Author Topic: How much we can "comfortably afford" for a mortgage payment  (Read 22548 times)

NumberCruncher

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How much we can "comfortably afford" for a mortgage payment
« on: January 13, 2013, 07:53:13 PM »
Apparently Bank of America says we can comfortably afford a monthly payment of around $4,500 for a mortgage...we're currently paying about $1000 a month on a rental. We're really not looking to quintuple our housing expenses...

At an open house we went to, we were told we should be looking at places around 4-5 times our annual salary. It just kills me that the conversation is never "how much do you need?" and always "what can you afford?"

kkbmustang

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Re: How much we can "comfortably afford" for a mortgage payment
« Reply #1 on: January 13, 2013, 08:10:45 PM »
We have always aimed at two times our annual salary, as opposed to three or four times. However, we're aiming even lower now. Gonna sell our house and get a cheap rental and stash some serious cash. (Other reasons as well for moving to a rental for now.)

Jamesqf

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Re: How much we can "comfortably afford" for a mortgage payment
« Reply #2 on: January 13, 2013, 08:13:39 PM »
It just kills me that the conversation is never "how much do you need?" and always "what can you afford?"

Or even "What do you actually WANT?"

sol

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Re: How much we can "comfortably afford" for a mortgage payment
« Reply #3 on: January 13, 2013, 09:10:49 PM »
Depends on what your goals are, I suppose.  When I bought my first house, I thought that spending 25% of my after tax income on a mortgage was a pretty safe bet because my income would rise over time and decrease the percentage.

lhamo

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Re: How much we can "comfortably afford" for a mortgage payment
« Reply #4 on: January 13, 2013, 09:47:30 PM »
Figure out what you need, first, which will likely be much less than you can "afford" by any mainstream measure.  Note that the mainstream measures are pretty much insane if you have a mustachian perspective on things.  Why would anyone looking to retire early want to sign up for 30 years of mortgage payments that equal 30% or more of two full-time salaries.  Might as well stamp "indenture servant" on your forehead and sign your future away to the bank....

Based on our experience buying in both the US and CHina, if you are trying to buy below what is "typical" (= pretty much crazy, most of the time) for your income level DO NOT I REPEAT DO NOT let the agent you are working with know what your salary is.  They often will not show you properties that are within youre preferred price range if they know you can pay more.  They will tell you nothing is available (even when there are properties -- online listing services are your friend here) or push you VERY VERY HARD to look at more expensive properties.  Will those properties be nicer than the less expensive ones?  Probably.  But you will not be making an informed choice if you only look at the more expensive ones.  You may end up bumping up what you are willing to pay a bit.  But you can only do this if you are talking about the difference between a 100k property and a 120k property.  If they know you make 250k a year, they will lie cheat and steal to get you to believe that there are no properties available in the lower price range.  We actually stopped looking in one entire neighborhood in Manhattan during our apartment search in 2000 because I was stupid enough to tell the agent our annual combined income.  He had been showing us plenty of decent places in the 100k-120k range.  Once he learned we earned that in a year and had plenty saved up for a down payment, suddenly the only apartments he could manage to find were 150-200k.  We switched to Queens, kept mum about how much we earned, and snagged a great place for 118k.  It needed work, but we managed to do most of it -- left updating the knob and tube wiring and major kitchen/bath remodels to the people who bought it from us for 280k 3 years later...  See, that's another good reason to buy a fixer upper low on the food chain -- you actually get some equity out of your sweat!  Granted, we bought/sold in a very hot market, but we wouldn't have made those kind of profits on a unit that had already been remodeled. 

How did we decide what we could afford?  Worst case scenario, we wanted to be able to afford the payment on one salary.  You never know what might happen.  Same with our current mortgage.  Technically we could afford a much higher payment, but we're not comfortable with it. 


Self-employed-swami

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Re: How much we can "comfortably afford" for a mortgage payment
« Reply #5 on: January 13, 2013, 10:11:24 PM »
When we got a mortgage, I wanted to make sure that we could make the payments (and the utilities/taxes/food) if we were working minimum-wage jobs. 

Our minimum mortgage payment is $87/week (but I put down like $200,000 too).

Good luck on your search!

Nords

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Re: How much we can "comfortably afford" for a mortgage payment
« Reply #6 on: January 13, 2013, 10:11:49 PM »
Remember the "good ol' days" when only one income counted (usually the male of the family), and the mortgage was limited to 26% of debt as long as total debt was less than 38%?

