Can I afford to take out a mortgage?
December 18, 2013 1:12 PM Subscribe
I make about $46,000 in Seattle, WA. Monthly take-home pay, excluding overtime which automatically goes into a savings account, is $2,800. I have no debts and no significant non-optional recurring expenses. At some point in the next few months, I will have about $150,000 in cash after splitting the equity in a home that is being sold. Assuming that I can put that amount toward a down payment, can I afford a mortgage? Before I contact my lender, is it even wise for me to take one out? I've been looking at a few suitable homes in North Seattle priced at or below $275,000.
If it's relevant, I've been at my new job for three months. My salary will increase to about $76,000 over the course of the next three and a half years, with scheduled raises every six months, and I have decent job security, and medical and pension benefits. However, I want to stick to a budget based on my current earnings so that I can afford to take longer unpaid time off.
I may end up with significantly more than $150,000 since the equity money is entirely separate from my divorce settlement, but I plan to invest any additional funds for retirement as I'm almost 30.
My credit score is ~730. I could probably raise it if I got a credit card, but that would take a long time. Apartment living is not a great option due to my side work (income from that is sporadic and not included in the above budget) and hobbies and the fact that my dog looks like a breed that is not allowed in most managed apartments.
If it's relevant, I've been at my new job for three months. My salary will increase to about $76,000 over the course of the next three and a half years, with scheduled raises every six months, and I have decent job security, and medical and pension benefits. However, I want to stick to a budget based on my current earnings so that I can afford to take longer unpaid time off.
I may end up with significantly more than $150,000 since the equity money is entirely separate from my divorce settlement, but I plan to invest any additional funds for retirement as I'm almost 30.
My credit score is ~730. I could probably raise it if I got a credit card, but that would take a long time. Apartment living is not a great option due to my side work (income from that is sporadic and not included in the above budget) and hobbies and the fact that my dog looks like a breed that is not allowed in most managed apartments.
Here's the thing, if your take home is $2,800, your optimal mortgage payment would be 25% of that, or $700.
Mortgage payments include property taxes, and your homeowner's insurance. That being said, you can afford a mortgage of about $75,000, if we're following that model.
So you should be looking at houses in the $225,000 range and I'm not sure those exist in your area.
Also, you're going to want to keep some cash back for projects and things that might break. So deduct that amount from the total amount for the house.
Some people use a higher percentage, but my experience has been that cheaper is better.
The tax rate in King county is pretty high, so do take that into consideration.
For now there are tax credits for Mortgage Interest and Property Taxes, so that could put some extra $$ in your pockets.
Find a trustworthy mortgage broker and discuss your options. Find out everything you can about homeownership. Here's a HUD website where you can find some Homeownership classes.
posted by Ruthless Bunny at 1:32 PM on December 18, 2013
Mortgage payments include property taxes, and your homeowner's insurance. That being said, you can afford a mortgage of about $75,000, if we're following that model.
So you should be looking at houses in the $225,000 range and I'm not sure those exist in your area.
Also, you're going to want to keep some cash back for projects and things that might break. So deduct that amount from the total amount for the house.
Some people use a higher percentage, but my experience has been that cheaper is better.
The tax rate in King county is pretty high, so do take that into consideration.
For now there are tax credits for Mortgage Interest and Property Taxes, so that could put some extra $$ in your pockets.
Find a trustworthy mortgage broker and discuss your options. Find out everything you can about homeownership. Here's a HUD website where you can find some Homeownership classes.
posted by Ruthless Bunny at 1:32 PM on December 18, 2013
What kind of a home would you be looking at? Could you get a two bedroom home and have a roommate? That might be a good way to eke a few more dollars out. Homeownership classes are a good idea, not least because they might help you qualify for better mortgage rates/special programs.
posted by mskyle at 1:39 PM on December 18, 2013
posted by mskyle at 1:39 PM on December 18, 2013
Hi, I'm in Seattle as well. Seattle is really expensive!
If you have $150k in cash to put down, then you really want to look at a $225k to $250k home for your income. That's pretty low, but it's not impossible. You may even be able to get a $275k home, depending on interest rates, property taxes, the condition of the home (and how hand you are), and how much you spend on transportation.
The rule of thumb is 25% of take home on housing, or 35% of take home for combined housing and transportation. So if overtime is consistent AND you have low transportation costs, you might be able to stretch it. For comparison, we spend 20% on housing, and it feels comfortable, and would not want to spend more.
