Questions on buying a house

**kork13** · 10-26-2021, 09:22 AM

This is nothing but great news. Congrats on the new job & new baby! This home purchase should be no problem for you, assuming you can find a decent place in your price range.

- First and foremost, do your best to stick to your guns on purchase price, or else use extra cash to keep your mortgage at the ~$600k figure.... It's easy to let that big number get bigger -- don't let it if at all possible, because in spite of being in a HCOLA area, a mortgage 3x your great income is still at the top end of what most folks would advise. Note that mortgage size vs. income is what matters, not value... extreme example: if you have a $200k income & can drop $1.5M on a $2M house, more power to you. It's a cashflow issue.
- Question #1: Others may know better, but I think most banks wouldn't want to write the loan if anyone besides the mortgagee is on the title -- they may force you to either keep her off the title, or have her on the mortgage.
- Question #2: In my experience, if you're using a competent/reasonable mortgage company, the location of the retirement funds should be a moot point...if anything, having the money in an IRA would probably be preferable, due to the looser rules for using IRA funds for a home purchase. But really, it shouldn't matter much. You've got a 20% downpayment, a strong income (note: if it's a significant raise from your previous job, they might be more leery), and a good amount of other funds available -- your retirement accounts should barely even enter the conversation, besides simply being another line item on the loan application.

Lenders in SOCAL are likely going to be more lenient anyway, knowing that the HCOLA drives such high numbers & otherwise less-optimal debt:income ratios. I wouldn't stress it too much. Make a reasonable purchase, and you'll be fine.

BTW, are you planning a 15yr or 30yr loan? If you can manage the 40-50% higher payment of a 15yr loan (~$3.8k/mo + T/I on $600k loan), it's remarkable how much less expensive those mortgages end up being, and you build up your equity really fast.

**Jluke** · 10-26-2021, 09:25 AM

2. You do not need to report your retirement holdings to qualify if your salary and downpayment justify your borrowing power. I never reported my taxable investments or retirement funds.

to keep things simple I would provide the account details where your downpayment is and do not make (or limit) any large transactions between now and the time you apply for the mortgage.

YMMV

**myrdale** · 10-26-2021, 10:33 AM

Originally posted by Leo View Post

We've been waiting for a while now and we are planning to buy a house next year. We are targeting a $800K house which is 4x my income and reasonable considering our expenses and budget......

Two rules of thumb.

First, the price of your home should not be more than twice your gross income.

Second, your house payment for a 15 year fixed mortgage should not be more than 25% of your monthly take home pay.

From how I read your post, the house is four times your gross income. Is this correct?

Be aware, even though you have a fabulous income, if you buy too much house you can be fabulously broke.

**Jluke** · 10-26-2021, 10:36 AM

^^^
some rules don’t apply to California and other markets

**kork13** · 10-26-2021, 11:04 AM

Originally posted by myrdale View Post

Two rules of thumb.

First, the price of your home should not be more than twice your gross income.

Second, your house payment for a 15 year fixed mortgage should not be more than 25% of your monthly take home pay.

Originally posted by Jluke View Post

^^^
some rules don't apply to California and other markets

Rules of thumb are great in the abstract, but specific application of those RoT may drive different answers. (Though I've generally heard a 3x multiplier used vs. 2x, and to target below 25% but no higher than 33% of monthly gross)

Having made some of these choices before in a HCOLA, I've found that these RoT are less applicable for abnormally high or low incomes. While $200k/yr isn't absurdly high, there's going to be enough play in the numbers that one can manage the budget such that other expenses are well-controlled & allow for higher spending in one area (housing) if necessary.

So for someone with a high income such as $200k could reasonably dedicate (for example) 40% ($80k/yr, $6600/mo) to housing, so long as the budget is managed to accommodate. At their income level, doing so can be entirely possible.

By the same token, a low income family (say, <$30k/yr) could often find it challenging to keep housing costs below 25% or even 33%, depending on the area. Out of necessity, they're going to have to accept a higher housing:income ratio to keep a roof overhead, and sacrifice in other areas to make ends meet.

