another house question

[nnkrealtor]

I know that the standard for buying a house is no more than 2.5 times your annual pay. Is that the mortgage or the total house value should be no more than that 2.5?

What I am getting at is My wife and I have a household income of around 80k-150k (we both work commission jobs so it varies) but I always base my yearly budget on the lower side. I want to put 230k down on a house that is about 440k leaving a mortgage of 210 that dosn't seem too bad does it? No kids and I want to still be able to max out our 2 SEPs and a Roth IRA.

[brewer12345]

As long as you can meet your other financial goals, sounds OK to me.

[tryan]

The banks will qualify you using only the mortgage (no taxes, insurance ...). With property taxes going to the moon is many places, I would include taxes in the figures (just for a piece of mind).

[nnkrealtor]

Property taxes on this house are 1100 per year and HO insurance is approx 1000 also so I would add 175/month to the payment.

[FIRE'd@51]

Using the "old" conservative lending rule of 28% of your annual income to service the mortgage, property taxes, and insurance, with a 20% down payment on a 500K house (I'm using this house value to make the numbers easy), you would get for your annual payments:

30-yr fixed-rate 400K mortgage at 6% => $28,800
property taxes at 1% of market value => 5,000
homeowners insurance (estimate) => 1,000

total annual expense => $34,800

required annual income = 34.8 / 0.28 = 124.3K

(home value) / (annual income) = 4

(mortgage) / (annual income) = 3.2

You can adjust the numbers for your specific situation, but the ratios should be about the same. I think the 2.5 and 2 ratios came from a time when mortgage rates were higher.

[runchman]

Quote:

Originally Posted by FIRE'd@51 I think the 2.5 and 2 ratios came from a time when mortgage rates were higher.

... and before the days of the "I can't really afford this but I want it anyway" loan products like ARMs, interest-only loans, etc...

[chinaco]

You should be fine.

One suggestion: You seem to be a little concerned. If you think it will be a stretch at times of low income... Consider the affect on your finances if one spouse losses their job or becomes disabled. Develop a contingency plan. Hopefully you will never need it.

[saluki9]

That rule also applied before it took $500K to buy even a small home in many urban areas. I wouldn't sweat it. If you feel comfortable with the payments and you have some visibility on your income then go ahead.

[nnkrealtor]

as far as the income flucuations, on the months we make over whats needed I put the extra in an interest bearing checking account and draw from that on the months where income is below whats needed, never neclecting our retirement accounts as I pay them just like any other bill.

Thanks for the help