Alternatively, consider getting a roommate. I had a roommate in my first house, and it made things considerably easier/better. Arguably, I have a "roommate" in my current house, since my partner moved in with me and we merged finances. We also bought our current house with a MIL unit that we rent out, to make housing expenses affordable.
But being a landlord is not for everyone. If it *is* for you, though, you'll have more options.
Also, 730 is a pretty high credit score, especially combined with >40% down payment. (You can get 40% down no-income-verification mortgages still, today, aimed mostly at foreign investors.) I wouldn't worry about that unless a mortgage lender tells you it's not enough.
Feel free to PM me if you want more details!
posted by ethidda at 1:42 PM on December 18, 2013 [2 favorites]
If you have $150k in cash to put down, then you really want to look at a $225k to $250k home for your income. That's pretty low, but it's not impossible. You may even be able to get a $275k home, depending on interest rates, property taxes, the condition of the home (and how hand you are), and how much you spend on transportation.
The rule of thumb is 25% of take home on housing, or 35% of take home for combined housing and transportation. So if overtime is consistent AND you have low transportation costs, you might be able to stretch it. For comparison, we spend 20% on housing, and it feels comfortable, and would not want to spend more.
Alternatively, consider getting a roommate. I had a roommate in my first house, and it made things considerably easier/better. Arguably, I have a "roommate" in my current house, since my partner moved in with me and we merged finances. We also bought our current house with a MIL unit that we rent out, to make housing expenses affordable.
But being a landlord is not for everyone. If it *is* for you, though, you'll have more options.
Also, 730 is a pretty high credit score, especially combined with >40% down payment. (You can get 40% down no-income-verification mortgages still, today, aimed mostly at foreign investors.) I wouldn't worry about that unless a mortgage lender tells you it's not enough.
Feel free to PM me if you want more details!
posted by ethidda at 1:42 PM on December 18, 2013 [2 favorites]
On $2,800/month with no other debts, a purchase price of $275,000, and $150,000 to put down?
Yes, absolutely. Especially if you have tens or hundreds of thousands of dollars invested in other places that you could use as reserves in an emergency.
I asked a similar question a couple years ago on here, everyone told me I couldn't afford it, I bought the house anyway, and surprise: I've had no trouble affording it, and now I make more than I did when I bought the house.
posted by tylerkaraszewski at 1:51 PM on December 18, 2013 [3 favorites]
Yes, absolutely. Especially if you have tens or hundreds of thousands of dollars invested in other places that you could use as reserves in an emergency.
I asked a similar question a couple years ago on here, everyone told me I couldn't afford it, I bought the house anyway, and surprise: I've had no trouble affording it, and now I make more than I did when I bought the house.
posted by tylerkaraszewski at 1:51 PM on December 18, 2013 [3 favorites]
Here's the thing, if your take home is $2,800, your optimal mortgage payment would be 25% of that, or $700.
I know this is the rule of thumb (although I also have seen 20%, 33%, and 35% used), but I disagree with it for several reasons:
1) The optimal mortgage payment is $0.
2) The amount you can afford for your mortgage is dependent on your other expenses, not your salary. If you make $10,000/month, should you really limit yourself to a $2,500 mortgage payment? To what end? What do you need an extra $7,500 for after your housing costs are paid every month? Granted, this is not the OP, but I don't think the rule of thumb is generally applicable enough to be useful. If your other expenses are low, which the OP's seem to be (no car loans, credit card, or student loan debt, etc) you can afford a bigger mortgage. The general rules tend to assume you have these other things to pay.
posted by tylerkaraszewski at 1:58 PM on December 18, 2013 [7 favorites]
I know this is the rule of thumb (although I also have seen 20%, 33%, and 35% used), but I disagree with it for several reasons:
1) The optimal mortgage payment is $0.
2) The amount you can afford for your mortgage is dependent on your other expenses, not your salary. If you make $10,000/month, should you really limit yourself to a $2,500 mortgage payment? To what end? What do you need an extra $7,500 for after your housing costs are paid every month? Granted, this is not the OP, but I don't think the rule of thumb is generally applicable enough to be useful. If your other expenses are low, which the OP's seem to be (no car loans, credit card, or student loan debt, etc) you can afford a bigger mortgage. The general rules tend to assume you have these other things to pay.
posted by tylerkaraszewski at 1:58 PM on December 18, 2013 [7 favorites]
Complete agree with @tylerkaraszewski. I think you'd be fine at $275K if most/all of the money down. You're not likely to even rent an apartment for 25% of your $2,800 take home, so it's silly to use that number as a metric for a mortgage.
posted by cnc at 2:09 PM on December 18, 2013 [1 favorite]
posted by cnc at 2:09 PM on December 18, 2013 [1 favorite]
I don't think this is unrealistic, and i just wanted to encourage you actually. Last year i moved out of a rental house which the owner then sold... for about 300k
It was incredibly nice, in a nice area(right near greenlake, on the downhill side of greenwood facing the lake), had a yard that was so nice it had been in a magazine, detached garage, fancy deck, two bedrooms and an "office", full basement that could easily be finished, finished attic, etc. There were a few minor things wrong with it but nothing showstopping.
