Mortgage Rule

[LivingAlmostLarge]

I just had lunch today with a couple of other moms and I was the strangely desparate one. I think I'm pretty liberal with borrowing and buying a home having lived always in a hcola. But a very young mom (25) was saying that her and her husband were arguing over how much to spend on a house.

He just got hired as a firefighter and is making $70k now but in five years he'll be making $100k and every year until then a 12% effective raise. He'll get to retire at 52 after 25 years and college, retirement is all taken out of the paycheck. So they'll be good to go and living the great life at 50 and 52. I agree.

But she said she wanted to cap their house hunt at $500k and he was thinking more like $600-700k. I said $500k was stretching it, but the other two moms said $500k on $100k salary no problem.

She said they are renting now for $2000/month and are able to save, so $500k mortgage = $2500/month and they could easily swing that and still live.

What am I missing? I feel like we lived in that sort of situation and it was tight 10 years ago before kids. I also swear most people here say 3x your income.

5-7x income for a mortgage I think is quite a bit. What rules of thumb do most people use?

Or is most rules of thumbs only for jobs that you have to save 15% for retirement? But as a firefighter all that is taken care off so they don't have to worry about retirement or savings?

[disneysteve]

Interesting scenario. Does it change the rules if you don't need to save for retirement?

First off, they need to buy based on what they earn TODAY, not what they anticipate earning 5 years from now. So the real question is how much can they afford to spend on a $70,000 income.

The rule of thumb is 2-3 times income, so that maxes them out at $210,000. That's way, way off from what either of them is thinking.

You say that college and retirement is taken out of his paycheck. What does that mean exactly? Is he contributing to it? Or is the 70K after that stuff comes out? If he grosses 70K, that means he brings home about 50K or about $4,200/month. A $2,500 mortgage would be about 60% of income. That's insane! They might possibly be able to swing that (assuming they could find a lender willing to make that loan) but they wouldn't have money left for anything else - like food, clothing, travel, gifts, etc. And certainly no room for additional savings for repairs, cars, medical bills, whatever.

So no, somebody making 70K can't afford a 700K house or a 600K or 500K house. Somebody making 70K can afford a 200K house and that's about it.

[97guns]

The way they are thinking along with the majority of Americans is that they will be able to afford it once his full pay kicks in, they count their chickens before the eggs hatch, tapping all the credit they can qualify for and getting in over their head just to live up with the Jonses, you surely cant drive a 20k toyota living in a $700k house. what happens if and when something unforeseen happens like loosing his job

[creditcardfree]

I'm really curious on the 'retirement taken out of paycheck'. Is he fully vested right away? What if he doesn't like it after five years? The problem with these scenarios is that no one considers the bad scenarios...only the best possible circumstances.

They can't afford it. Too risky.

[disneysteve]

The problem with these scenarios is that no one considers the bad scenarios...only the best possible circumstances.

True, and even in the best circumstances, someone making 100K can't afford a 700K home... or a 500K home.

[Leo]

My best friend is earning 70k/year and his take home is around $3500 after taxes and 401k deduction. His rent is $1000/month for a really small place but I would say his living comfortably without debts and with expenses somewhere around $1700-$1800.

Can he afford a 500k house with mortgage of $2500/month? NO

Yes, he has $700 leftovers per month but that should go to savings. $1000 + $700 leftover is not even close to $2500.

Another rule of thumb is to put 20% of downpayment (100k for 500k house) and have 3-6 months of emergency fund without any debts. Also owning a house is expensive too, repairs, taxes, insurance, etc.

[mo0n]

I'm going to guess he isn't vested right away. My retirement is taken out of my paycheck as well, but I have 10 years with the employer until I'm vested (I'm currently at 8 and some change). **I would like to note that I also contribute to a 401k, 457 and Roth IRA.

http://www.njspotlight.com/stories/14/12/03/moody-s-new-jersey-s-pension-funds-could-run-dry-in-just-10-years/

An article like this terrifies me, as well as motivates me to use other avenues to save for a retirement. I do not want to work for 30 years, and find out that hey, remember all that money you contributed to a general fund? It's not there any more, so sorry.

But I digress. There's no way that on his salary alone can they afford a $500k house, much less $700k. Are we sure there isn't an inheritance or family help in play?

[97guns]

http://www.njspotlight.com/stories/14/12/03/moody-s-new-jersey-s-pension-funds-could-run-dry-in-just-10-years/

An article like this terrifies me, as well as motivates me to use other avenues to save for a retirement. I do not want to work for 30 years, and find out that hey, remember all that money you contributed to a general fund? It's not there any more, so sorry.

This is the case with most every pension fund out there, they are all running in the red though nobody wants to admit or realize it. Government, state, county, city and private pensions are all in big trouble, they've all robbed Peter to pay paul just like social security

[LivingAlmostLarge]

She said as a firefighter it's guaranteed unlike other state jobs the pension. It's a 25 year working period till retirement. I think immediate vesting but it's not a 401k it's a pension.

I thought them nuts saying $500k on $100k. But others were saying $100k sure no problem $600-700k home I thought crazy. But she was right $2500/month which she said wasn't a problem since they were renting for $2k now, they can easily afford on $70k.

They don't need to save for retirement or college it gets taken out from the paycheck before they see it. I don't get it at all. DH was making $140k gross and we saw $4500/month after savings and stuff so I couldn't fathom trying to buy $500k on a lesser income.

[Nutria]

This is the case with most every pension fund out there, they are all running in the red though nobody wants to admit or realize it. Government, state, county, city and private pensions are all in big trouble, they've all robbed Peter to pay paul just like social security

This is why defined contribution plans are so much better.

[Nutria]

She said as a firefighter it's guaranteed unlike other state jobs the pension.

Guaranteed by whom? The same government that's cocking up every other pension? By an insurance company that can declare bankruptcy?

[feh]

What am I missing?

You aren't missing anything. The other people that were at the table are.

[snafu]

Each city's contract with their firefighters has different details but broad similarities. Perhaps someone in SA community can offer details. 'Salaries' don't reflect shift differentials, weekends and stat holiday pay. There is a lot of overtime available if desired. Due to rotated schedules, a huge percentage of firefighters join together with two or three others of like mind and skill set to operate a part time business.

These guys have a lot of down time to learn 'DIY' skills and earn 'off the grid.' Further, staff benefits include life and medical/dental insurance premiums. While they contribute to the 'house' food expense, it means far less spending on weekly food bills at home than average. I think many group as the 'house' to get better rates for home and car insurance. Doesn't sound like a lot but when you add it all up and multiply by 25 years, it isn't a paltry sum.

[ua_guy]

With these kinds of conversations, because I've had many similar ones of my own with the same kind of people LAL is speaking of...

Something is missing. They just aren't talking about it.

...like someone's parents will be chipping in $200k for a down payment.

...or there's inheritance money.

...they simply haven't applied for a mortgage yet and experienced a loan officer slapping them in the face with a big fat stack of "NO".

...or they are simply dumb enough to try to afford life with a $500k house on just $70k/year, if a bank would even give them a loan.

----

I was a volunteer in the fire service. I've never met a rich firefighter. Most people in the fire service who spend big are only robbing themselves, and most of the guys I know working or living in high COL areas have side jobs out of necessity. Some people do well, but that comes with saving and time, and they put in a lot of extra hours to get there. There can be a real downside to health and happiness too.

We here at SA know how to do simple math on a budget, and this scenario simply doesn't add up.

[dawnwes]

I would be very surprised in today's loan industry if they would qualify for that large of a loan. In 2005 maybe.