First time homebuyer (soon) how much can I realistically afford?

[Coronet]

Hi all, I was wondering if I could get some analysis help on how much of a mortgage range I can afford. I'm 23, less than a year out of college with a full-time, stable job. I am considering purchasing in about a year's time.

Yearly Gross: $61k
Downpayment Amount: I will be able to do 20% due to previous savings/inheritance
Debt (CC/student/car): $0
Credit score: 760+ as of last year's check

I plan to live in this area for a number of years.

I've heard your mortgage + principal interest + insurance + homeowners fees should not be more than 25-30% of your gross income. Is this a good rule of thumb?

I'm concerned because the area I live in is expensive and realistically I'd love to get a starter house in the 125-150k range, but there's absolutely nothing within a 20 mile radius of where I work that would be that cheap unless I wanted to live in a drug-infested/unsafe area so I'm trying to figure what I can get a mortgage for that would be humble, but reasonable for a starter house.

Or should I continue to rent and wait a few years till my income goes up and buy then? I can't decide upon the best course of action.

Any suggestions are greatly appreciated!

[parafly]

There are mortgage pre-qualification calculators available on the internet, and they can be found with a quick Google search.

Going by the information you provided, I am going to assume the following:

Gross monthly income: $5083
Mortgage Term: 30 years
Annual interest rate: 4.75%
Property tax rate: 1.5%
Money available for closing: $30000
Other Monthly Debts: $0

Going by these numbers (which very well may need to be tweaked), you should be able to afford a home with a purchase price of about $225,000. This is a ball park number for the maximum amount a lender would be willing to approve, and certain factors could cause it to go up and down. The standard convention is that your total housing expense cannot go higher than 28% of your gross monthly income.

You seem to be in a good position to buy a home. Make sure you have a sufficient emergency fund (3-6 months of expenses), and you are saving 15% toward retirement. This is a good time to take advantage of record low interest rates and home prices which have come down significantly in the past few years.

[parafly]

One thing I forgot to add:

The higher your purchase price, the higher your down payment will need to be in order to reach 20% and avoid paying mortgage insurance. In the example above, if you had $30,000 to bring to closing and your purchase price is $225,000, you will not have enough to cover the 20% and will be paying PMI. This is something you want to avoid, but it's tough to give solid advice without knowing exactly how much money you have for a down payment.

[jIM_Ohio]

Hi all, I was wondering if I could get some analysis help on how much of a mortgage range I can afford. I'm 23, less than a year out of college with a full-time, stable job. I am considering purchasing in about a year's time.

Yearly Gross: $61k
Downpayment Amount: I will be able to do 20% due to previous savings/inheritance
Debt (CC/student/car): $0
Credit score: 760+ as of last year's check

I plan to live in this area for a number of years.

I've heard your mortgage + principal interest + insurance + homeowners fees should not be more than 25-30% of your gross income. Is this a good rule of thumb?

I'm concerned because the area I live in is expensive and realistically I'd love to get a starter house in the 125-150k range, but there's absolutely nothing within a 20 mile radius of where I work that would be that cheap unless I wanted to live in a drug-infested/unsafe area so I'm trying to figure what I can get a mortgage for that would be humble, but reasonable for a starter house.

Or should I continue to rent and wait a few years till my income goes up and buy then? I can't decide upon the best course of action.

Any suggestions are greatly appreciated!

The 25%-30% is a good rule of thumb for the payment.

But in high cost of living areas that rule of thumb might be bent considerably or ignored.


Here are some thoughts- can you get a higher down payment? For example if you inherited 56k and financed 225k (280k house) the payment would be about $1300/mo which is 225k financed at 5.5% for 30 years.

I calculated that on an amortization table, you can download them from the web (I downloaded mine from microsoft).

Because you indicated 125-150k range, I am assuming inheritance was smaller (30k inheritance or less?). This means you have a few options

1) save more money before moving
a) this implies removing the 1 year constraint

I am considering purchasing in about a year's time.

b) allows you to keep the mortgage to 25% of gross pay
2) Break the rule of thumb- use the 20-30k you have available to purchase a house, but have that be 5-10% of the price (not 20% down)
a) this might imply FHA loan
b) this might imply PMI
c) the mortgage payment might be more than 25% of your gross pay


I have bought a house twice. At age 27 I bought a condo (when single), then 5 years later wife and I moved to a single family home after being married for about 3.5 years.