That math may still work LBYM wonders, but I suspect that prices have been bid up by two-income families trying to score a good school neighborhood.

gooki

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Re: How much we can "comfortably afford" for a mortgage payment
« Reply #7 on: January 14, 2013, 01:19:12 AM »
Our first (and current home) was 5x our combined before tax annual income. And this was for a modest home. The crazy thing was the bank was willing to lend upto 8x.

happy

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Re: How much we can "comfortably afford" for a mortgage payment
« Reply #8 on: January 14, 2013, 01:45:36 AM »
I would consider the opportunity cost of the mortgage: e.g. how much will it eat into tax sheltered retirement contributions and other stashing? What are you prepared to to trade: What FIRE goals do you have and again, how much time tradeoff would you make for the mortgage - this might hlep determine how big you wish it to be?

Personally, as a rule of thumb I like to make sure the mortgage ( or the mortgage interest ) and council rates are no higher than what I would pay in rent. There are maintenance costs still to consider, but I like to feel I'm not paying too much more than rent for the privilege of owning my own place.

dragoncar

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Re: How much we can "comfortably afford" for a mortgage payment
« Reply #9 on: January 14, 2013, 06:02:21 AM »
Affordability is really a matter of how the payments will fit into your budget.  You probably know your net income, non-housing expenses, and savings goal.  What is left over?

You can also look at the total cost instead of the monthly payments.  This works better for someone with significant savings (opportunity cost as mentioned above).

As an aside, do most people on this forum seek FI, or are some simply trying to get a handle on personal finance?

Norman Johnson

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Re: How much we can "comfortably afford" for a mortgage payment
« Reply #10 on: January 14, 2013, 06:32:50 AM »
Our first (and current home) was 5x our combined before tax annual income. And this was for a modest home. The crazy thing was the bank was willing to lend upto 8x.

Is this normal where you live? The banks here wouldn't lend you more than 2.5x your income, maybe up to 3x now.

tooqk4u22

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Re: How much we can "comfortably afford" for a mortgage payment
« Reply #11 on: January 14, 2013, 07:51:20 AM »
The amount of mortgage you can afford is basedo on income and the guidelines are your PITI should not exceed 28% of gross income and your total debt payments would not exceed 34%.

Historically, these guidelines translated into a house that was 2-3x your income but now with interest rates so low it is more like 5-6x. 

I think 28% is too high because it is based on gross income and there are other costs to homeownership beyond PITI, but like SOL said if you income is expected to rise faster than typical then it may be ok. 

The other reason why I don't think it is ok is because people, especially young people, do not typically stay in their house for 30 years for any number of reasons (job change, family change, etc) and if you need to change the rising interest rates that are coming will play a part.  Obviously if you stay in your house with fixed payments it doesn't matter and 5-6x your income is fine as long as you keep your job or otherwise can afford the payments.

Khao

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Re: How much we can "comfortably afford" for a mortgage payment
« Reply #12 on: January 14, 2013, 07:59:21 AM »
From all the online calculator tools I checked, the banks would have lend us easily ~4.5x to ~5x our annual salary before taxes for a mortgage.

We bought a really small condo that's only about 2.5x our annual salary before taxes and we don't feel stressed at all about making payments for this! It's really the best choice to start with the smallest thing you can afford without sacrifying too much of your lifestyle.

tmac

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Re: How much we can "comfortably afford" for a mortgage payment
« Reply #13 on: January 14, 2013, 08:31:30 AM »
It's really the best choice to start with the smallest thing you can afford without sacrifying too much of your lifestyle.

We are often mocked for our weird, old house, but the purchase price was less than one year's income, and we're about to refinance it to get the payments down to $350 a month.

We plan to move in a year and a half, and that very low mortgage will allow us to move without worrying about selling it first. We can wait for the right offer, or rent it at a sustainable rate.

twinge

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Re: How much we can "comfortably afford" for a mortgage payment
« Reply #14 on: January 14, 2013, 08:32:33 AM »
The "rules of thumb" don't go very far for me.  If you analyze your mortgage without reference to what you would otherwise spend in housing, the costs of commuting from the location, your sense of security in your income, your net worth, your expectations for relocation, your view on the local housing market etc. you're not making a wise decision. 

Rules like 2.5 x salary, 26% of income  tells you what bankers feel they can comfortably lend.  They determine that based on patterns of default rates, current laws/regulations, and their own expectations about how long they are going to hold your lien and what market price they can get for it.  Little to do with you really.

