$80k salary / $220k house - Doable?

[huskeralum07]

After throwing away rent money for the last few years, I'm thinking of buying something. Would a mortgage be affordable with my details below? I don't want to throw away all my savings in the down payment, but I'd like to make as close to, if not, 20% of the down payment (I also have to factor closing costs to about 8k, right?).

Update: Added some more detail in blue after I received a few questions. Wanted to keep all the info in one place.

Property Details:
-Condo price = $220,000 (sale price, not offer)
-Appraised Value = $195,000
-Property Taxes = $5100/year (pulled this from our county appraisal website), high tax state
-HOA = $300/mo (premium amenities and location)
-Downtown location
-First time home buyer
-Research shows current interest rates would be around 4.1 - 4.5%

Incoming Cash:
-Salary = $80,000/yr (after state income taxes, but not federal)
-Job prospect and salary outlook is favorable for at least the next 5 years

Financial Situation:
-NO student loans
-Age: early thirties, not married
-Savings today: at least 1 year's worth of my current salary is available
-Average monthly expenses for fuel, food, phone, internet, TV, car insurance, utilities, entertainment = $1300/mo
-Car payment = $400/mo (mainly took to offset a large initial payment, 0% interest, 2 of 4 yrs left)
-Current rent: $1200/mo, renting a house that is near nothing which has utilities around $200/mo (elec/water/trash)



Credit Score:
-6 year history, with mean score of 780 at all three bureaus.

Thoughts? Doable? Not doable? I haven't made any commitments yet.

[HappySaver]

If you put down 20% ($44k on a $220k home) that leaves you with a monthly mortgage payment of $892 (assume a 30 year fixed at 4.5% on $176,000).

Factor in monthly RE tax ($425), homeowner's insurance (assume $100) and HOA ($300) and you're at $1717 per month.

How does that compare with your current monthly rent? That of course does not include maintenance and repairs.

Assuming you're bringing home in the ballpark of $4000, almost half of your monthly take-home expenses would be for housing. That's very high.

Add in your monthly living expenses (another $1700* for regular living costs and car payment) and you've got $600 leftover for all other life expenses (clothing, furniture, vacations, medical, unforeseen costs, and savings).

*Count on utilities to go up as well. Do you currently pay your own heat and water?

Doable perhaps, but things would be very tight. Can you save a bit longer? Does the house have an extra bedroom where you could have a roommate?

[dczech09]

Here is MY advice.

I think you need to change your outlook on housing in general. You referred to rent as throwing away your money. It drives me nuts when people make this statement! Do you know who came up with that statement in the first place? REAL ESTATE AGENTS! They don't make money if you rent, so they don't want you to rent.

The fact of the matter is that the interest that you pay on a mortgage is just as "thrown away" as any money you would pay in rent. Interest does not go towards your equity; it goes to the bank! If you are going to call rent money "thrown away," then please consider interest on a mortgage to be the same because it is the same.

With a home, you will have much more in expenses than if you rented. I ran the numbers, and you would be looking at spending an additional $368 per month in terms of interest, plus an additional $725 per month for property taxes and HOA. That is $1,093 per month MORE than if you rented. Also, any maintenance, insurance, and utilities/services that would not be funded by your HOA needs to be considered!

You had mentioned that you do not want to throw away your money on a down-payment. The fact of the matter is that when you buy a house, you want to throw AS MUCH MONEY down as possible! When I say "possible," I mean without killing your emergency fund. You say that you have about one year's salary in savings, which is great! Make as high of a down-payment as possible without going below a 6 month emergency fund (6 months worth of expenses, including the mortgage payment). A large down-payment means that there is less you need to pay-off, the sooner you are debt-free from the house, the less likely you will fall underwater, the less likely you will ever have to pay PMI, and the less interest you will pay over the life of the loan!

That car payment is not doing you any favors. Get rid of it before going into homeownership. First of all, you have fantastic credit from the sounds of things. Secondly, the idea of building credit is a crock. Think of it this way- "you borrow money to build credit so that later you can borrow more money." When I read that, I visualize a hamster running on a wheel! Even though the car payment is at 0%, it would best serve you to pay it off before assuming a mortgage. I would not want that hanging over my head if I were to buy a house.

Your regular spending looks to be fine. You are not over-extending yourself there. Are you investing 10% to 15% of your gross income for retirement? You should be, and that is a much higher priority than a house!

