1st time home buyer please help how much “house” can I afford comfortable?
November 30, 2008 · Print This Article
MeB asked:
I plan on buying my 1st home this spring. I gross about 65k/yr and the only debt I have is a $222/mo car payment. My credit scores are 729,744,779. I have about 125k in CDS/moneymarkets and plan on using about 40k for a downpayment. I don’t want to be “house poor” but I don’t want a fixer-upper ether. My questions are how much house can I afford comfortable(what price range should I be looking at). Plus how will lenders view me with the info given above and is there anything else they look at when applying for a house loan? I plan on looking in the Albany new york area.
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I plan on buying my 1st home this spring. I gross about 65k/yr and the only debt I have is a $222/mo car payment. My credit scores are 729,744,779. I have about 125k in CDS/moneymarkets and plan on using about 40k for a downpayment. I don’t want to be “house poor” but I don’t want a fixer-upper ether. My questions are how much house can I afford comfortable(what price range should I be looking at). Plus how will lenders view me with the info given above and is there anything else they look at when applying for a house loan? I plan on looking in the Albany new york area.
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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.
Assuming you are looking to spend 40% of your income on debt, you can afford a monthly payment of about $1950 ($1945). This will give you almost a $300,000 loan for your house which I am assuming is a very comfortable first home in that area. This of course does not include taxes and insurance which will run several hundred more per month. If you wanted to include these and still keep it under 40% of your income you could afford a 200,000 loan. This could still be a decent first home.
You shouldn’t have a problem getting a mortgage with a 744 mid FICO and that much of a down payment (a 40k down payment is about 15% if you go for the lower amount). Assuming you can document both your income and at least 3 months history of your assets and down payment you shouldn’t have a problem getting a loan at all.
What you want to remember about first homes is that usually you will be moving out of them, so you will want to look for something comfortable that you can afford, but you don’t need to stretch yourself.
(A side note- for my calculations I assumed a 30 year loan with 7% interest which I think is a bit on the conservative side given your financial strength (if you put 15% down) and the current market.)
I warn you that I am not a certified financial planner so I take no liability if you follow my advice.
I suggest looking through the following website:
I found it helpful in making my decision to purchase a home recently. It is written by a Wharton business school professor.
The rule of thumb is that monthly housing expense should be a maximum of 28% of your gross monthly income. However, this number could be less depending on your situation. At 28%, this would mean that your house expense would be about $1516. This expense includes mortgage interest, principal, taxes and insurance. Assuming property taxes are 2.5% of property price, insurance is .32% of property price, 1% for home repairs, and assuming you make a 20% down payment with a 30 year mortgage:
The current mortgage rate in Albany is about 6.375% for $160K mortgage for a $200K home.
taxes, insurance and repairs - $637/month
mortage principal and interest - $998/month
total housing cost - $1635 - which is above the recommended housing expense of $1516.
So I would suggest looking below $200K even though you have a desired maximum down payment of $40K.
If you look at it from an asset allocation point of view, normally very wealthy people keep the percentage of assets in the principal residence below 10% of their net worth. However, not many people can do this. A debt to asset ratio of below .50 is considered prudent.
So if your debt happens to be $160K and home price is $200K, your debt to asset ratio would be $160K/($200K+$125K-$40K (down payment)) = 0.56 which would be above 0.5.
If you were to reduce your mortgage and house price and maintain 20% down payment, to get a 0.5 debt to asset ratio:
mortgage = $124000
house price = $155000
down payment = $31000
estimated monthly costs
principal and interest (6.75% interest rate)= $804
taxes, insurance and repairs = $493.42
total monthly housing cost = $1297.42
housing cost as percentage of gross income = 23.95%
house as percentage of assets = $155K/(155K+125K-31K)
=62% of assets as house - considerably higher than that of wealthy families
So unless you have more assets you did not mention, most of your wealth will come from the value of your home at a price of $155K. Unfortunately, this is not the best situation but most people are in it.
This percentage will decrease as you invest more for your retirement and increase your stock investments and other investments. Remember that now with the mortgage you will want your investments to out pace your mortgage interest. So I would minimize short term holdings to a 6 month income reserve, pay off your car (unless interest rate is very low), allow for furnishings for your home and then start putting the rest in long term investments such as a total stock market index fund.
you give a lot of facts/figures but the key one is monthly disposal income — do not reduce your 401k payment when coming up with that figure and than your home payment should not be more than 30% of you month net income — with that and say 40k down you are looking at a very costly house!!!