Author Topic: Help on guideline for mortgage amount  (Read 2537 times)

MountainTown

  • Bristles
  • ***
  • Posts: 256
Help on guideline for mortgage amount
« on: February 01, 2017, 09:31:24 PM »
We have been house hunting for about a year now and I am thinking on moving up our price range. We have both seen some raises and we have been going the traditional DR route and it's not working too well for us in this competitive market. I see a lot of ranges from 25% of take home pay to 36% of gross. Does anyone have any recommendations? Right now we make about $115,000 gross, have no debt, and share a 15 year old Toyota. Wife walks/bikes to work most days and I work from home every other day.

We became fond of a house that is listed at $345,000 and on the side of a mountain. We think we can get it for $330,000 or may have  chance but this puts our PITI payment around $1700 or more. I only pay $825 a month for rent now so this kind of mortgage seems like a big gulp for me. However it's a neighborhood we have really wanted to live in, it's a 4 bedroom newer house, and in good condition. Garage...UG sprinklers...appliances are okay.

Thoughts anyone ? Thanks for your help.

Maybe I should also mention we are both young 30's married couple...this would be our first house. We save a healthy amount but bounce back and forth to building ourdown payment and hitting deferred comp/ TSP/ IRA etc.

Oh I should have mentioned that part. We have now saved about $83,000 in cash so I would say we comfortable have $70,000 to put down on a house.

Thanks for any help, advice. I know there are guidelines on the internet but I guess I am looking to hear from people who have actually bought, have wisdom, and have learned some lessons over time!

Drifterrider

  • Handlebar Stache
  • *****
  • Posts: 1119
Re: Help on guideline for mortgage amount
« Reply #1 on: February 02, 2017, 06:44:13 AM »
The question is:  how much are you comfortable paying each month AND how likely is it that you will not be able to spend that much (single income, loss of income, etc).

People sometimes love to look at big numbers and determine if they can afford it but in reality, unless you pay cash you are a monthly buyer.  You don't pay for the house all at once, you pay each month.

How much money per month are you comfortable spending on a house.  THAT is your starting point.

I make about what you make, have a very secure job and would never, NEVER take on that much debt on a house to live in.  BUT, that is me.  What is important in YOUR life:  more money in the bank or a bigger house payment?

MountainTown

  • Bristles
  • ***
  • Posts: 256
Re: Help on guideline for mortgage amount
« Reply #2 on: February 02, 2017, 08:27:00 AM »
thanks drifter ...good response. I'm not very comfortable with it either. I think it's hard not quite understanding what the costs of home ownership are at this point. I mean after our 825 rent and decent TSP/D. comp savings(not FI extreme) we still end up saving about 2000 a month so I figure we definitely have room in our budget for a good house...but I am definitely more on the conservative route...and yes I always wanted something where if we lost a job we would be fine.

That being said, we both have secure Gov jobs and it is pretty unlikely either of us would lose them. Mine is sensitive at times so it sometimes feels insecure but it's ultimately pretty stable.

Drifterrider

  • Handlebar Stache
  • *****
  • Posts: 1119
Re: Help on guideline for mortgage amount
« Reply #3 on: February 02, 2017, 01:05:54 PM »
I'm not very comfortable with it either. I think it's hard not quite understanding what the costs of home ownership are at this point.

Cost of home ownership.  Everything that breaks, wears out or needs "updating".

Were I you, I'd max my TSP and other savings, live where I live for now and keep an eye out for just the right thing.  Don't rush.  Bigger houses cost more to heat and cool and clean and maintain.

AND, with more floor space you have the temptation to fill it with "stuff".

BTW.  The house you live in is never an "investment".  The house you own and rent to others is an "investment". 

MountainTown

  • Bristles
  • ***
  • Posts: 256
Re: Help on guideline for mortgage amount
« Reply #4 on: February 02, 2017, 05:03:22 PM »
Can I ask what kind of percentage of take home pay or gross pay you would recommend for total mortgage costs(PITI)?

Ha...I guess I should say it just went under contract. :(

cchrissyy

  • Pencil Stache
  • ****
  • Posts: 758
  • Location: SF Bay Area
Re: Help on guideline for mortgage amount
« Reply #5 on: February 02, 2017, 05:17:03 PM »
4 bedroom house for 2 people?

sounds beyond your needs now and quite a while in the future, right?

