True Affordability

K

knm131_IHB

New member
(Sorry if this is the wrong forum). But I thought a rough guide on how much house you can buy, depending on your income and avail down payment would be an interesting topic esp for OC real estate.
 
Basically, you can service whatever 28% of your monthly income will cover for principal, interest, taxes, mello-roos, insurance and association payments.

Which without mello-roos and HOA is a loan of about $350,000.

HOA or Mello-roos drop that a bit, $300 in HOA or mello-roos/month drops to about $300,000.

With $50,000 you're on the cusp for putting 10% down and having enough for closing costs so your second will run a little more.

So I'd guesstimate, low $300s, like $325,000.
 
So, if anyone can correct my math ... I'd appreciate it.

If I were to buy a $349,000 home, and put down $50,000 down (the one I'm looking at has $75/mo HOA and it's in Lake Forest). 3 bdrm/2 ba SFR and about 1,300 sq ft.

That means I'd have to borrow $299,000 and I'll assume a rate of 6.75% over 30 years fixed. Using a calculator I found on BankRate, I'm looking at a monthly mortgage payment of $1940. Plus $75 for HOA makes it $2015 per month.

Add 1% for property tax is $3,490 annually is $291 per month for a grand total of $2,306 per month not including maintenance.

That's still a ton of money, with someone whose annual is $110k I'd say their take home is around $4,700 per month. That's a pretty high DTI no?

I guess I could factor in the mortgage interest deduction, but I'd like to make my mortgage payment in spite of it, and not because of it.
 
first, you should look up what the actual tax rate is. even if the nominal rate is 1%, there are usually many additions for various district bonding. usually it is more like 1.3%

second, you need to figure in money for insurance, 0.25% to 0.5%, depending...

and yes, $2600 for housing, before maintainance, is a big % of your $4700 take home.
 
Well this sucks. I mean, I rent in Irvine and I really like this area. I can walk to a basketball court and shoot around, the convenience is nice, and it's super close to work for me.

If I have to be married to buy a place, I should use my money to get a nice car to help make that process faster =)
 
In there lies the problem.

If you look at this post it seems to me only the top 12% can "truly afford" to live in Irvine. That is the 150k+ range.

http://www.irvinehousingblog.com/blog/comments/irvine-income-data/

Looking at this post I still think we are in the 5-6 range or very unaffordable maybe even in the wtf range.

I think housing prices will slide until they become affordable for the average joe without all the exotic mortgates. Average Joe being the family at the Median could at least live withing the city.
 
But even in that post, the affordability range was 2.5 to 4.

If you make $100k, that range suggests you can afford a $400,000 house. Even if you somehow, amazingly, had EIGHTY-THOUSAND dollars cash to put down as your 20% down payment, you're looking at about $2,100 per month for a mortgage. Add $330/month for taxes and say $100/month for HOA and you're looking still at $2,600 out of pocket.

That's a LOT for money for someone whose take home is around $4,600/month.

I don't even see how that affordability range can work. Does it assume people have $0 in credit card debt, no car payment, no other bills, etc?
 
knm131 said:
So, if anyone can correct my math ... I'd appreciate it.

If I were to buy a $349,000 home, and put down $50,000 down (the one I'm looking at has $75/mo HOA and it's in Lake Forest). 3 bdrm/2 ba SFR and about 1,300 sq ft.

That means I'd have to borrow $299,000 and I'll assume a rate of 6.75% over 30 years fixed. Using a calculator I found on BankRate, I'm looking at a monthly mortgage payment of $1940. Plus $75 for HOA makes it $2015 per month.

Add 1% for property tax is $3,490 annually is $291 per month for a grand total of $2,306 per month not including maintenance.

That's still a ton of money, with someone whose annual is $110k I'd say their take home is around $4,700 per month. That's a pretty high DTI no?

I guess I could factor in the mortgage interest deduction, but I'd like to make my mortgage payment in spite of it, and not because of it.
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DTI is usually calculated by using gross income, not net. Therefore, your "take home" amount is not the relevant amount for DTI purposes. Whether that reflects true affordability is a separate question.

If you gross $110,000 and you are only netting $56,400 ($4,700 x 12), something is seriously wrong. Your combined federal and state tax burden should not exceed 35% of your unadjusted gross income. By my rough and dirty calculations, your net should be at least $5,800 monthly, unless of course you are discounting for retirement and insurance deductions.
 
knm131 said:
If I have to be married to buy a place, I should use my money to get a nice car to help make that process faster =)
Click to expand...
IMO if you're looking for marriage as the key to affording a house, you really should marry someone who totally digs you picking him or her up in your 1996 Corolla.
 
knm131 said:
Well this sucks. I mean, I rent in Irvine and I really like this area. I can walk to a basketball court and shoot around, the convenience is nice, and it's super close to work for me.

If I have to be married to buy a place, I should use my money to get a nice car to help make that process faster =)
Click to expand...

Or a hot dress and hang at Javiers in NC?
 
[
knm131 said:
I don't even see how that affordability range can work. Does it assume people have $0 in credit card debt, no car payment, no other bills, etc?
Click to expand...

That would be the back-end DTI.

Loan affordability is based on Front-end DTI and back-end DTI.

Front-end is what I said earlier, all the housing expenses / gross income.

Back-end is easy, all debt service payments/gross income. All debt includes the proposed mortgage. Typically 40% or under, conforming is under 36%. In tight times or old times, 36% wasn't uncommon. In the bubble they ran this to 55% or 60%. IMHO, insanity. This is were you get pinched.

In your hypothetical example, let's say the mortgage and taxes are $2400/month. That comes in a comfortable 26%. After taxes, you'll get a bit of a break. However, if have a $500 car payment and run a consistent $500 on your credit card, your backend will be 37%. Lob on a student loan or something else for a consistent $200/month and you nudging 39.2% in a hurry.