I had no idea cheap stuff like that was still around. It was just... pretty small, so i guess a lot of people passed it over. It was nice/cute/homey though and had tons of nice details and had obviously been meticulously kept.
Also, seconding that the rule of thumb thing is moronic. My butthead landlord would not have rented you my $1000/month apartment because she expects people to make 3k a month to live in a 1k apartment. There are no apartments for less than 1k in seattle anymore that aren't studios. Everyone is paying more than "a third" of their income into rent, so why is that such an awful thing to do with a mortgage?
I would love if someone could make a compelling argument as to what would be wrong with paying say, 1500 a month into the mortgage after all the fees/insurance and such. Because anyone i know whose making around 3k a month is paying close to or that in rent anyways.
posted by emptythought at 3:12 PM on December 18, 2013 [1 favorite]
It was incredibly nice, in a nice area(right near greenlake, on the downhill side of greenwood facing the lake), had a yard that was so nice it had been in a magazine, detached garage, fancy deck, two bedrooms and an "office", full basement that could easily be finished, finished attic, etc. There were a few minor things wrong with it but nothing showstopping.
I had no idea cheap stuff like that was still around. It was just... pretty small, so i guess a lot of people passed it over. It was nice/cute/homey though and had tons of nice details and had obviously been meticulously kept.
Also, seconding that the rule of thumb thing is moronic. My butthead landlord would not have rented you my $1000/month apartment because she expects people to make 3k a month to live in a 1k apartment. There are no apartments for less than 1k in seattle anymore that aren't studios. Everyone is paying more than "a third" of their income into rent, so why is that such an awful thing to do with a mortgage?
I would love if someone could make a compelling argument as to what would be wrong with paying say, 1500 a month into the mortgage after all the fees/insurance and such. Because anyone i know whose making around 3k a month is paying close to or that in rent anyways.
posted by emptythought at 3:12 PM on December 18, 2013 [1 favorite]
Everyone is paying more than "a third" of their income into rent, so why is that such an awful thing to do with a mortgage?
Because if things go to hell in a rental your landlord is the one with the problem. With a mortgage you need a much bigger available budget for repair/maintenance/catastrophe.
Not saying OP shouldn't buy a house, just -- it's a big difference. Bills can snowball quickly if a lot of major things need replacing in a short period of time. I suppose that's the case for a lot of exigencies, but with a house it is guaranteed that one will need to replace the furnace, re-shingle the roof, and so on.
posted by kmennie at 3:56 PM on December 18, 2013 [3 favorites]
Because if things go to hell in a rental your landlord is the one with the problem. With a mortgage you need a much bigger available budget for repair/maintenance/catastrophe.
Not saying OP shouldn't buy a house, just -- it's a big difference. Bills can snowball quickly if a lot of major things need replacing in a short period of time. I suppose that's the case for a lot of exigencies, but with a house it is guaranteed that one will need to replace the furnace, re-shingle the roof, and so on.
posted by kmennie at 3:56 PM on December 18, 2013 [3 favorites]
One more perspective to consider:
Assume you buy the house, putting 20% down, and having a monthly payment of $1,200. Also assume you *really could* only afford to pay 25% of your take home pay. You're now burning through an extra $500/month and sitting on $95k in reserve cash. You have over *15 years* in this situation before you run through your reserves. During that time, you'd need to increase your income by $500/month (which is only $6000/year after taxes, or about 1/3 of your expected increase over the next three years), or sell the house and move into something cheaper. Even if you do have to sell the house and move into something cheaper, you get your money back out of the house, that extra $500/month wasn't lost, it was basically invested until the sale goes through.