It's up to you to analyze your situation to know what you can comfortably afford.  Given that buying a house is one of the biggest financial decisions people make, I think rules of thumb do more damage than good--both in limiting what people will consider (e.g., if you live in a location where housing prices mean you can't find something as little as 2.5x your income yet it would be a good deal to buy a house compared to the cost of renting) and buying too much (e.g., the house is less than 2.5x income but they haven't figured in job insecurity adequately).

noob515

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Re: How much we can "comfortably afford" for a mortgage payment
« Reply #15 on: January 14, 2013, 11:52:49 AM »
I did what Sol and Happy did - my mortgage is 25% of my net household income, and the monthly payment (taxes and insurance included) is the same as what I was paying in rent.  All the extra money we earn from future raises/promotions will only make me feel that much safer in regards to my ability to pay my mortgage and other bills.

I actually have no idea what the bank approved us for.  I went to a mortgage broker who asked me "how much do you feel comfortable spending a month?".  I told him my desired maximum monthly payment, and what maximum purchase price I thought that translated to, based on a few online calculators.  He said my estimate was about $10k too high, but that we had no problems qualifying for what we wanted to spend.

I'm glad we stuck with a monthly payment that we felt safe with, because 5 months after we purchased the house, my husband had to take a significantly lower paying job due to downsizing. 

tmac

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Re: How much we can "comfortably afford" for a mortgage payment
« Reply #16 on: January 14, 2013, 11:59:46 AM »
The confused look on the banker's face was priceless when we applied for our mortgage 10 years ago. She kept asking us to confirm the amounts because she couldn't figure out why someone who made what we made would want to buy the house we were buying. The cost of our house is .75x our annual income, and the payment is 10% of our annual income. We're in the middle of a refi that will lower the payment to 5%. And our income isn't all that high. :D

Self-employed-swami

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Re: How much we can "comfortably afford" for a mortgage payment
« Reply #17 on: January 14, 2013, 12:00:45 PM »
Our first (and current home) was 5x our combined before tax annual income. And this was for a modest home. The crazy thing was the bank was willing to lend upto 8x.

Is this normal where you live? The banks here wouldn't lend you more than 2.5x your income, maybe up to 3x now.

This is going to shock you, but the bank we have our mortgage with, was willing to lend us 10x our take-home pay, with a $200,000 downpayment.  This means that they would have given us a $400,000 mortgage, so we could buy a $600,000 McMansion, when I was making $43,000/year before tax (and my husband was a student with no income).

I'm in Canada, and there is no bloody way that I want a $400,000 mortgage!  My MIL has one of those, and it costs her so much money and stress!

Our average housing prices in this city are all over the place.  We bought a house for $374,000 and it is more than enough for us to live in, until we have more than 2 kiddos (not that we want more, but my MIL will likely wind up with us at some point down the road too).

kolorado

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Re: How much we can "comfortably afford" for a mortgage payment
« Reply #18 on: January 14, 2013, 12:03:11 PM »
Swami, that is crazy! Just when you think maybe the banks learned their lesson....
What the banks say is comfortable and what I personally feel is comfortable are separated by a sizable spread of percents. Personally, anything over 25% of one income would keep me up at nights.
The super low interest rates really have changed the "rules". Hubby made less than $40K in 2011 but the banks wanted to lend us $200K to buy our home a few months ago. We do have flawless credit and no other debt though. So on top of our $$$ in liquid savings and similar amount in investment accounts and qualifying for a no down payment required VA loan, we could have "afforded" a fancy-pants place. Of course we didn't do that. As is we bought way higher than I wanted to on our "good ole days" single income(5X) but only after months of exhaustive eliminations. But since the interest rate is so low plus the three pay raises  hubby has had since the yearly salary benchmark the banks used, our payments are just under 20% of current gross pay.
Here in the big city we looked at nearly a thousand homes online and over 30 in person once we eliminated poor neighborhoods/locations. It was quite a challenge finding something on the small side out here that had more than a postage stamp size yard. We opted for those two options in combination over being closer to the workplace. Having lived 12 years with my growing family in an 800 square foot rancher(at 15% gross pay) I knew exactly what my family needed and we were prepared to accept less based on what we felt we could comfortably afford. Our new place is a 1492 square foot tri-level with unfinished basement and 3 car garage. It's about 300 square feet more than I think we really need but the best we could do with what we saw in our range.

tooqk4u22

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Re: How much we can "comfortably afford" for a mortgage payment
« Reply #19 on: January 14, 2013, 12:04:04 PM »
I did what Sol and Happy did - my mortgage is 25% of my net household income,

I missed that part of Sol's comment  - 25% of after-tax/net pay.  That probably equals 15-20% of gross pay - so that is really good and probably in line with the more historical house price that is 3x salary.