Both times my payment was more than 30% of my gross when I moved in. Both times within 2 years raises dropped that percentage down to something more moderate. I live in a moderate cost of living area (Ohio costs are not as low as you think).

The advice given to me was to make sure you squeezed into house when young, because it prevents you from moving (I HATE MOVING) and within a year or two once you see tax return and similar, its not as tight as it appears on paper when you move.

I am older now and would not use that logic 14 years later, but I do not regret either purchase I made. They were the right decisions for that time in my life, just wish bubble had not burst in 2006 (I bought at peak of the bubble in Dec of 2005).

[Coronet]

Because you indicated 125-150k range, I am assuming inheritance was smaller (30k inheritance or less?).

My 125-150k range was calculated based on my salary and what I'd be comfortable with spending each month for a mortgage based on my current salary, not the amount I have for downpayment. My philosophy is buy within my current salary range and imagine I don't have a downpayment right now/assume my salary will be the same in 5 years as it is now (probably not the case) and that I'd have to save for it in the future (if that makes sense). I don't want to be jaded and think I can afford more than I really can because of money I inherited.

Hmmm, you guys make great points on expensive areas breaking the 25% rule. It's realistic to expect that in 5 years my salary will be greater than it is now and that in the future my mortgage payment would be more like 25% of my gross. Things to think about, I suppose.

Thanks for the input!

[littleroc02us]

You are in an excellent position to make it happen. You seem to make a great salary and have the right mind set about putting 20% down and to only spend 25-20% of your gross income. Additionaly I might add, take a 15 year mortgage when your ready, find a good neigborhood to live in. This may require you renting for a couple of years and stock away 40% down. How long do you think that would take with your current salary having no debt? 2-3 years. At your salary wouldn't it be possible to save 80-100k in 3 years or so? Just think you would have a small mortgage, no debt and it could be paid off in your late 30's. My advice from experience is to be patient, wait and make sure you can kick some butt out there and not be like everyone else barely able to make their mortgage payments. Be different and you will succeed.

[jIM_Ohio]

My 125-150k range was calculated based on my salary and what I'd be comfortable with spending each month for a mortgage based on my current salary, not the amount I have for downpayment. My philosophy is buy within my current salary range and imagine I don't have a downpayment right now/assume my salary will be the same in 5 years as it is now (probably not the case) and that I'd have to save for it in the future (if that makes sense). I don't want to be jaded and think I can afford more than I really can because of money I inherited.

Hmmm, you guys make great points on expensive areas breaking the 25% rule. It's realistic to expect that in 5 years my salary will be greater than it is now and that in the future my mortgage payment would be more like 25% of my gross. Things to think about, I suppose.

Thanks for the input!

Keep in mind the advice is given is based on (limited) information you are giving (thus I make assumptions which are probably wrong).

For example, you mentioned this in OP

I'm concerned because the area I live in is expensive and realistically I'd love to get a starter house in the 125-150k range, but there's absolutely nothing within a 20 mile radius of where I work that would be that cheap unless I wanted to live in a drug-infested/unsafe area

To me this trumps all money matters. Budgeting for a 125k house makes no sense because you don't want to live there. #1 rule for buying real estate is location-location-location.

You need to choose your location before you choose your cost (IMO) and then you do various things to fit the cost into the budget. Like waiting 3 years to save a large enough down payment so the $1300/mo or $2500/mo mortgage is something you are comfortable with. Whether you borrowed 125k on a house which is worth 200k or 400k, that payment is still in $1300/mo range (25% of salary). Whether you borrowed 280k on a house worth 400k or 900k is still a mortgage around $2600/mo, even if you have less or more equity in one situation or the other.

So first thing I would do is window shop and focus on the price tag of houses you want to live in. Focus on the neighborhood, location, what is around you (parks, street lights, sidewalks) and what you get (snow removal, trash pickup, other?) and also focus on size (how much house do you need?). Focus on the functions you desire in a house (and not just the cost). Do you want a fixer upper, or a house which functions when you walk in, and has X and Y and Z amenities within walking (driving) distance?

Window shopping is cheap and educational for real estate. After you visit 2-3 houses in an area, stop by grocery store, check on price at their produce, bakery and meat department for something, then make a mental note of each. The next day do same thing in a different part of town (check 2-3 houses, then check price at grocery stores). You might see a trend in better parts of town that certain items get inflated prices. Another good measure of this is order a beer at the corner pub and see if the beer is cheaper. Order food at a restaurant and see if its more expensive closer to one location or another.


