If You Make "x", Then You Can Afford "y"

[Tommy_Dolitte]

I have a friend that will be finishing grad school this year, student loan debt payments of about $250/mon---no other debt (so she says).  :

She is looking to purchase a home in the $250 - $300 K range.       I say she can't afford it, she claims that she knows people that make less that have been approved?

Her gross salary pre-bonus she says is $80K/yr (bonus + 15% max).  At this level, I say the most she can afford is a home worth about $160 K, since she says she doesn't have anything to pay down.

Am I being too conservative for her or helpful?

As a rule of thumb, for every $100 K (ex PMI, taxes), isn't this approx. equivalent to $650/mon in mortgage payments?

Hope you voted!!!

 

[soupcxan]

If you limit housing to 30% of gross salary, she has $2k per month for mortgage plus homeowners insurance, maintenance, upkeep, and property taxes. So she might be able to pull off a $250k house depending on the interest rate she gets and the taxes/insurance in the area. But it's certainly not an ER-compatible plan. And the fact that she has no money down means she'll be wasting money on PMI until she gets enough equity built up. Does she have any emergency savings at all? If she lost her job, how would she make the mortgage payments?

All these people that are overextending themselves to rush and buy real estate frighten me. Renting for a few years is not nearly as bad as some make it out to be.

 

[Tommy_Dolitte]

She has no emergency savings as well. She's a status chaser though....

 

[cute fuzzy bunny]

Key question:

Do you "like" her in "that" way?

 

[Tommy_Dolitte]

Marriage material....if she didn't have such a consumeristic mind....

 

[yelnad]

My husband works in the mortgage industry. Assuming decent credit, she can get approved without a problem.

 

[Jarhead*]

I have a friend that will be finishing grad school this year, student loan debt payments of about $250/mon---no other debt (so she says).  :

She is looking to purchase a home in the $250 - $300 K range.       I say she can't afford it, she claims that she knows people that make less that have been approved?

Her gross salary pre-bonus she says is $80K/yr (bonus + 15% max).  At this level, I say the most she can afford is a home worth about $160 K, since she says she doesn't have anything to pay down.

Am I being too conservative for her or helpful?

As a rule of thumb, for every $100 K (ex PMI, taxes), isn't this approx. equivalent to $650/mon in mortgage payments?

Hope you voted!!!

Tommy: My daughter, about 5 mos ago purchased a home in Sacramento for $248,000.00 financed 100%.
Her income is just shy of $50,000.00. (Of course that's Calif., and there aren't any $160,000.00 homes out here. (Maybe a building lot?).
Just a starter home, about 1200 sq feet, so she wasn't being elaborate.
Does that work on paper? Hell no.
Your friend making $80,000 plus bonus would be a ratio dream out here for a $250,000 home
Regards, Jarhead

 

[IDunno]

She is looking to purchase a home in the $250 - $300 K range.       I say she can't afford it, she claims that she knows people that make less that have been approved?

If she really wants to know, she could get pre-approved.

But the question I would ask her is "Would you mind if in a few years your home was taken away from you?" If she doesn't mind, she should go for it. If she does mind (as I would!), she should look for a more affordable house.

The problem is that lenders have become less and less strict, as the housing prices have gone up. Remember, 100% of all people who had houses that were foreclosed were approved for a mortgage. As someone else pointed out, without an emergency fund, if she loses her job, she could lose her house. Or if she has to get an ARM or an interest-only or balloon mortgage, when it comes time to refinance, interest rates could be much higher, forcing her to sell the home.
-Scott

 

[KB]

Just remind her: Every person that lost their home due to not being able to pay the mortgage, was qualified for their loan. Also, being house rich and cash poor is not fun!!

 

[cute fuzzy bunny]

Ok, now that we know theres a potential love interest...because that makes all the difference!

Banks will give a mortgage of almost any conceivably reasonable size to anyone with a pulse right now, pulse optional. That means for someone earning what she makes, 250k is not going to be a problem. With zero down, she's going to have to pay mortgage insurance though.

I never could figure out the logic in mortgage insurance. "We're not sure you're going to be able to make the mortgage payments, so we're going to ask you to pay extra." :

That reminds me of one of my trips driving across the country. At a truck stop I ordered a burger and fries. The waitress delivered my order with a huge pile of fries. "They're a little cold, so I gave you extra.". My head still hurts when I think about that, but I think its derived from the same logic pool.

Anywho, I would suspect that "leaning on her" about the house might reduce your future potential for that love interest. You might leave her a copy of "the millionaire next door". Besides making the subtle point with data, she'll become so incredibly bored by the book that by halfway though, you'll become twice as interesting

Then the next couple of questions are: "How do you feel about the house as a potential future asset and liability", or if you're still interested but less serious than marriage, "How do you feel about spending a few nights or weekends in that really nice house vs some cheap dump".

And no, I'm hardly serious about any of this. Just in a persistently mischievous mood.

 

[ESRBob]

Picking up on TH's mishievous mood.... Is she counting on your income to help her bail out the mortgage payment if things turn south? (How far along is this relationship, anyway?) A house that size for two young working professionals seems pretty conservative. Is this a way of getting you off the dime to start shopping for a rock to go along with the house?

Also, she may have other assets you don't know about -- access to Dad or Mom's checkbook can solve lots of cashflow crunches.

Anyway, people right out of grad school don't tend to be the ones laid off, and tend to be pretty employable.

ESRBob

 

[azanon]

I think you're right on the mark Tommy.  My wife and i collectively will bring in 92,500 this year, and we just purchased a home for $150K, and paid 20% down.  With a 30-year mortgage, one car payment of 458/month, one child, and other expenses, we're just meeting all our financial goals, including 12% retirement savings (+5% match, pension, SS, ), 10% long-term savings, and 10% short term savings (i follow the 60% rule mostly at msn.com).

Any more than that, and I think that'd be putting too much into the house for that income. Being ER minded myself, i disagree with the convential wisdom of no more than 28% of gross/36% if you have no debt, that you see on some websites. I think more like 15% of gross income for mortgage or less is more like it .

 

[windedhare]

I imagine she's worked hard and is looking to enjoy her earning power. I understand that, I am guilty of indulging in alot of whims my first few years of employment. It comes down to you can probably have what you want if you work hard enough, but you still probably can't have it all at once.

In addition to the other points raised about being so highly leveraged:

1.) Doesn't leave much room for discretionary spending... shes going to want to furnish and decorate the place too!
2.) Doesn't leave much left for ER contributions
3.) She locks herself into "having" to make at least her current income in order to keep the house. Should she decide to go for a job/career change later on the road, she may no longer be able to keep the house. Especially if this is her first house, I think it would be difficult to accept. You become accustomed to a "certain standard" and a step down is harder decision to accept. (can't miss what you dont know)

I bought my house for 240K, when I was 25 and single and making 125K. I wasn't dating at the time. If I had known that future DH's salary was in the 90K range, I'd gone for 160-180K range. I would prefer that all expenses can be covered by the smaller of the two incomes. Can't plan for love though, it just happens!

Good luck to the both of you!

 

[soupcxan]

Are you talking USD or CDN? If USD, what career path offers $125k at age 25 (except i-banking)?

I bought my house for 240K, when I was 25 and single and making 125K.  I wasn't dating at the time.

 

[windedhare]

USD/IT consulting. Unfortunately, that career path is laden with minefields-- I have several friends who were casualties of the dot.com bust are they are still trying to recover their careers and finances.