When DW and I bought our first house we based it on just one of our salaries at the time and it was about 30% of gross - then a couple of years later had kids and DW stayed home and it wasn't a big change, well and my income rose also.


Woolie

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Re: How much we can "comfortably afford" for a mortgage payment
« Reply #20 on: January 14, 2013, 12:04:23 PM »
We are often mocked for our weird, old house, but the purchase price was less than one year's income, and we're about to refinance it to get the payments down to $350 a month.

I can relate to that. I bought a smaller 1950s cottage type house when I was getting divorced. People thought I should go for larger or fancier or newer or in a different/more expensive part of the city.

It is technically about 1.5x my salary or 1x my total income in a good year with bonuses. I can comfortably afford it without the bonuses factored in, and more so with the recent refi I did. I wanted something that was easy to afford as a single parent and wouldn't be a stretch if I had a bad year and received no bonus income. This is more of a reality now since someone on my team is quitting and I will likely have to merge onto another team, which will impact my bonus in a bad way for at least the first year or two. But at least I know I don't have to sweat being able to afford my home.

It amazed and saddened me that when I went to pre-apply for a mortgage loan, even though we were not divorced yet so that loan showed up in my credit report ($220K), they were still willing to sell me up to $375K of house. All I could do was shake my head.

tooqk4u22

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Re: How much we can "comfortably afford" for a mortgage payment
« Reply #21 on: January 14, 2013, 12:12:06 PM »
We are often mocked for our weird, old house, but the purchase price was less than one year's income, and we're about to refinance it to get the payments down to $350 a month.

I can relate to that. I bought a smaller 1950s cottage type house when I was getting divorced. People thought I should go for larger or fancier or newer or in a different/more expensive part of the city.

I can comfortably afford it without the bonuses factored in, and more so with the recent refi I did. 

We moved into our current house about a year and a half ago and still get questions from people if we are doing ok - all because we downsized our house, and by no means is our current house overly small

And I still can't believe that bonuses are included in income for determination of a mortgage.

SwordGuy

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Re: How much we can "comfortably afford" for a mortgage payment
« Reply #22 on: January 14, 2013, 03:04:25 PM »
Our first, starter house, was very inexpensive and was 1.8x my single salary.  (Wife was in school, I was in a growing field with lots of experience, but with my first big corporation job.)

Our second house was moderately priced and 1.3x my single salary. 

Our third house was less expensive than our second and only .74x our two salaries.   We paid it off in 9 years, free and clear. :)

We have lots of fun money and lots more saved up than most. (Though not by MMM devotee standards!)  Couldn't have done that with a huge mortgage!

NumberCruncher

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Re: How much we can "comfortably afford" for a mortgage payment
« Reply #23 on: January 14, 2013, 07:13:39 PM »
The confused look on the banker's face was priceless when we applied for our mortgage 10 years ago. She kept asking us to confirm the amounts because she couldn't figure out why someone who made what we made would want to buy the house we were buying. The cost of our house is .75x our annual income, and the payment is 10% of our annual income. We're in the middle of a refi that will lower the payment to 5%. And our income isn't all that high. :D

love it! We're looking at a place about .65x our annual income - mortgage (15 year) + taxes + condo fee is similar to some rentals we've looked at (that were not as convenient location-wise).
« Last Edit: January 14, 2013, 07:17:24 PM by NumberCruncher »

Self-employed-swami

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Re: How much we can "comfortably afford" for a mortgage payment
« Reply #24 on: January 14, 2013, 08:26:27 PM »

The confused look on the banker's face was priceless when we applied for our mortgage 10 years ago. She kept asking us to confirm the amounts because she couldn't figure out why someone who made what we made would want to buy the house we were buying. The cost of our house is .75x our annual income, and the payment is 10% of our annual income. We're in the middle of a refi that will lower the payment to 5%. And our income isn't all that high. :D

That sounds like the phone conversation I had with someone at the mortgage company, when they goofed up the first weekly mortgage payment, and tried to take 3 months worth at once.  She kept telling me that I had insufficient funds for my payment (I did, I don't keep that much in my chequing account).  She just couldn't wrap her head around someone having a small enough mortgage to have payments at under $100/week.  I finally asked her to look at the amortization (30 years) and the mortgage amount (I think it was like $87,000), and tell me how she thought I should be making payments of $1500/week...