Second thing I would do is create a cost table/ cost chart for the house(s) in location(s) you desire.

For example, if you found several houses which cost $350k-$500k in an area you want, you need to map out your plan to get them.

350k and you are willing to finance 150k (so payment is 25% of gross).
200k needs to be down payment
you have 30k from inheritance
You need to save 170k to get house
so you plan to set aside 17,000 per year for 10 years and you have house
or plan to set aside 34k for 5 years to get house
or you set aside 17k for 5 years and add $85k to financing because raises will kick in within 5 years.


If you constrain yourself, you will limit choices (that is what constraints do). For example if you say you need to move in less than 18 months, I would say you WANT to move (you don't NEED to move) and that single constraint limits how you can accomplish your goals.


I would focus on the cost of the house and work backwards at same time you focus on how much you can afford and move in that direction (how much you can afford is a good question, but that still does not tell me how much houses in your area cost).

My house cost me 352k in 2005
if I changed to a better part of town, the same floor plan with same builder was selling for about 400-425k. In my zip code, in a less desireable location, my 352k house would have cost me $325k (so I valued location at about 27k) and if I moved one zip code east, I could have dropped price by 100k or more, but again, that location is not what I wanted (based on school districts and the types of people which live there).

[wincrasher]

I've had my mortgage now for alittle over 1 year.

At the time, the rules were payment no more that 31% (of net for self-employed, of gross for the rest of you) and no more than 41% for total indebtedness. Those are the limits to still be considered "prime".

Mortgage rates keep falling lately - I've heard 4.5% is easy for a 30 year.

Although all this doesn't matter if you are uncomfortable with the payment or the neighborhood the house is in. So if you are only comfortable with $1000 a month, then just do that.

Absolutely go with 20% down (to avoid PMI) and count on 8-10% for closing and moving expenses. Lots of bargains to be had out there - you may end up with some more equity if you find the right deal.

It's pretty standard to have the seller pay 1/2 to all of the closing costs - so don't be reluctant to ask.

Good luck!

[Coronet]

Thanks for the extra feedback.

I have researched a few areas that are in the best school districts in areas I'd be interested in. I've been keeping track of houses on Zillow that are being sold, for what price, etc so I can get a good estimate of what to expect financially and if it's a good investment for me.

I'll definiately take everyone's suggestions to heart! I'm going to be doing plenty of research over the next half year.

Any suggestions on how to find a good realtor to work with when the time comes?

[jIM_Ohio]

Any suggestions on how to find a good realtor to work with when the time comes?

Friend referrals
or pay attention to who sells the most houses

If you lived in Ohio, I know a really good one (used him twice).

[jpg7n16]

Yearly Gross: $61k = $5083.33 /month = $3812.5 after taxes (estimated at 25%)
Downpayment Amount: I will be able to do 20% due to previous savings/inheritance
Debt (CC/student/car): $0
Credit score: 760+ as of last year's check ; should be able to get a 5.25% loan -hopefully better-
I plan to live in this area for a number of years.

I've heard your mortgage + principal interest + insurance + homeowners fees should not be more than 25-30% of your gross income. Is this a good rule of thumb?

Yup it's a good rule of thumb - for a MAX home purchase. If you can find one cheaper that meets your needs, where you would be happy then try go cheaper! But it doesn't seem like that's your case. Are you in Cali or NY or somewhere uber-expensive?

Using 25% for the mortgage payment, in a 30 yr @ 5.25% - you could afford around $762.5/month = 138k mortgage = 172k house (with 20% down) as around the max you should go. Your 125-150 is a better range with some wiggle room.

Why the need for a home? If you can't find a house in your price range, could you rent in your price range? Could you get a roommate to lower the net cost of home ownership?

I view it like: net mortgage = mortgage payment + insurance - rental income

So if you could find a roommate to supplement $400 a month, that could bump your acceptable payment up to around $1162.5 for a mortgage of $210,520.14 = $263k (with 20% down) - again MAX, not suggested

[maat55]

Remember, your retirement savings % is just as important as your home %. Many make the mistake of buying more house and lifestyle while ignoring retirement. One's home should not be his/her biggest investment.

You should make sure your house, cars, lifestyle not block you from investing at least 10% to retirement. So, if you like having cars and lifestyle, you may want to sacrifice house or visa versa.