$80k in savings, but dropping to a lower income. Will banks give us a mortgage?

[Daffy]

My fiancee and I have about $77,000 saved up. We work part-time and go to school part-time. I also have some side-businesses that generate income online. Combined we bring home at least $2,500/mo.

We're moving to another city this Summer to transfer to a new university in the Fall and finish our Computer Science degrees. By the time we move, we'll have around $80,000+ saved up.

We both have excellent credit, 780+ scores. I'm 27 and she's 25.

Instead of renting like we do now, we're thinking of buying a condo or possibly a house in the new city. Based on what we see, there are some good opportunities between $80,000-$90,000 for a house. If we move in, we'd rent out one or two of the bedrooms at a rate of around $450/mo each, which would effectively cover the mortgage.

After we move, we'll be more focused on school and our monthly income will drop to around $1,300 or so, not including the income from renting our spare rooms. Besides the mortgage (which renters would cover), our monthly expenses would be no more than $2,000/mo total (this includes paying for school). That's using very conservative estimates in our budget. It would likely be less than that.

We'd put down a 20% payment for the house. My question is, do you think banks will be nervous to lend to us because our income will drop so much?

We're going to talk to someone soon about pre-qualifying/approving for a mortgage and see what the banks think of us. Just wanted to ask this great community if they have any advice!

[JohnGalt]

Why not pay cash for the house if it will cost $80-90k and you have that much saved?  It would deplete your savings - but you would then have the rental income w/out mortgage payments. 

[Danielle]

I was going to suggest paying more down (50%+), but at that point, it's not even really worth it to deal with the hassle of payments.  My new advice is to shift to super mustachian mode and have at least $100k saved by the time you are ready to buy.  That way you have some emergency/moving cost money, and you'll have some time to get settled by yourself without having to rely on a tenant for extra income.

[arebelspy]

We'd put down a 20% payment for the house. My question is, do you think banks will be nervous to lend to us because our income will drop so much?

Possibly, but you can put down more.

That is, you can see what size mortgage you qualify for, and then you can use your cash to make up the difference.

Unless your new income is super small, you probably won't have an issue qualifying for a mortgage in the 60-70k range.

You could pay cash, but you'd want to have a cushion saved up above the purchase price.

A mortgage is much smarter math-wise, so if you're comfortable with it, get one.

[AJ]

I think you'll have a difficult time getting a mortgage with only $1300 a month income. You can't count income from roommates in the mortgage qualification. Plus, depending on what jobs you get, you may not have the 2 years job history they will want to see. I think you would be better off paying all cash at this point. That will save you the hassle of dealing with the bank for such a small sum. Additionally, paying cash means you can get a much better deal on a house. Cash buyers can close faster, so they are more appealing to sellers that are in a hurry, or have a house that would have difficulty qualifying for financing.

[Daffy]

Thanks all for the responses.

Why not pay cash for the house if it will cost $80-90k and you have that much saved?  It would deplete your savings

That's not really an option since it would completely deplete our savings, leaving us no money to pay for school and monthly expenses. But if we go with something cheaper like a condo at 50k, that's possible.

My new advice is to shift to super mustachian mode and have at least $100k saved by the time you are ready to buy.  That way you have some emergency/moving cost money, and you'll have some time to get settled by yourself without having to rely on a tenant for extra income.

We'd love to do that but can't because we must move by August, 2012. At that point we'll have $80-$82k saved up. Even if we could save every penny we make, we wouldn't get to $100k by then. But of course we have rent, food, utilities, etc.

If we had another year, we could easily get above $100k saved, but we don't have the time. Our budget is already very lean so there's not much more we can save every month.

That is, you can see what size mortgage you qualify for, and then you can use your cash to make up the difference. Unless your new income is super small, you probably won't have an issue qualifying for a mortgage in the 60-70k range.

Makes sense.

I think you'll have a difficult time getting a mortgage with only $1300 a month income. You can't count income from roommates in the mortgage qualification. Plus, depending on what jobs you get, you may not have the 2 years job history they will want to see. I think you would be better off paying all cash at this point.

I'll still keep the job I have because I can work remotely, so I'll have 4+ years of job history. Yeah, if we go with something cheaper we'll just do all cash.

We're planning on talking to a mortgage broker on Tuesday just to get a feel on how they'd feel about a special case couple like us. Thanks again all for the replies and advice.

[tannybrown]

We've found that for smaller loans, you seem end up with a slightly higher rate.  Borrowing $100k will get you a great rate, but you get penalized at the $75k-99k and again at the $50k-74k level.  Something to build into your analysis.  When we moved, the length of our employment in the new city played a factor, too -- though if you're staying in the same field, they say that helps.

[cosmie]

I recently ad a conversation with my father-in-law, who happens to be a mortgage broker. I was asking him the reverse question, what would be the requirements for a mortgage on a $100,000 house with 5% down (i.e. a $95k loan). He told me that in the current market I would have to show 2+ years of steady employment at a ballpark of $1,600/month in income (or 2 months in a career position utilizing my degree, if I were a recent graduate). As long as his off-the-top-of-his-head figures stand true, you should easily be able to qualify for a $72,000 mortgage (80% of a 90k home) with an income level of $1,300, since you're also keeping the same employment (4+ year history). It's right at the cusp, but with the savings you have and the ability to slap 20% down, you should get approved.

[slugsworth]

You may have already gotten your answer from a lender but one of the primary factors they look at is a ratio between your income and your debt. I'm not in the single family business, but I think the most generous underwritign you will see is .45. Which means that at the extreme they would figure that you would spend between 45% of your income towards PITI (this is a called a back end ratio). So, at most I could imagine them dedicating ~$585/mo toward PITI and any other debt. Insurance is about ~$45/mo, if you figure out what property taxes are per month you can deduct that and then use the PV fuction in excel to get a good idea what you would qualify for.  The other thing that you didn't state is if you have any debt, I assume not with that much cash. . .

Good luck in whatever you choose.