The manager got it straightened around, and when I renewed it last year, I got a super special rate as an A1 rated customer, because they actually had the head of the mortgage department take the 'missed payment' flag off the account.

gooki

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Re: How much we can "comfortably afford" for a mortgage payment
« Reply #25 on: January 15, 2013, 01:33:04 AM »
Our first (and current home) was 5x our combined before tax annual income. And this was for a modest home. The crazy thing was the bank was willing to lend upto 8x.

Is this normal where you live? The banks here wouldn't lend you more than 2.5x your income, maybe up to 3x now.

This was in 2005, banks were lending money like nobodies business, interest rates were high 7.5%. That and we were bringing a large deposit to the table, (20%, when the industry norm was 5%).

So glad we paid that mortgage off in 5.5 years.

NumberJohnny5

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Re: How much we can "comfortably afford" for a mortgage payment
« Reply #26 on: January 15, 2013, 03:33:20 AM »
DO NOT I REPEAT DO NOT let the agent you are working with know what your salary is.  They often will not show you properties that are within youre preferred price range if they know you can pay more.

True.  I give as little information as possible.  Let them know I'm interested in a certain property (but not TOO interested...let them know I'm casting a VERY wide net).  When the time comes, give them the earnest money and a letter from the bank confirming that there are funds available for the (lowball) offer.  Each offer that's higher requires a new letter from the bank.  It'd be easier to just get one letter stating the funds in the account...but I want them to think that this guy's crazy, this just may be every last penny he has (when I make my "real" offer, I don't like it to be too round of a number...i.e. make it end in 500 or 750 instead of the nearest thousand).  Just because I can afford a wee bit more, doesn't mean I want to just throw it away.

jp

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Re: How much we can "comfortably afford" for a mortgage payment
« Reply #27 on: January 15, 2013, 07:57:54 AM »
DO NOT I REPEAT DO NOT let the agent you are working with know what your salary is.  They often will not show you properties that are within youre preferred price range if they know you can pay more.

True.  I give as little information as possible.  Let them know I'm interested in a certain property (but not TOO interested...let them know I'm casting a VERY wide net).  When the time comes, give them the earnest money and a letter from the bank confirming that there are funds available for the (lowball) offer.  Each offer that's higher requires a new letter from the bank.  It'd be easier to just get one letter stating the funds in the account...but I want them to think that this guy's crazy, this just may be every last penny he has (when I make my "real" offer, I don't like it to be too round of a number...i.e. make it end in 500 or 750 instead of the nearest thousand).  Just because I can afford a wee bit more, doesn't mean I want to just throw it away.

Man, wouldn't it be easier to just be more assertive with your agent?  I just tell them, "yeah, I have it- but this is what I am going to pay."  I don't understand why people are so afraid to actually tell the truth to salesmen. 

NumberCruncher

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Re: How much we can "comfortably afford" for a mortgage payment
« Reply #28 on: January 15, 2013, 08:28:49 AM »
DO NOT I REPEAT DO NOT let the agent you are working with know what your salary is.  They often will not show you properties that are within youre preferred price range if they know you can pay more.

True.  I give as little information as possible.  Let them know I'm interested in a certain property (but not TOO interested...let them know I'm casting a VERY wide net).  When the time comes, give them the earnest money and a letter from the bank confirming that there are funds available for the (lowball) offer.  Each offer that's higher requires a new letter from the bank.  It'd be easier to just get one letter stating the funds in the account...but I want them to think that this guy's crazy, this just may be every last penny he has (when I make my "real" offer, I don't like it to be too round of a number...i.e. make it end in 500 or 750 instead of the nearest thousand).  Just because I can afford a wee bit more, doesn't mean I want to just throw it away.

Man, wouldn't it be easier to just be more assertive with your agent?  I just tell them, "yeah, I have it- but this is what I am going to pay."  I don't understand why people are so afraid to actually tell the truth to salesmen.

Eh...depends on the person/situation. Sometimes it's just easier/less stressful to appear poorer, and sometimes it's not an issue. We got a really low-pressure realtor who is pretty awesome. She's never inquired about our salaries (though I think she knows we're both in tech fields), and she's never raised an eyebrow about the smaller places we've been mostly looking at. Then again, it might be different if we were about 10 years older with kids - more expectation to have a larger house.

tooqk4u22

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Re: How much we can "comfortably afford" for a mortgage payment
« Reply #29 on: January 15, 2013, 08:35:35 AM »
Man, wouldn't it be easier to just be more assertive with your agent?  I just tell them, "yeah, I have it- but this is what I am going to pay."  I don't understand why people are so afraid to actually tell the truth to salesmen.