SwordGuy

  • Walrus Stache
  • *******
  • Posts: 6028
  • Location: Fayetteville, NC
Re: Help on guideline for mortgage amount
« Reply #6 on: February 02, 2017, 07:11:50 PM »
Can I ask what kind of percentage of take home pay or gross pay you would recommend for total mortgage costs(PITI)?

Ha...I guess I should say it just went under contract. :(

I consider a house that's no more than twice your gross income to be very affordable.   Personally, I think 3 times is too much.

If there are just 2 of you, why do you need a 4 bedroom house?   For kids in the future?  Wait until you have kids.  And then wait some more.   When they are really young it doesn't really matter.

While you're socking away all those savings into investments, read up on real estate investing.  Even if you don't want to be a landlord or a flipper, there are some really good techniques for getting a house for a lot less than market rate.   Since you don't have to act anytime soon, it's worth your while to spend time finding a real deal.

A real deal might include:

1) Buying a house for 40% of retail because it needs 10-15% of retail price worth of work, or because it's been foreclosed or is up for a short sale.

2) Buying a house for simple interest instead of compound interest.

3) Buying a duplex and living in one half until its time to get a nicer place for the kids (like when they turn four, before they hit kindergarten age).   Living in the house for free for 3 to 6 years will really accelerate your savings rate.

4) Buying a decent house in a good working class neighborhood.   Frankly, I've found that working class neighbors are often much better neighbors than the well-to-do folks.   More friendly, more dependable if you need help, and they won't inadvertently get you into keeping up with the Jones.

Cwadda

  • Handlebar Stache
  • *****
  • Posts: 2182
  • Age: 25
Re: Help on guideline for mortgage amount
« Reply #7 on: February 02, 2017, 07:49:46 PM »
Wait, so you guys already have the house under contract? If yes, then it sounds like you've already made your decision. If you're already regretting the purchase, you should try and find an out for the contract.

I'll echo what others have been saying in that you really don't need a 4 bedroom house for 2 people, realistically you need half of that.

MountainTown

  • Bristles
  • ***
  • Posts: 256
Re: Help on guideline for mortgage amount
« Reply #8 on: February 02, 2017, 10:20:02 PM »
Sorry what I meant to say is it went under contract with another offer...it was one I was sorta competing with but not willing to play the game and up their ante.

Thanks for the feedback. I admit it's more than we need. It's not really about that--honestly we would be happy with a 3 bedroom. It's just those are rare and they would probably be the same price. In fact in this area only two bedrooms and four bedrooms have come up...why only those I dunno!

Drifterrider

  • Handlebar Stache
  • *****
  • Posts: 1119
Re: Help on guideline for mortgage amount
« Reply #9 on: February 03, 2017, 04:38:52 AM »
Can I ask what kind of percentage of take home pay or gross pay you would recommend for total mortgage costs(PITI)?

Ha...I guess I should say it just went under contract. :(

Those "numbers" tend to get skewed when your income goes above a certain amount.  I pay 12% of my gross.

The total mortgage cost I would recommend is:  How much can you comfortably pay each month without feeling stress?  Pay less.  In some locals you will be forced to pay more if you live there (high cost of housing):  in others you will pay less (more inventory).

Don't buy a house based on percentages.  Buy (or not) based on need, future resale, future rental and probably future family size.  If most houses in your area are 3/2 with garage, buy that.  Although you are looking for a place to live now, always be thinking of the future potential.  Plan ahead, get ahead, stay ahead.

Cwadda

  • Handlebar Stache
  • *****
  • Posts: 2182
  • Age: 25
Re: Help on guideline for mortgage amount
« Reply #10 on: February 03, 2017, 07:15:39 AM »
Sorry what I meant to say is it went under contract with another offer...it was one I was sorta competing with but not willing to play the game and up their ante.

Thanks for the feedback. I admit it's more than we need. It's not really about that--honestly we would be happy with a 3 bedroom. It's just those are rare and they would probably be the same price. In fact in this area only two bedrooms and four bedrooms have come up...why only those I dunno!

I'd question your content with getting a 3 bedroom. Are you having children? If not, you don't need more than a 2 bedroom. Do you have guests frequently? Then no need for more than a 2 bedroom. Does either of you work from home in which an extra bedroom could dual function as an office space?

