Buying a house

Doc

I'm about to consider buying a house. My landlord wants to sell me the one I am currently renting.

How much of my income should I consider putting into a house? I am about to get a substantial pay raise. If I put all of my pay raise towards mortgage payments and had a roommate that payed a very low rent, I could keep my current amount of disposable income. What is the maximum percentage of income that one should consider putting into a mortgage?

Keep in mind that I'm a young professional with no kids and no dependents.

Edit: This is by no means the only place I'm asking. Just wanted to get as many opinions as possible.

FyreWulff

I'd say you have an advantage with this house here, as you have lived in it and know what's wrong with it, what needs to be done, etc.

But don't consider it as your only house.

Things I'd do:

1) check to see how much houses sold for in your neighborhood, and compare it to what the landlord wants to sell for.

2) are utilities included in your rent? If not, get a quote from your landlord on how much they are.

Doc

I'm not worried about the price of this house specifically. My question is more along the lines of 'what is the maximum percentage of income that a yuppie with no children should consider putting into a mortgage?'

an_alt

I believe the general rule is 1/3 of your gross income is the max for your mortgage. I'm not sure how much this changes for a lack of dependants. I'd personally include property tax and insurance when calculating this amount if your mortgage people don't already do it for you. Actually, going to a mortgage broker would probably be your best bet to find out this kind of information.

I'm sure you've already thought of this, but I'd just like to remind you not to count your chickens before they hatch when it comes to raises.

Liquid Hellz

I have always heard the 1/3 rule as well. Like alt said it would be a good idea to have property tax and insurance in mind especially if you live in a place like Florida.

Djeet

Put as much income as you can afford into it if you're debt-averse. Usually though, the loaning institution is going to be deciding how much house you can afford and they have pretty rigid standards (if they are legit). They use 28-35% (depending upon down-payment, creditworthiness, and home buying programs) of your monthly income (net of other obligations) as the max you can afford for your PITI (Principal, Interest, Taxes, and Insurance). Check into FHA, through that program you can buy a bit more house for a given income (though there are income and house price restrictions). Your "Mortgage payment" in mortgage payment calculators usually only includes principal and interest, you will also be responsible for property taxes and homeowners insurance. If you waive escrow (usually for a fee) you won't have to pay property taxes monthly into escrow (but you will be responsible for full tax bill at years end).

If you put less than 20% down you will also have to pay for Private Mortgage Insurance, this protects the lender in case you default on your mortgage.

The above information kinda ssumes you're doing 20% down and a fixed 30-yr mortgage (which is conservative). You could get into more house for less money if you want to get into creative financing (interest-only, flexible rates), but this is not a good idea in current environment.

Ganluan

When calculating how much income to place into a house, keep tax deductions in mind. You can pay more per month against your principal, but if you think you can make a higher return than your interest rate, use that money elsewhere. A mortgage can be considered "good debt" in that the (likely) huge amounts of mortgage interest you'll be paying are all tax deductible, giving you a sizable reduction come tax time. If you spread that out across the year, you'll see how much you're actually saving as opposed to renting.

Subtract that value from what your mortgage payment will be, and compare it to what you're paying now for rent. If your rent + raise covers that value, you're in good shape. If this is your first house purchase, lenders may be more lenient on how much of your income you plan to devote to your mortgage payments. To avoid PMI it may be worthwhile to check into doing an 80/20 mortgage, depending on the rates you can get.

For your original question though, it should really be 33% of your gross income. If you're going over that, you may not have quite enough income (where your roommate paying rent may come in handy).

Another thing - when is this pay raise happening, and will it be before you attempt to get the mortgage? You will need proof of your current income when you apply for the loan, especially if you're banking on that raise to bring you to a workable level. Keep in mind that some lenders will not consider using a roommate as a viable source of alternative income for means of calculating what they will loan you.

m3k

Loan officers are slimeballs. ALL OF THEM. They can pretend to be your friend all they want, but at the end of the day they'll do ANYTHING to close the sale. This can work for you or against you, it's really your choice, and I shouldn't have to explain. Being a recent homebuyer and having many friends who are recent homebuyers, this tops the list of people who will try to screw you over when buying a house.

As for roommates, it's a good idea, but dont factor rental income into your budget. Some roommates are flakes and there may be a point where you simply want to live alone, and a lot of times rental income will go right back into the house (repairs, upgrades, random fees/taxes/levies).

Get a good interest rate (anything above %6.5 is too high), and go to multiple loan officers and make them fight and claw for you. Don't pick one because "he's nice", b/c once you sign those papers, you'll never hear from them again. They get paid when the sale is closed, and they could care less if you foreclose two weeks later. To help pay for the house, figure out what your post-W4 income will be (interest is tax deductible).

Oh, and ARMs are a fucking joke. Anyone who tells you otherwise is trying to get you to bend over.