Not necessarily as agents get paid more if you buy more and they usually are focused less on the "if you don't buy I don't get paid" aspect.

So even if you tell them directly they will still find ways to show you better properties that cost more, which results in buyers seeing bigger spaces and better finishes for ONLY $_x___ more money and that is ONLY $_x___more in the payment.  Then when the buyers go back to their price range they don't like it and feel bad and then migrate back to the higher priced homes. 

Obviously this wouldn't work on anybody here but it works on the majority of people - it is kind of hedonistic adaptation in a very compressed timeframe.


jp

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Re: How much we can "comfortably afford" for a mortgage payment
« Reply #30 on: January 15, 2013, 08:52:42 AM »
Man, wouldn't it be easier to just be more assertive with your agent?  I just tell them, "yeah, I have it- but this is what I am going to pay."  I don't understand why people are so afraid to actually tell the truth to salesmen.

Not necessarily as agents get paid more if you buy more and they usually are focused less on the "if you don't buy I don't get paid" aspect.

So even if you tell them directly they will still find ways to show you better properties that cost more, which results in buyers seeing bigger spaces and better finishes for ONLY $_x___ more money and that is ONLY $_x___more in the payment.  Then when the buyers go back to their price range they don't like it and feel bad and then migrate back to the higher priced homes. 

Obviously this wouldn't work on anybody here but it works on the majority of people - it is kind of hedonistic adaptation in a very compressed timeframe.

I guess my personality makes it easy for me to be direct.  I would just tell the agent "guy, I told you my price range, I am not looking at things i specifically told you not to show me."  I find that less stressful than trying to be sneaky or indirect.  I just dislike when people can't be upfront with their motives.  So I make it clear what is expected from people working for me.

The other issue that agents do get paid more, but it is not a marked difference.  Say your buyer's agent is splitting a 6% commission... if you buy a $200k house, they will get $6k.  If you you buy a $250k house, it only goes up to $7.5k (and they don't keep all of that, it probably means a few hundred extra dollars for the realtor).  The incentive is not that strong and most of them would rather make a quick sale IME.  It is the same reason why most realtors will pressure you to price your own house lower (a quick sale beats out the extra $500 they might get by waiting months for the $15k difference in price). 

tooqk4u22

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Re: How much we can "comfortably afford" for a mortgage payment
« Reply #31 on: January 15, 2013, 12:48:09 PM »
I guess my personality makes it easy for me to be direct.  I would just tell the agent "guy, I told you my price range, I am not looking at things i specifically told you not to show me."  I find that less stressful than trying to be sneaky or indirect.  I just dislike when people can't be upfront with their motives.  So I make it clear what is expected from people working for me.

The other issue that agents do get paid more, but it is not a marked difference.  Say your buyer's agent is splitting a 6% commission... if you buy a $200k house, they will get $6k.  If you you buy a $250k house, it only goes up to $7.5k (and they don't keep all of that, it probably means a few hundred extra dollars for the realtor).  The incentive is not that strong and most of them would rather make a quick sale IME.  It is the same reason why most realtors will pressure you to price your own house lower (a quick sale beats out the extra $500 they might get by waiting months for the $15k difference in price). 

You nailed it - you and most on this forum are not like most people.

Also keep in mind that an extra $1.5k may not seem like worthwhile difference but when you sell 10, 20, 30 homes it quickly becomes a big difference.  The motivation on the sale side is because they want a sure sale that happens quicker and with as little effort as possible.  Buy side always is longer and requires more effort for the agent.

People say don't sweat the small stuff, but the small stuff adds up.

And remember they are not necessarily showing you stuff out of your price range as much as they are showing houses that quite possibly could be negotiated down to your price range thus providing you an opportunity to get more for your money - see the difference - even if it is not true most will end up wanting the stainless steel or nice counters or refinished bath or bigger yard or whatever is the reason for the higher price. 




NumberJohnny5

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Re: How much we can "comfortably afford" for a mortgage payment
« Reply #32 on: January 15, 2013, 03:57:05 PM »
Man, wouldn't it be easier to just be more assertive with your agent?  I just tell them, "yeah, I have it- but this is what I am going to pay."  I don't understand why people are so afraid to actually tell the truth to salesmen.