It seems like a no brainer that you can afford it to me.
posted by tylerkaraszewski at 3:59 PM on December 18, 2013 [1 favorite]
Assume you buy the house, putting 20% down, and having a monthly payment of $1,200. Also assume you *really could* only afford to pay 25% of your take home pay. You're now burning through an extra $500/month and sitting on $95k in reserve cash. You have over *15 years* in this situation before you run through your reserves. During that time, you'd need to increase your income by $500/month (which is only $6000/year after taxes, or about 1/3 of your expected increase over the next three years), or sell the house and move into something cheaper. Even if you do have to sell the house and move into something cheaper, you get your money back out of the house, that extra $500/month wasn't lost, it was basically invested until the sale goes through.
It seems like a no brainer that you can afford it to me.
posted by tylerkaraszewski at 3:59 PM on December 18, 2013 [1 favorite]
I looked at getting a $150,000 mortgage when I was making about what you were and had a similar lack of debts and could have easily have afforded it. I ended up not doing so because I wasn't sure I wanted to be tied to the area long enough to make it worth giving up a really nice lease I had.
A $150,000 mortgage might run you around $760/month (just for the mortgage itself) at the moment, which doesn't sound bad to me on your take home, especially if you end up with some tax advantages that boost that a little. How bad are taxes?
posted by Candleman at 4:25 PM on December 18, 2013
A $150,000 mortgage might run you around $760/month (just for the mortgage itself) at the moment, which doesn't sound bad to me on your take home, especially if you end up with some tax advantages that boost that a little. How bad are taxes?
posted by Candleman at 4:25 PM on December 18, 2013
Seems to me that given your situation, a $275K house would certainly be within your reach. Obviously the more money you put down the lower your payments. But also the less money you put down the more money you have in the bank to keep you covered if you need the cash. Basically, with $150K avail plus what ever else comes your way...doesn't seem like you'd be doing anything outrageous here. Also...as for the folks stating what your monthly percentage of your income should be devoted to for housing payments...take it with a grain of salt. Yes you wanna have a cushion, no you don't wanna be house poor, but I know plenty of people who spend 40-45% of their income on housing. Especially if they live in a really expensive area. I'm not encouraging it but if you're other expenses are low and you have minimal other debt...I think you'll be ok. In the end, always best to buy well within your means and play it safe. But overall seems to me you're in decent shape.
posted by ljs30 at 5:44 PM on December 18, 2013
posted by ljs30 at 5:44 PM on December 18, 2013
Just wanted to chime in that houses have monthly expenses that you may not anticipate if you've always been a renter.
Semi-Annual HVAC Tune Ups
Quarterly Pest Control
Tree Pruning/Removal
Gutter Cleaning
Random maintenance (deck cleaning, power washing, driveway patching, garage door fixing, weather stripping, etc.)
We had lawn mowing and landscaping, but some folks enjoy puttering around in the yard, so that's an individual thing.
If you have a significant portion of your take home pay going to house payments, these little expenses can really ding up your budget.
Not meant to scare you off of the idea, but more of a heads up.
posted by Ruthless Bunny at 5:59 AM on December 19, 2013 [2 favorites]
Semi-Annual HVAC Tune Ups
Quarterly Pest Control
Tree Pruning/Removal
Gutter Cleaning
Random maintenance (deck cleaning, power washing, driveway patching, garage door fixing, weather stripping, etc.)
We had lawn mowing and landscaping, but some folks enjoy puttering around in the yard, so that's an individual thing.
If you have a significant portion of your take home pay going to house payments, these little expenses can really ding up your budget.
Not meant to scare you off of the idea, but more of a heads up.
posted by Ruthless Bunny at 5:59 AM on December 19, 2013 [2 favorites]
> Random maintenance
You're going to want to put a big chunk aside for that. Most houses (not condos) in North Seattle in your price range are going to be older and you can expect some big repairs in the near future, outdated appliances, older roofs, leaky windows...
You have a few areas that are going to raise eyebrows at the bank. You haven't been in your job long, you're getting divorced, you don't have a credit card. If I were in your shoes I would apply for a mortgage pre-approval letter from my bank and see how that goes; do that now before putting any more time into househunting.
posted by The corpse in the library at 9:06 AM on December 19, 2013
You're going to want to put a big chunk aside for that. Most houses (not condos) in North Seattle in your price range are going to be older and you can expect some big repairs in the near future, outdated appliances, older roofs, leaky windows...
You have a few areas that are going to raise eyebrows at the bank. You haven't been in your job long, you're getting divorced, you don't have a credit card. If I were in your shoes I would apply for a mortgage pre-approval letter from my bank and see how that goes; do that now before putting any more time into househunting.
posted by The corpse in the library at 9:06 AM on December 19, 2013
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posted by Lutoslawski at 1:20 PM on December 18, 2013