The comments on PMI are correct, go with an 80/20... But be weary on the terms of the 20% loan. This is where they like to pad their bottom line. Many loan officers will tell you all sorts of wonderful things like, it has to be "interest only" or "ARM". These are what the french refer to as "Le fucking lies".

Sorry, still have a bad taste in my mouth.

Malkor

Djeet wrote: »

If you put less than 20% down you will also have to pay for Private Mortgage Insurance, this protects the lender in case you default on your mortgage.

I thought this doesn't apply if you're a first time home buyer.

Djeet

@Malkor -> if you go thru an FHA program I think you can avoid PMI, as FHA (or whatever underwriting body of the program) is insuring the mortgage.

I think the tax benefit of mortgage debt is way way overplayed. Unless you already itemize. I was looking forward to a big refund this year, my itemized deductions put me a couple of hundred over the standard deduction, so I got like $30 more in refund than is I had no mortgage deduction (within a year or 2 I will not see ANY tax deduction benefit from the mortgage unless other I'm paying for other deductions). I don't normally itemize, so perhaps I'm not representative. And for singles the standard deduction ought to be lower. You're deducting the interest on the mortgage only (and property taxes of course).

Doc

m3k wrote: »

Loan officers are slimeballs. ALL OF THEM. They can pretend to be your friend all they want, but at the end of the day they'll do ANYTHING to close the sale. This can work for you or against you, it's really your choice, and I shouldn't have to explain. Being a recent homebuyer and having many friends who are recent homebuyers, this tops the list of people who will try to screw you over when buying a house.

As for roommates, it's a good idea, but dont factor rental income into your budget. Some roommates are flakes and there may be a point where you simply want to live alone, and a lot of times rental income will go right back into the house (repairs, upgrades, random fees/taxes/levies).

Get a good interest rate (anything above %6.5 is too high), and go to multiple loan officers and make them fight and claw for you. Don't pick one because "he's nice", b/c once you sign those papers, you'll never hear from them again. They get paid when the sale is closed, and they could care less if you foreclose two weeks later. To help pay for the house, figure out what your post-W4 income will be (interest is tax deductible).

Oh, and ARMs are a fucking joke. Anyone who tells you otherwise is trying to get you to bend over.

The comments on PMI are correct, go with an 80/20... But be weary on the terms of the 20% loan. This is where they like to pad their bottom line. Many loan officers will tell you all sorts of wonderful things like, it has to be "interest only" or "ARM". These are what the french refer to as "Le fucking lies".

Sorry, still have a bad taste in my mouth.

Yeah, I was going to stay away from an ARM as best as possible.

Also, I assume that anyone trying to sell me anything where more than $50 is on the line is subhuman, so don't worry about that.

Malkor

I'm also thinking about buying, but I'm not sure I'm ready. I've looked over all the numbers, and I can easily afford the payments, (I'd be paying less than rent) but I'm not sure how I feel about being 'stuck' in one place. After my lease is up, I can pack up and go wherever the hell I want that's close enough to work, but with a mortgage to pay I'll have a substantial commitment. I could always rent the place out eventually, but my mom has some rental properties and it's a pain in her and sometimes my ass. She has money to back it up if her tenents are late or bail though. Financially I know it's the right move. I've watched the market drop over the past two years, and I'm not in it for a quick buck. If I do it, it will require a whole new mindset for me which could be a great change but... The 'I don't wanna grow up' song is playing loud in my head. I need a crystal ball.

3lwap0

Doc - I assume you're buying the house you're renting? Some hidden costs to be aware of, are closing costs, Sewer, Garbage, Home Owners Association fee's, and city/municipal/state taxes. Don't forget home owners insurance too. That stuff doesn't factor into your mortage payment, and can tack on a good bit extra to what you pay per month.

It can add up real fast mate.

EggyToast

Yeah, I find that the savings you get via mortgage interest tax deductions are simply enough to counteract the property taxes and random city fees that are "hidden." Property taxes are not included in mortgage calculations, and can change from year to year (and usually increase from seller to buyer, as the city has a new datapoint for calculating taxes).

I find that the 1/3 ratio works very well due to those hidden fees. If you peg your mortgage right at 1/3rd, you will likely be spending closer to half than you'd probably like, unless the property taxes in your area are particularly depressed.

Preacher

Doc you still living in washington? If so I can provide some insight into the local real estate scene as I work for a company the services most of western washington. My advice if you are still living here right now is hold off if you can on buying as prices have reached their max recently and starting to recede.

You can PM if you want for more insight into forms and other legal mumbo.

Fibretip

i read the title as "buying a horse" and thought "gosh, what an original H/A title, never seen that before"...needless to say, the thread didn't deliver

I recently waded into a rental agreement spending all my available money. Whilst i realise that buying is different...i just want to echo the statments about insurance... i didn't realise how much it was going to hit me for, and im' now struggling thanks to it...

make sure you get quotes before hand from a couple of insurers, espeically if you're looking at letting to someone else as well.