As for the mortgage deal itself...

Only consider 15 year mortgages. I DO NOT recommend 30 year mortgages (just pretend that they do not exist). With a 20% down-payment, a 15 years mortgage at 4.5% APR would cost about $1,346 per month. When you add in the HOA fees and the property taxes, your payment would be more than 31% of your gross income, which is too high!

Some people here will disagree with me on the 15 year mortgage thing, but I do not care. That is my recommendation and I am sticking to it!

Here are my criteria for home ownership...

AT LEAST 20% equity when you sign (hence the down-payment)
Payment (principle, interest, tax, and insurance) is no more than 25% of gross
Have a 6 month emergency fund
No other debt
Only 15 year fixed rate mortgages

Keep in mind that I hold myself to an even higher standard

[97guns]

my only advice is to look for something with no HOA, prop tax seems VERY high, higher than mine here in CA

[MonkeyMama]

I am from a high cost region, so this seems very doable, to me. Of course, home ownership is also a substantial tax break. Anyway, nothing about this seems *tight*, to me. A $220k house on a $80k income, with 20% down and cash reserves, sounds pretty reasonably by most any measure. (We've personally mostly owed $200k-ish on a $50k - $80k income. & we have only had a 4% interest rate in the past few years; started at over 8% in 1999. Our first home was a condo with $300/month HOA, so factoring that part too).

I think the response you are getting is mostly in regards to your motivations. I would hope you had more home buying motivation than "rent is throwing away money". I'd think more carefully about all of the costs and benefits of home ownership in regards to what is best for you personally.

[bigdaddybus]

Is $300 a month HOA a typo? I could see $300 a year. What do you get for that $3600 a year? I hope it's alot.

I didn't do the math, but if you found a similarly priced home in an area with no HOA fees you could likely cut a decade off you house payments (if you kept the payment per month the same)

[huskeralum07]

I added more detail to my original post to answer some of the questions asked above. You can see those updates in blue.

No the HOA is not a mistake, but this property is in a premium location (downtown). It is actually on the lower end of the other HOA's here. And yes, my motivation to buy is more than just throwing rent money away. I want something fixed so I don't have to worry about moving again.

Please let me know what you think.

[LivingAlmostLarge]

Also coming from a high COLA it's doable to me. But it depends on what you feel comfortable.

[tripods68]

At 80K salary it is doable (not ideal) assuming debt/income ratio is below 30%. I tend to avoid homes that have HOA, at $300 a month (+ Property tax) that maybe average where you live unless it is an exclusive area.

[HappySaver]

Thanks for the update.

Comparing your current rental ($1200) with this purchase ($1700) is apples to oranges since you're not happy with your current location.

What you should do is look at the cost of equivalent rentals in your desired location (downtown) and see how that compares.

Also, do you currently feel like you have an extra $500 to spare each month, aside from what you'd like to be saving and spending?

I admit to being more cautious than some, but with one income I feel you have to be. The risk is higher than with a two-income household.

Also, in my high cost of living area, a $400,000 purchase will run you about $4-5k in taxes, so I agree that does seem high, although if that's the rate in your city there's little you can do about that. If you can afford it and the amenities are important to you, the HOA fee doesn't seem out of whack, although you should definitely compare with some other units.

[disneysteve]

-Property Taxes = $5100/year

prop tax seems VERY high, higher than mine here in CA

97guns, taxes vary greatly by region. Personally, I would love to pay that little for taxes. Our house is worth about the same and we pay about $8,000/year. It all depends where you live.

[dawnwes]

Excellent post and your ideas reflect our thoughts on home purchasing.

OP, Exactly how much will you be taking out in a loan?

Our general rule has been "no more than 25% of our take home income towards a 15 year mortgage, including taxes and HOA." Our taxes are also much less ($3,500) and we have no HOA.

OP, I would not feel comfortable with your income, debt, etc....and that home payment. Are you married? Might you be at some time?

Dawn

Here is MY advice.

I think you need to change your outlook on housing in general. You referred to rent as throwing away your money. It drives me nuts when people make this statement! Do you know who came up with that statement in the first place? REAL ESTATE AGENTS! They don't make money if you rent, so they don't want you to rent.

