.

Plus look at tax return with new house payment- you will get around 3-5k more back based on your income and mortgage size (what are property taxes?).

[jeebuss31]

Originally Posted by jIM_Ohio

FYI 10% of x+ 10% of y is still 10% of (x+y); you are not saving 20% in 401ks. Just 10%. Look to increase 401k savings.

I don't think I understand the question- you have the money for the house, but need to figure out the budget? Or you need to save more to get into house? Or something else?

Here is what you need to plan for
a) make sure you have 3X monthly expenses in savings account.
b) when you close, make sure you have around 5k in "extras accounted for- paint, vacuum, cleaning, lawn care (mower), fertilizer, pest control, leaky roof whatever
c) get around 3-12 months expenses in a moderate account. This is for larger purchases (new roof, new driveway, new hot water heater) which occur randomly once every 10 years. If you are thinking of kids and want money to subsidize part time work, then increase this with more contributions (but only increase after d is taken care of).
d) get retirement savings up to 15% of gross pay combined. If you get 5%, plus 5% matching, you need to find another 5%- which is around 6k for you- and set this aside in 401k or Roth IRAs. If you do not have a Roth, I would start one now (5k max per spouse per year).

Get in general habit of spending less than you earn. You are doing this already if you have amassed that kind of savings, I think you could do better.

You can look at ratios forward backwards and sideways. Having cash on hand trumps the ratios. If your back end ratio is 45%, but you have 12 months expenses in the bank, that might be better than 35% with only 2-3 months expenses in the bank.

Plus look at tax return with new house payment- you will get around 3-5k more back based on your income and mortgage size (what are property taxes?).

I apologize if this post was confusing. We want to know if we could afford a mortgage of 2500.00 and still live comfortable with our current status and in the future if one should drop partime. We both have combine 30k in our 401k(only 28). We havent open a roth IRA, but plan to. We also have life insurance,but should we lower that and focus more on 401k?

When speaking of ratio and talking percentage, do you mean with our gross pay? For example, if our back end is 33% ratio, that means we could not exceed (140000/ X .33,/12=$3850) with mortgage and debt? And as long we are under this, we should be ok?

[jIM_Ohio]

I am not looking at the ratios- that is between you and bank.
Look at my list- emergency fund- is it accounted for? Long term house expenses- do you have this accounted for? Retirement- do you have it accounted for?

You need a long term financial plan which includes the budget you are asking for, but also need to provide for retirement for your family. It is better for your kids if you can self sustain your retirement so you do not require your kids to sustain you later in life.

I think you are so focused on the house that you are not seeing the big picture. If you budget $250/month for big ticket house items (roof, water heater, hvac, driveway etc...) I have read that will account for most expenses in moderately priced cities.

for example
new roof $5000 every 240 months
new HVAC $4000 every 120 months
new water heater $3000 every 120 months
new driveway $2000 every 84 months
paint house $500 every 60 months

what I just added up is $100/month more or less
I also did not see propery taxes included
I have not seen any comment to the tax implications of owning either.
You are not seeing big picture- a percent or two on ratios is one issue, having the cash for the ownership is another. If you take on debt, you will need life insurance AND the 401k/ Roth IRA.

Think smaller or come up with a comprehensive plan

When we moved I adjusted my withholdings (federal) to 7 and have more going to my 401k each check than I do to federal taxes. We still got 3k back on tax return for 2007.

The mortgage we had moved us into 15% tax bracket, even though our gross income is similar to yours, and that allows us to contribute to Roths at 15% taxes, and withdraw tax free when income will be 25% taxes or 28% taxes. Huge savings for us.

You need to step back and look at the details of various points already discussed (taxes, retirement, mid term expenses, kids).

[jeebuss31]

Jim-

You are correct. We are focused on the house. And people like you are great assets to help remind us young buyers what we really need to realize and that is savings.
But every family is different, and I do appreicate your effort in making me think through this before I make a decision.

I've come up with a plan and here is what I'm shooting for.

-Mortgage $2100-2200(tax,ins) Looking in the 380k-400k
-30% percent down payment( we have 20% saved) if house is 395k, loan would be 280k

I'm not going to list everything down, but after paying bills, entertainment, grocery,debt,utlites, 401k,etc etc, we are left with $1985( about 26% of our take home pay). These funds will be distributed to: Nest Egg($800),our own accounts($200 each), and Combine account/house expenses($985).

Now, since we're building, we should have a good 3 years before replacing anything in the house(as long we keep everything updated).
By then our income will be alot more and our nest egg and house funds will increase (provided we don't have issues)