Lenders! How much house can I afford?
November 30, 2008 · Print This Article
I want to buy a house next January near Sacramento, Ca. The housing prices are $270,000+ and the cheapest it gets in a decent area is $250,000. Rent in the similar area is $1500.
-We are a family of 3 and have a monthly take home of $5400.
-We have $10,000 in credit card debt (using 18% of total credit), $10,000 in school loans, and pay $530 a month for a car.
-Our current FICO scores are 712 and 719.
-I am an accountant trying for my CPA and my wife is a social worker
-The goal is to save $10,000 in cash to put down and have the credit cards completely paid off.
1) What interest rate should we qualify for?
2) What are the monthly bills we need to pay for the house (Insurance, taxes……)?
3) How much can we afford?
4) Any other advice?
Yes I know that it would be nice to save 20% and then buy a house but California’s house prices are too high. Anything else you need to know?
New houses are advertised at the same price as used ones. Used ones have grass and already are decorated while new homes are not. For the same purchase price, is it better to go used or new for a first home?
For that calculation, do you use take home numbers or pretax figures? If it is pretax then we actually make $6833 a month
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Josh Dunaway has been a certfied Realtor in the suburban Chicagoland area for over 20 years. Aside from starting his own real estate company, he also owns a mortgage company as well.
Sacramento is number 1 in forclosures in CA…check out those…you’ll save thousands…
Honestly in your current situation it doesn’t seem like you could afford or qualify for such a purchase. Lenders want your debt to income ratio traditionally under 40%. At $5400 a month that would be $2160 minus your car payment only leaves $1630, which would have to include all your other monthly credit and loan payments, plus the mortgage, insurance and taxes and mortgage insurance since you aren’t paying 20% down. If you were to get a $250,000 loan at 6% your monthly payment would be about $1500, only leaving about $100 for all the other expenses. Perhaps save up some more so you can take out a lower loan amount. On the positive side your credit is pretty good so you’d definitely qualify for a good interest rate, but there’s no telling what that would be next year since they change daily. Good luck.
One of the main items a mortgage lender will be looking at is your debt to income ratio, which is based on your total house payment (principal, interest, property tax, & homeowner’s insurance) and other debt payments versus your gross income (not net or take-home). I don’t have all your info, so I’m going to make some assumptions (revised):
1) I’m going to assume gross income of about $6,833/month.
2) I’m going to assume total payments of about $400 per month for your credit cards and student loans, or about $930 per month in total debt payments (other than the house), including your car payment. I’ll assume that this will reduce to $730 after the credit cards are paid off.
3) Your FICO scores are just short of excellent, but still good, so you should be able to get market rates.
4) Paying only about 4% down will make it necessary for you to pay PMI
5) Interest rates fluctuate from day to day. You won’t know what it is until you lock in - but let’s assume you can get a rate of 6%.
Let’s assume you find a house to buy for $250M, and you put down $10M (and also pay closing costs out-of-pocket), so that you need to finance a $240M loan. At an interest rate of 6% fixed, your payment on a fully amortized 30-year loan would be $1,439/mo. At 1.1% of the purchase price, property taxes would $229/mo. Let’s assume insurance payments of $35/mo. and PMI payments of $140/mo.
Using these assumptions, your total house payment would be $1,843/mo., and total debt payment per month would be $2,573/mo. (after credit cards are paid off). With gross income of $6,833/month, you’d have a “front-end” ratio (house payment only) of 27%, and a “back-end” ratio (total debt) of 38%, which is within lender limits. Most lenders will go up to at least 32%/38%, compared to your 27%/38%.
It would be nice to not have the PMI payment (which only happens if you put 20% or more down), but as you said, that’s not always possible. If your interest rate ends up being a bit higher at let’s say 6.5%, increasing your payment from $1,439/mo. to $1,517/mo., your ratios would increase to 28%/39%, for which you’d still probably be able to get a loan.
Hope that helps - good luck.
the number one key factor you need to keep in mind is that you would hate to effect you living style to own a home. The saying goes, no one cares if your alive till you miss a mortgage payment. Keep your quality of life at this point. When you start making more money, that is why you should look into buying a home. Being able to take your child to a movie is much more satisfying then stressing to make a mortgage payment.