The fact of the matter is that the interest that you pay on a mortgage is just as "thrown away" as any money you would pay in rent. Interest does not go towards your equity; it goes to the bank! If you are going to call rent money "thrown away," then please consider interest on a mortgage to be the same because it is the same.

With a home, you will have much more in expenses than if you rented. I ran the numbers, and you would be looking at spending an additional $368 per month in terms of interest, plus an additional $725 per month for property taxes and HOA. That is $1,093 per month MORE than if you rented. Also, any maintenance, insurance, and utilities/services that would not be funded by your HOA needs to be considered!

You had mentioned that you do not want to throw away your money on a down-payment. The fact of the matter is that when you buy a house, you want to throw AS MUCH MONEY down as possible! When I say "possible," I mean without killing your emergency fund. You say that you have about one year's salary in savings, which is great! Make as high of a down-payment as possible without going below a 6 month emergency fund (6 months worth of expenses, including the mortgage payment). A large down-payment means that there is less you need to pay-off, the sooner you are debt-free from the house, the less likely you will fall underwater, the less likely you will ever have to pay PMI, and the less interest you will pay over the life of the loan!

That car payment is not doing you any favors. Get rid of it before going into homeownership. First of all, you have fantastic credit from the sounds of things. Secondly, the idea of building credit is a crock. Think of it this way- "you borrow money to build credit so that later you can borrow more money." When I read that, I visualize a hamster running on a wheel! Even though the car payment is at 0%, it would best serve you to pay it off before assuming a mortgage. I would not want that hanging over my head if I were to buy a house.

Your regular spending looks to be fine. You are not over-extending yourself there. Are you investing 10% to 15% of your gross income for retirement? You should be, and that is a much higher priority than a house!

As for the mortgage deal itself...

Only consider 15 year mortgages. I DO NOT recommend 30 year mortgages (just pretend that they do not exist). With a 20% down-payment, a 15 years mortgage at 4.5% APR would cost about $1,346 per month. When you add in the HOA fees and the property taxes, your payment would be more than 31% of your gross income, which is too high!

Some people here will disagree with me on the 15 year mortgage thing, but I do not care. That is my recommendation and I am sticking to it!

Here are my criteria for home ownership...

AT LEAST 20% equity when you sign (hence the down-payment)
Payment (principle, interest, tax, and insurance) is no more than 25% of gross
Have a 6 month emergency fund
No other debt
Only 15 year fixed rate mortgages

Keep in mind that I hold myself to an even higher standard

[MonkeyMama]

I added more detail to my original post to answer some of the questions asked above. You can see those updates in blue.

No the HOA is not a mistake, but this property is in a premium location (downtown). It is actually on the lower end of the other HOA's here. And yes, my motivation to buy is more than just throwing rent money away. I want something fixed so I don't have to worry about moving again.

Please let me know what you think.

Is this for a condo or a single family home? Something in between? Just curious because in a condo situation I would expect general home maintenance to be minimal. There should be some trade-off there. Paying a premium for the premium experience, I would feel more iffy about. That is a lot of money.

Which brings up the point to check the financials and board minutes of any HOA and ask for how much the dues generally rise with inflation. It's a fine balance because if they have never raised the dues they may not be collecting enough. BUT, I'd also be wary to start at $300/month with ever rising dues. Of course, there is always the potential for special assessments, if the HOA is behind on any maintenance. The economy during the past decade has brought about a lot of HOA horror stories. One way to navigate HOAs is with a good realtor who is familiar with the properties you are looking at. (Our own realtor told us which properties she would not buy from and what issues they had with the property). You can't foresee everything, but is better than just going in completely blind.

[97guns]

97guns, taxes vary greatly by region. Personally, I would love to pay that little for taxes. Our house is worth about the same and we pay about $8,000/year. It all depends where you live.

this guys numbers are all out of whack, a $220K house with a tax liability of $5100? that is 2.3% provided they even value the property that high, valuations always are below what the property sells for. the highest property tax state in the union is at 1.89%, more than 2% is not right

your home has to be valued at around 400K

[disneysteve]

this guys numbers are all out of whack, a $220K house with a tax liability of $5100? that is 2.3% provided they even value the property that high, valuations always are below what the property sells for. the highest property tax state in the union is at 1.89%, more than 2% is not right

your home has to be valued at around 400K

You've never been to New Jersey, have you?

A house identical to ours 3 houses away sold last year for $215,000 and is probably in better shape than ours.