You don't have to answer these questions, but they are helpful to think about. I don't bring these points up to be critical or condemn you for wanting more space. I just think if you want to accelerate your savings rate and expedite your way towards early retirement you should consider all angles.

RWD

  • Magnum Stache
  • ******
  • Posts: 3689
  • Location: Mississippi
Re: Help on guideline for mortgage amount
« Reply #11 on: February 03, 2017, 07:28:35 AM »
[...] we have been going the traditional DR route [...]
Please don't do this. His advice is generally bad after step 1.

To answer your question, I also think less than 2x gross income is ideal. We purchased a house at 1.5x our gross income and it's nice to know we could continue to make the mortgage payments even if one of us loses our job.

MountainTown

  • Bristles
  • ***
  • Posts: 256
Re: Help on guideline for mortgage amount
« Reply #12 on: February 03, 2017, 10:36:18 PM »
Hmm ya I do work from home most of the time so that is part of the desire for an extra room. I don't have to work from home but ...isn't that what this is all about? Not spending our life on a commute? I  also have a chronic pain condition at a young age of 33...working from home really helps with that because there isn't as much pressure, stress, and activity just to go work in a stuffy office.

Well I appreciate everyone's feedback. Honestly the desire for a 3 bedroom is still there...but I get it! Frankly, I just want a functional living space. I guess I'm not quite like some of the people here who are happy to live in small spaces. I don't need 3000 sq feet but after living in a 2/1 with no garage, no yard for 4-5 years....well  I think the idea of one more bathroom and one more room and maybe  1500 sq feet sounds pretty damn nice lol

sparkytheop

  • Pencil Stache
  • ****
  • Posts: 856
Re: Help on guideline for mortgage amount
« Reply #13 on: February 04, 2017, 05:12:18 AM »
I don't fault you for wanting more space at all.  I'm a space person, and so is my son.  We have a large-ish house but use every room in it.

Since that house is already gone...

You know what the mortgage would be, so I would try to live with that for the next year to try it out (put that money away as untouchable, since it's "your new mortgage" and you can't just not pay part of it every month). 

Now, every time an appliance breaks, put more money aside as if you had to replace it yourself (hopefully nothing breaks, but you can pretend!  Set aside the money every month for at least one appliance failure a year, and hopefully, as a homeowner, your rate won't be anywhere close to that.)

What utilities are included with your rent?  Garbage?  Water/sewer?...  Find out what the average household uses and set that aside as well (then aim to be a less-than-average user once you finally buy your own place).

Electricity will likely cost more in a larger place (however, that's not always the case, since a newer place may have a more efficient heating/cooling system and better insulation).  Double your electric bill and put that money aside. 

Now think about those things that have to be done for maintenance.  Eventual new roof, painting, plumbing repairs, furnace parts, landscaping (cost of a mower, weedeater, gas, etc).  Set aside some money for that every month.

After a year (or a few months if it's a bad experience), you could have a better idea if this is something you want to be tied to as a monthly obligation, or if it is worth it to save a little longer for a larger down payment and better sale price.  Is the chance high that real estate is going to go up too high and you'll get priced out?  Or does it seem to be pretty steady?

I'm single (with one kid) and have about the same income, depending on how much overtime I work.  My mortgage is right at $1k/month.  My only other debt is some property where I will eventually build a house.  Just the mortgage is no problem.  The property payment puts me pretty much where your mortgage will be.  I can say that I still save for my son's college, I still travel (although not as frequent as I want yet), and I still save for retirement, and still save up for all the repairs, etc.  However, if I lost my job, I'd likely have to give up the property.  If those two payments were all one mortgage, rather than a mortgage and separate property, I'd probably lose my home.

You also said your wife walks/bikes to work.  What will her options be if you "move to the other side of the mountain"?  Will you need another car?  Do you have the money already saved for that?

When I bought my first house in '97, I believe the recommendation was that mortgage be no more than 29% of gross income.  I'm much more comfortable with something closer to 10-15% (and that's what my mortgage+insurance+taxes is, it's the property that sets it higher).  I also have a secure job that I don't see going away anytime soon, and raises have been small, but have been received almost yearly.  However, job loss can also happen through injury, etc. 