If I had a pre-approval letter, I might have to be more "assertive".  And I won't get into details, but I definitely had to be assertive with this particular agent (along the lines of...seller didn't have everything ready in time, original contract expired which she made very clear, then the seller had everything ready a few days later, I made a lower offer, she was pissed...a call to her boss cleared things up and the new lower offer was accepted).  I never said that this was all I had, but if they want to assume that, and if it helps the offer get accepted....

NumberJohnny5

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Re: How much we can "comfortably afford" for a mortgage payment
« Reply #33 on: January 15, 2013, 04:00:28 PM »
And remember they are not necessarily showing you stuff out of your price range as much as they are showing houses that quite possibly could be negotiated down to your price range thus providing you an opportunity to get more for your money - see the difference - even if it is not true most will end up wanting the stainless steel or nice counters or refinished bath or bigger yard or whatever is the reason for the higher price.

A good point.  When we were looking for a house, I included houses that were a bit over our price range.  I figured that either they'd be dropping in price soon, or we could negotiate a lower price (or maybe both!).  I think what people are upset about, is if the agent realizes you're pre-approved for $500k, you're trying to look at $200k houses, and he/she keeps showing you houses for $550-$600k.

dragoncar

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Re: How much we can "comfortably afford" for a mortgage payment
« Reply #34 on: January 15, 2013, 08:39:39 PM »
Beyond showing you more expensive places, there are reasons not to let your agent know your final number.  Unless you trust them beyond question, it's always possible they will leak the knowledge in order to make a deal happen (in which case they get paid).  For example, when delivering your initial offer, the convo could go like this:

Your agent:  We are offering X
Their agent:  That won't work, the sellers won't go less than Y... is there any wiggle room?
Your agent: Between you and me, they will go to X+Z
Their agent: OK, I'll advise counteroffer of X+(Z-Y)/2 ... done deal.

It's not legal, but it happens.

swiper

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Re: How much we can "comfortably afford" for a mortgage payment
« Reply #35 on: January 15, 2013, 09:22:56 PM »
Also keep in mind that an extra $1.5k may not seem like worthwhile difference but when you sell 10, 20, 30 homes it quickly becomes a big difference.  The motivation on the sale side is because they want a sure sale that happens quicker and with as little effort as possible.  Buy side always is longer and requires more effort for the agent.

Or ignore the difference and sell 20, 40 and 60 homes in the same time frame. 
Freakonomics covers this misaligned interest well: http://www.youtube.com/watch?v=17jO_w6f8Ck


Norman Johnson

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Re: How much we can "comfortably afford" for a mortgage payment
« Reply #36 on: January 16, 2013, 06:23:08 AM »
Our first (and current home) was 5x our combined before tax annual income. And this was for a modest home. The crazy thing was the bank was willing to lend upto 8x.

Is this normal where you live? The banks here wouldn't lend you more than 2.5x your income, maybe up to 3x now.

This was in 2005, banks were lending money like nobodies business, interest rates were high 7.5%. That and we were bringing a large deposit to the table, (20%, when the industry norm was 5%).

So glad we paid that mortgage off in 5.5 years.

+1 to that!

tooqk4u22

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Re: How much we can "comfortably afford" for a mortgage payment
« Reply #37 on: January 16, 2013, 10:33:29 AM »
Also keep in mind that an extra $1.5k may not seem like worthwhile difference but when you sell 10, 20, 30 homes it quickly becomes a big difference.  The motivation on the sale side is because they want a sure sale that happens quicker and with as little effort as possible.  Buy side always is longer and requires more effort for the agent.

Or ignore the difference and sell 20, 40 and 60 homes in the same time frame. 
Freakonomics covers this misaligned interest well: http://www.youtube.com/watch?v=17jO_w6f8Ck

Agents are absolutely and completely motivated by their own self interests at the expense of the buyers/sellers.

NumberCruncher

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Re: How much we can "comfortably afford" for a mortgage payment
« Reply #38 on: January 16, 2013, 12:30:46 PM »
Also keep in mind that an extra $1.5k may not seem like worthwhile difference but when you sell 10, 20, 30 homes it quickly becomes a big difference.  The motivation on the sale side is because they want a sure sale that happens quicker and with as little effort as possible.  Buy side always is longer and requires more effort for the agent.

Or ignore the difference and sell 20, 40 and 60 homes in the same time frame. 
Freakonomics covers this misaligned interest well: http://www.youtube.com/watch?v=17jO_w6f8Ck

Agents are absolutely and completely motivated by their own self interests at the expense of the buyers/sellers.

