What house can I afford?

Question

Hi,
I am a complete newbie.   So  here is my situation. 
I am about to graduate and I have accepted an offer  with a starting salary of $72000 with a note that the salary will increase to $80k in 1-2 years if I pass the PE exam. In addition I have $23k debt from my undergrad and grad school which I  think I will pay off  in less then a year I believe.   
My plan is to work for a year or two to save up for a downpayement and the buy  a SFH and rent one of the rooms while living myself in the other.   How expensive house do you guys think I can afford  with my salary if I come up with  60-80k for down payement? Please let me know if I have not provided enougth info. Thanks.

Vasia Pupkin · Answer

Hi,
 I am back after 2 years:-) . 
My salary is about 100k. My student loans are gone.  I bought a car and I owe 20k on it. My monthly pmt is about 700 for 2.5 years.  I have saved about 25k in cash and about 7k in stocks, but I am allowed to withdraw 3.5k for down payment purposes.

I currently live in a very bad part of Koreatown. It is so bad that I am embarrassed to bring my friends over. The only good thing about is cheap rent 700.

I know that I don't have a normal downpmt for a 400k house in LA. And from my understanding the FHA rapes the borrower with extra fees. Should I buy a house despite that? Or should I continue saving and living in a bad neighborhood? I am very afraid of the RE market.

Mike C · Answer

Vasia,
            
            While I like the enthusiasm and the fact you are starting out much better off than many, I personally think you are being overly optimistic about how much you can save over 1-2 years. 72k after taxes, especially in California, is not a ton of money that would make it almost impossible to save 30k a year, especially as a young guy of 22 or 23. If you are willing to live very frugally you may be able to save 15k but that is not going to be easy. My brother lives in the bay area and taxes take 50% of income or so. 
            
            We are also not mentioning the fact that the 260k Jon says you can afford doesnâ€™t go very far in Cali. Can you even buy something that cheap there, even after the property value readjustments of the last few years?

I also hope the student loans are government loans and not private loans. If they are private, you need to make sure to pay them off as soon as possible. They have a poor reputation of servicing their loans. 
            
            Good luck with your plan. Was not trying to rain on your parade so I hope you can meet your goals. 
            
            Mike C

Vasia Pupkin · Answer

i got my score from experian. it is not the same  with FICO? I got $23k debt because I was not working full time during school. I just had summer internships for 6k a month.

Corey Demuth · Answer

how on earth can you have 60-80k saved up for a down payment if you needed to take out student loans for school? are you being honest with yourself?

*edit* also your credit score from which bureau? how did you get it? If you didn't pull it from myfico or through a broker, you didn't get a real score. lots of companies offer credit scores (orchard bank, bank of america, creditkarma, there are tons of them) but they are all BS because they don't use the real fair isaac formulas. banks generally pick your middle score of the 3 when deciding your interest rate, whether you qualify, etc

Jon Holdman · Answer

The classical rule of thumb is that your PITI payment should be under 28% off your monthly gross income.  Assuming $80K as an annual salary, that gives you a max payment of $1867 a month.  Not sure what taxes and insurance would be, so  I'll subtract $300 for those, for a max P&I payment of $1567.  At 6% for 30 years, that translates into a loan of $261,306.  With an actual down payment of $65,326 (20%, with some of your money for the other closing costs and pre-paid expenses), that puts you at a price of $326,634.

That's a very conservative number.  It assumes your other debt payments are no more than 10% of your gross monthly income, which sounds like that's the case.

Don't fall for the NAR promoted myths of "starter house" or "buy the most house you can afford".  It costs you about 2% of the price to buy a house and 8-10% to sell.  So, just like a stock broker who keeps convincing you to buy and sell stocks to generate more commissions, a real estate industry that promotes buying a starter home and moving up every few years is really advocating a strategy that keeps its agents in commissions rather than a strategy that's good for homeowners. The dangers of exotic loans should be apparent.

Buy a decent, but affordable place you're willing to live in for a while.  With a 20% down payment, and buying in two years, you should be OK even if prices decline a bit more.  Meaning, if you have to sell because of family issues or a job change, you don't have to bring money to the table.  Nevertheless, a big chunk of that down payment could get eaten up by the selling costs.  I really don't think we'll see 10% appreciation anytime soon.

Vasia Pupkin · Answer

Checked my credit couple days ago it was 761.
Besides $23k school loans I don't have any other debt.

James Hiddle · Answer

It depends on your DTI(dept to income)ratio and how good your credit is.