Back-end DTI is where people get themselves in trouble. If your revolving debt is paid off every month, you can game it a bit, but you only hurt yourself ending up house heavy and cash poor.
 
No_Such_Reality said:
[
knm131 said:
I don't even see how that affordability range can work. Does it assume people have $0 in credit card debt, no car payment, no other bills, etc?
Click to expand...

That would be the back-end DTI.

Loan affordability is based on Front-end DTI and back-end DTI.

Front-end is what I said earlier, all the housing expenses / gross income.

Back-end is easy, all debt service payments/gross income. All debt includes the proposed mortgage. Typically 40% or under, conforming is under 36%. In tight times or old times, 36% wasn't uncommon. In the bubble they ran this to 55% or 60%. IMHO, insanity. This is were you get pinched.

In your hypothetical example, let's say the mortgage and taxes are $2400/month. That comes in a comfortable 26%. After taxes, you'll get a bit of a break. However, if have a $500 car payment and run a consistent $500 on your credit card, your backend will be 37%. Lob on a student loan or something else for a consistent $200/month and you nudging 39.2% in a hurry.

Back-end DTI is where people get themselves in trouble. If your revolving debt is paid off every month, you can game it a bit, but you only hurt yourself ending up house heavy and cash poor.
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Hey this really helps (and makes me feel a lot better!). So it does look like on my current income, I could affordably buy something in the 300-350 range ... along with the 50k downpayment.

Also, would you guys recommend pulling out the 10k from 401k for first time home buyers?

My thing has always been that I do not want to be a slave to my home. My home will just be a place to relax, sleep, and enjoy company and nothing more. I do NOT want to be house heavy and cash poor.
 
don't use your 401k or IRAs to fund part of your down. you could borrow against your 401k if your employer allows it but the penalty-free 10k freebie is anything but. it's penalty-free, but not TAX-free. i know several people who forgot that part, used the $10k on a down and assumed no other tax implications, then got slapped with a notice they owed the IRS $3k + interest.

on the other hand, getting to grow your retirement funds tax-free probably is probably the nicest thing the IRS is going to do for you. take advantage of it.

the first-time homebuyer exemption makes sense maybe in detroit where houses cost $1 but around here where down payments are going to be significant, if the $10k is going to make or break the deal you probably shouldn't be buying a home.
 
knm131 said:
Hey this really helps (and makes me feel a lot better!). So it does look like on my current income, I could affordably buy something in the 300-350 range ... along with the 50k downpayment.

Also, would you guys recommend pulling out the 10k from 401k for first time home buyers?

My thing has always been that I do not want to be a slave to my home. My home will just be a place to relax, sleep, and enjoy company and nothing more. I do NOT want to be house heavy and cash poor.
Click to expand...

I wouldn't recommend raiding the 401K for the down.

I also would use my gross as gross - retirement savings. IMHO, the 28/36 was and still is really based on when employees had pensions. You likely have to do your own now and that's money off the top before anything else.

If you don't want to slave to the home, then push that backend to 30% and include recurring 'fun' spending. I know many a single that are use to smoking $1000-$2000 a month on going out, weekend trips, shopping, etc. Or make it 36% and include the food and gas.

It's where the slave to home, or 'being responsible' aka dull comes into play. They buy the home and their FTI (Fun to Income) goes from 25% to 5% of gross, if they are lucky, and often to 0% because they've maxed the DTIs and essentials like food, gas, needed clothing, insurance eats the rest.
 
I think you may be confused. You cannot pull out anything from the 401k (you can borrow it) without penalty or taxes. However, you can do that with an IRA.

to quote awgee (he's a tax guy) from another thread

I think you misunderstood your accountant. You may not take out anything from your 401k prematurely without paying tax and possibly penalties, but in some instances you may borrow from your 401k. The $10k limit is for IRAs.
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heres the thread:

http://www.irvinehousingblog.com/forums/viewthread/2589/P0/

Before you ask, I would search about borrowing from a 401k. I believe most people here would never recommend that. I personally would never touch my 401k, and whether or not I'd take the 10k out of my IRA, I am still 50/50 on it.

Quick question, do you already have the 50k in cash or are you still working towards that? Seeing the process from Ipo's sale it looks like having more than 20% in cash really works to your advantage as a buyer and from your annual income it seems like you should be able to get to 20-25% on a 350k house. Plus you are still waiting for prices to drop it seems, who knows what 350k will buy you in 2010, plus gives you more time to get that downpayment up :)

edit: guess I took too long doing my post....2 of you beat me to it
 
To be honest, if as a single person you can get into a 3/2 starter SFR outside of a ghetto, you should consider yourself lucky. My former roommate bought a condo for $305K in AV in Jan '04 with 3% down on an income of $65K/yr. She didn't have any sort of stated income. The first year she had to adjust her going out and shopping budget significantly and then she decided to get a roommate. Flash forward nearly 5 years later and she has even more savings, more in retirement, more disposable and a newer car. Her income has gone up, mortgage stayed the same and she does have a bit of equity.

You can't have it all... if you want a 3/2 SFR on your income, you have to give some things up, including the comfort of not being tight. In the long run you're better off. Granted, now might not exactly be the best time to make the leap, but you're in a great position. Appreciate what you have and what you can afford. A house is actually within your reach without a second income. That's pretty nice.
 
Don't raid the 401K. That "loan" for 1st time buyers has to be paid back in after tax dollars.

Instead, wait a year.....poof - there's your extra 10K (probably more), lopped right off the price tag of the house. Like magic !

Patience Grasshopper....keep reading IHB.
 
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