We're going through this site called Redfin http://www.redfin.com/buy-a-home/how-redfin-compares

Granted, we haven't completed the homebuying process yet, but the structure they have seems very appealing. They give you a portion of the buyer's agent commission back, and the realtor gets paid based on your satisfaction. You can also see all the reviews for any given agent.

sisca

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Re: How much we can "comfortably afford" for a mortgage payment
« Reply #39 on: January 16, 2013, 01:21:48 PM »
Regarding how much you can comfortably afford, it really does depend a lot on income. If it is low enough, I would say that 0.5 or even zero is the right answer. Likewise, for people with well above average income, with lots of money down, even 5x or 6x income can be very comfortable. It might not be a mustachian life, but it can certainly be comfortable.

I recently checked with my local bank what my actual max was, as we were contemplating moving. The bank set the limit at 7x, obviously way over what I am comfortable with, but that was were they drew the line.

The old 3x income rule is still a great rule, if your income is average. If it is different, so will the answer to your question be.

strider3700

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Re: How much we can "comfortably afford" for a mortgage payment
« Reply #40 on: January 17, 2013, 11:25:04 AM »
almost 5 years ago, my wife had our first kid and was off on maternity leave.  I lost my job and we decided I'd stay at home and she would go back to work after maternity was over.  we were looking for a bigger place.  The bank pre approved us for $580,000  with just her income which was about $70k at that point.  They did specify they'd want us to put the majority of what we got from selling the current house against the new one at that amount.   it turns out that house netted me $125k in profit.    So the bank would happily let us buy a $705,000 house with 17% down and a mortgage of 8 times the before tax income.

Completely insane.   Hell even the one that we did buy which was 3 times before tax income has a annoying weekly payment. I can't imagine if we had pushed to the limit.

Jack

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Re: How much we can "comfortably afford" for a mortgage payment
« Reply #41 on: January 17, 2013, 01:15:58 PM »
We bought a home that was about 2x our combined annual income.  Because we rolled our equity from our prior house into the purchase, our mortgage is about 1x our annual income. 

Our thinking was that if one of the two of us lost their job, we wanted to be able to cover the payment still.  So that was our test for deciding how much to spend.

Based on similar reasoning, my wife and I bought a house right after I graduated college for about 3x her income alone and using down-payment assistance provided by our city (which we qualified for because I didn't have a job). Now that I'm gainfully employed, our mortgage is about 1x our annual income.

Had we not planned it that way (i.e., if we hadn't had the expectation of the huge jump in income), I would not have felt comfortable with a 3x-salary-mortgage in the long term.

kkbmustang

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Re: How much we can "comfortably afford" for a mortgage payment
« Reply #42 on: January 18, 2013, 06:06:35 PM »
I can't wait until we sell our current house (should list for around $500k) and go move into an apartment. On purpose. Should raise a lot of eyebrows in our circle. But I don't give two shits.

ketchup

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Re: How much we can "comfortably afford" for a mortgage payment
« Reply #43 on: January 18, 2013, 11:10:03 PM »
A former coworker of mine and her husband recently moved to Iowa.  She had no job lined up yet, and he had just graduated medical school with hundreds of thousands in debt.  For some reason they were pre-approved for a $480,000 mortgage.  Luckily, they are not idiots (he's of the "I have eight grand to spend on a car, so I'll spend four." mindset), so they bought a reasonable house and are doing quite well for themselves.

Self-employed-swami

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Re: How much we can "comfortably afford" for a mortgage payment
« Reply #44 on: January 19, 2013, 08:23:32 AM »
A former coworker of mine and her husband recently moved to Iowa.  She had no job lined up yet, and he had just graduated medical school with hundreds of thousands in debt.  For some reason they were pre-approved for a $480,000 mortgage.  Luckily, they are not idiots (he's of the "I have eight grand to spend on a car, so I'll spend four." mindset), so they bought a reasonable house and are doing quite well for themselves.

I don't know how it works there, but the banks cater to specific university program graduates and students here.  The loans people from a few banks will have info sessions with refreshments provided (think pizza and a few beers in the afternoon, on campus) for specific faculties, such as law and medicine.  I also know that putting my program of studies (geology) onto a credit card application, got me a 3x higher limit, than my friend in fine arts got.

I don't think it is anything new, to assume that people with specific vocations, are going to be making more money on average, and thusly, can be lent more.