**rennigade** · 10-26-2021, 03:19 PM

I wouldn't want to take on a house that is 4x your income. Also with you being the only one working, there is no fall back if you would lose your job. You just never know.

But, $800k is ho-hum in LA. That's about par for the course.

**Leo** · 10-26-2021, 04:15 PM

Originally posted by kork13 View Post

This is nothing but great news. Congrats on the new job & new baby! This home purchase should be no problem for you, assuming you can find a decent place in your price range.

Thank you and yes it is not a huge increase from my previous job (175k) but I've been in the industry for a while now.

Just to add into the discussion:

I know there are some rule of thumbs but I do agree that it really does not apply with HCOLA, or it is really hard to follow.

We don't have any debts and after maxing out my 401k, our target is not to exceed 35% of our "take home" for mortgage. Assuming we will get the best rate of around 2.75% with our perfect credit score, a $800k with 20% DP will be about $3,600/monthly. (We are renting for $2,400 right now and we have about 3k saved per month that goes to IRAs and savings account)

And of course that's our max, if we can get a 750k house in the suburbs then better.

Plus my wife will find a part time job in the future. I'm sure she will want to work at least part-time at some point in the next 15-30 years.

**LivingAlmostLarge** · 10-27-2021, 04:22 PM

Rules of thumb don't apply anymore. With interest rates so low if you do the 2x or 3x it will be much too cheap. When you can get a $1m house with 20% DP for $3300 PI and then $1000/month taxes you are looking at a gross of 25% = $16k/month which is $180k/year so more like a 5x affordability. Not that I'm saying to do that but it's out the window with these ridiculously low rates. Prop 13 in CA also allows for people to buy and have their property taxes limited which makes it easier to afford as prices rise.

Also most people in HCOLA pay way more than 25% of their income to rent. Many pay like 50% so buying a home at 35-40% is not out of the norm. Also if you are making $200k+ it becomes a different figure of budgeting. If you make say $400k combined the food and car payment are the same. Taxes are higher but then you have more disposable income to pay for the house.

I'm not saying do it, depends on what you want, but in a lot of coastal areas it's not out of the norm to be paying a lot to rent so buying isn't such a stretch. People on the coasts are used to living I think very leanly except for housing costs. I know that we always have lived pretty lean except for housing which has always killed our budgets.

**NickGross** · 06-03-2024, 06:48 AM

Originally posted by Leo View Post

I just switched jobs and now earning $200k/year and my wife will quit her job and be a stay-at-home mom for the new baby, for now.

We've been waiting for a while now and we are planning to buy a house next year. We are targeting a $800K house which is 4x my income and reasonable considering our expenses and budget, a net worth of $475K. Hopefully, the housing market settles down a little bit and we can find a house in that price range here in LA.Fence company in Los Angeles globusgates.com

I have two questions:

1. Since I am the only one with the job, what are the pros and cons of not including my wife in the mortgage application? We have the same credit score and of course, we want to include my wife in the title but we just want to make sure we are aware of all the possible strategic actions.

2. I am planning to move my 401k (about $75k) from my previous employer to my IRA ($60k). How does a bank or loan officer calculate my buying power? I heard that they also include a percentage or fixed amount of your 401k or IRA as assets. Of course, we are not going to use our retirement for a house (we have 20% downpayment saved) but my concern is that if I move my 401k now to my IRA, I am losing some kind of buying power on paper. Should I move it after buying a house?

Thank you

Hey there! Congratulations on the new job and the baby! Regarding your first question, not including your wife in the mortgage application could make the process simpler since only your income and credit score would be considered. However, if you have similar credit scores and your combined financial profile looks stronger together, it might be beneficial to include her. On the other hand, having her on the title means she'll still have ownership rights, which is important for estate planning and legal purposes.

**disneysteve** · 06-05-2024, 08:27 AM

Folks, please don't respond to posts that are several years old.

Questions on buying a house