What should my approach be to buying my first home?

[boilermaker27]

Hi Everyone,

I'm 27/m, engaged from Northwest Indiana. I graduated with a degree in mechanical engineering last December, and have been employed since January. I am currently living at home, saving up money for my wedding and a new home.

Some basics:

My base salary is currently $59,000. My lowest credit score (TransUnion) is 746. At my one year mark (January 9,2013) I'm due for a 10% pay raise as part of job, I should also get a cost of living raise, but not sure if I'll end up with both. I also get some form of overtime or premium pay every month. My base is 59,000, but for the year I've already taken home $63,000. I get paid monthly and still have a November and December paycheck. Overall, I would expect to average per month someone making no less than $65,000 next year (although I'd expect closer to $75,000, I want to be conservative.)

I contribute 6% into my 401K with a 6% match and a 4.75% company contribution for retirement. So I have $6700 in there now and 16.75% goes in every month

I've paid off a few expenses already (engagement ring, bedroom set for my home) and have averaged savings $2000-$2500 per month while living at home. My Current Savings is about $26,000.

I bought a new car in January, 5 year, no interest loan. My monthly payment is $444

My monthly student loan obligation for the next 10 years is $160/month.

My only other fixed expense right now is my phone bill for $120/month.

My car insurance is $85/month

I have no credit card debt and pay the balance off every month.

I currently give my dad $500/month toward a loan he gave me for other school expenses. But he is forgiving the rest of the debt when I move out.

My fiance's parents and my own are contributing to the wedding. I should be on the hook for $5000-$6000 of wedding expenses. Wedding date: September 21, 2013.

I should also be on the hook for a $4000-$4500 honeymoon.

We plan to have children in 2-3 years.

My fiance has medicore credit, and is set to graduate next month. She has about 40K is school debt. I plan to go alone on the mortgage and add her later. I anticipate her getting a job, but I will put her whole salary toward student loan repayment. So I'm trying to budget based SOLELY on my salary. Eventually I'd like her to be able to be a stay at home mother and the mortgage will obviously be 30 years.

My question is, how much house can I confortably afford? How much of a downpayment should I consider? What kind of interest rate for a mortgage am I looking at?

Right now, decent houses in my area are about $150,000. Pretty Good houses are $180,000 and AMAZING houses (at least in my opinion) are around $200,000-$220,000. I feel I can afford the amazing if we budget well, but I feel like I might be missing something.


Does anyone have any useful advice?

[rxtrom]

I agree.

You have a lot of student loan debt (combined) and a car loan while its not interest bearing you still owe the money. It will depreciate and before long that car will be upside down and you will want to pay it off.

The house is more than a mortgage payment, its taxes, utilities, maintenance, furniture, decorations, yard work, projects, improvements, money, money, money, and while many people believe they are investments - primary residences really are not.

It is ok to rent. People who rent are stereo typed like they have no financial sense, but in your case its the most financial savvy thing to do.

Establish your roots as a married couple, pay off some debt, and then pick an area to live based on your employment and family location or wherever you spend your time.

[Bades]

If OP can responsibility pay off all debt payments each month and still have plenty left over to take on a mortgage and other associated expenses regarding home ownership, there is no reason why he cannot afford a house.

Run the numbers, make sure you can take on a mortgage payment and other house expenses, along with your current debt. I wouldn't advise buying an "amazing house" right away. There should be some pretty nice houses in the 150k range. Over 200k would most likely be a sizable mortgage payment.

Again, go over all the details: all your incomes, all your expenses, all your planned future expenses, etc. and crunch the numbers. In my opinion if you can pay off everything and still net a decent amount each month for savings, you're good to go.

[Bades]

It does seem like you have quite a few expensive items coming up in the next year...

• You will probably want to save up 30-35k for a house down payment.
  
• Looks like you'll be spending 10k for your wedding.
  
• You'll want several thousand for an emergency fund.

Probably looking to save upwards of 55k before you should start being serious about a new home. But I don't think you need to be completely debt free. Does your finance have any savings, credit card debt, car loan?

That's an expensive car payment too, even with a no interest loan.

[Ramose]

Monthly Pay:$63,000/10=$6,300 (before/after tax?)
Fixed Expenses: $444+$160+$120+$85+$500=$1,300 rounded
Monthly Savings: $2000
Misc. Expenses: $6300-$1300-$2000=$3000-401k payments.
Total Monthly Expenses:$1300+3000-401k=$4300-401k=Estimated $3500?

Where is the rest of your money going?

Savings (excluding emergency fund and wedding)=$26000-10000(wedding+honeymoon)=$16,000-(3500*6(Emergency Fund))= -$5000

I assumed a 6 month emergency fund because you and you're fiancée have quite a bit of debt.

Did I miss anything?

[siggy_freud]

You should not buy a house now. You are in debt.

In my opinion, you should get your debt cleaned up first, then have 3-6 months expenses in an emergency fund.

Once you have done that, save up at least 20% for a down payment on a house. Get a 15 year fixed rate mortgage with a payment of no more than 25% of your take home pay.

I would start by using about $23,000-$24,000 of your savings to pay off your debts. There are different philosophies about whether to pay them off smallest to largest or highest interest rate to smallest interest rate. It doesn't make a big difference, as long as you pay them off.

If you buy a house before you are ready financially, your dream house could become a nightmare.

While this is all well and good, it may not be realistic depending on the OP's location.

Lets plug some numbers in:

$65k a year would probably net him about $3700 a month depending on withholdings.

25% of that is $925 per month.

$925 per month will support a mortgage of about $128,500, so with 20% down you're looking at a property value of about $154,000. Now, depending on where you live, $154 can buy you something decent, or nothing at all.

This also doesn't factor in taxes or insurance, so beware of that.

Bottom line from my perspective, at 27 (same age as me) don't be afraid to start with a 30-year. You're not going to retire in your first home, few do. A 30-year will ease you into ownership, so long as you're responsible enough not to overbuy. Yes, you WILL pay more in interest, but you may end up in a place you're happier and more comfortable in, which can add (money earning) years to your life.