If you made it through all that...  I think the mortgage is doable, especially if you don't have kids/plan on having kids (so no having to save for college, daycare, etc).  However, if you can "practice" for a year, you'll be much better prepared for the actual costs, and have another year's worth of savings for a down payment, while hopefully figuring out if you'd really be comfortable with the payments.

waltworks

  • Magnum Stache
  • ******
  • Posts: 3398
Re: Help on guideline for mortgage amount
« Reply #14 on: February 04, 2017, 08:10:50 AM »
This question depends on both your goals (ie kids, stay where you are vs move, etc) and your existing housing situation. If you're paying $2k a month to share a cot in the backyard with 4 friends, then buying a very expensive house might be an ok move. If you can rent a nice place similar to what you're thinking of buying for $1k/mo, not so much.

Obviously I'm exaggerating a bit there.

I'm an example of someone who bought "too much" house, but I did it strategically. Everywhere I would want to live (ski resorts) is stupid expensive, so we bought a house that was ~6x our annual income - but that had a 2000 square foot unfinished basement that we converted to an apartment. Boom, mortgage payment takes care of itself.

So you can think about a house a bit more strategically than just "it's 3x my income". If you want a house, and you want to live where you want to live, then you may have to throw those rules (which are generally good ones) out the window a little.

-W

Greenstache

  • 5 O'Clock Shadow
  • *
  • Posts: 31
Re: Help on guideline for mortgage amount
« Reply #15 on: February 04, 2017, 08:35:49 AM »
Conventional rules of thumb regarding the affordability of mortgages are typically designed to encourage you to spend more and have a short term (monthly) focus rather than a long term strategic emphasis.  Remember, real estate broker commissions are set up in a way that makes it in their best interest for you to purchase more house and thus increase their commission.

As far as personal experience goes, our monthly mortgage payments (including escrowed property taxes) are under 4% of our gross income.  Our incomes would allow us to be approved for a McMansion, but we have no need for that, and are perfectly happy in a house that is actually smaller than our prior home.  Our utility payments are also low because our house isn't huge.  (We could pay off the remaining mortgage immediately, but the low mortgage interest rate combined with tax benefits makes it more beneficial to keep investing rapidly, rather than paying off this house.)

What are your priorities?  Have you looked at the impact various home purchases and associated costs will have on your projected cash flows over the next 5, 10 and 15 years (and beyond)?  While you can probably cover a larger house payment, will that use of your income allow you to achieve your other financial goals?

monarda

  • Pencil Stache
  • ****
  • Posts: 572
  • Age: 59
Re: Help on guideline for mortgage amount
« Reply #16 on: February 04, 2017, 09:34:51 AM »
Hmm ya I do work from home most of the time so that is part of the desire for an extra room. I don't have to work from home but ...isn't that what this is all about? Not spending our life on a commute? I  also have a chronic pain condition at a young age of 33...working from home really helps with that because there isn't as much pressure, stress, and activity just to go work in a stuffy office.

Well I appreciate everyone's feedback. Honestly the desire for a 3 bedroom is still there...but I get it! Frankly, I just want a functional living space. I guess I'm not quite like some of the people here who are happy to live in small spaces. I don't need 3000 sq feet but after living in a 2/1 with no garage, no yard for 4-5 years....well  I think the idea of one more bathroom and one more room and maybe  1500 sq feet sounds pretty damn nice lol

3 BR, 1500 sf is a good amount of space for 2 people who have projects that take up space. 

The two of us have been living in a 2BR house for 22 years. We've added on to it twice. It started at <800 sf, and is now 1100 sf. We're thinking of adding on again, because we spent two years in a house that was 1700 sf and realized that the one extra room really felt comfortable. We use our basement for woodworking. Our second bedroom is a computer room that's also the guest room and recording studio. I'd really like to have an extra room or two so that this second bedroom doesn't have to serve all of these purposes.

8 years ago we shopped for houses and learned that what we want in our town costs over $100K more than our current house was worth at the time. It won't cost us $100K to add on again to get to 1500-1600 feet.

If you are shopping while keeping in mind (perhaps) making changes to a house in the longer term- try to visualize what finishing a basement might look like. Try to visualize what adding a dormer on the upstairs might look like - the time to do that is when it needs a new roof. Ask a realtor what they think about the potential for creative changes to existing houses you are looking at.

Like what Waltworks did. But you could start with a smaller, less expensive house and make it grow over time. The important part is location.
« Last Edit: February 04, 2017, 09:37:34 AM by monarda »