Home Buying in 19063>Question Details

Laurafrompa, Home Buyer in Media, PA

I have the opportunity to purchase a home appraised at 375K for 320K The payments are about $200/month more than we had anticipated and we will be on

Asked by Laurafrompa, Media, PA Wed Apr 28, 2010

a tight budget ($2100 mortgage payments and $4600 gross monthly). Is there a good reason to purchase this home which will have instant equity, or are we setting ourselves up for failure?

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Then this puts your front end debt ratio at 30% which is acceptable. Add to the $2,100 mortgage all of your monthly consumer debt. Consumer debt can be car payments, credit card debt, installment loans, and similar related expenses. What is that total amount now. Divided that number by $7,000 and see what the % is. Long as it's 40% or under you should be ok. Quike frankly what worries me is not so much your question but your comments afterwards. We will be on a tight budget...I would NOT by the house JUST for the mere fact that you can get it for 14.6% less than the appraisal.

Is this the house of your dreams that you can't live without. Who did the appraisal? Do you wnat to live on a TIGHT budget for many years to come? You really need to factor in everything to make a solid decision. Keep us posted...
1 vote Thank Flag Link Thu Apr 29, 2010
I agree with Linda. Don't get creative with financing. you are at a house debt to income ratio 45.6% which is way too high. To determine your maximum mortgage amount, lenders use guidelines called debt-to-income ratios. This is simply the percentage of your monthly gross income (before taxes) that is used to pay your monthly debts. Because there are two calculations, there is a "front" ratio and a "back" ratio and they are generally written in the following format: 33/38. I've also lower and higher one like 29/42....

The front ratio is the percentage of your monthly gross income (before taxes) that is used to pay your housing costs, including principal, interest, taxes, insurance, mortgage insurance (when applicable) and homeowners association fees (when applicable). The back ratio is the same thing, only it also includes your monthly consumer debt. Consumer debt can be car payments, credit card debt, installment loans, and similar related expenses. Auto or life insurance is not considered a debt.

A common guideline for debt-to-income ratios is 33/38. A borrower's housing costs consume thirty-three percent of their monthly income. Add their monthly consumer debt to the housing costs, and it should take no more than thirty-eight percent of their monthly income to meet those obligations.

The guidelines are just guidelines and they are flexible. If you make a small down payment, the guidelines are more rigid. If you have marginal credit, the guidelines are more rigid. If you make a larger down payment or have sterling credit, the guidelines are less rigid. The guidelines also vary according to loan program. FHA guidelines state that a 29/41 qualifying ratio is acceptable. VA guidelines do not have a front ratio at all, but the guideline for the back ratio is 41.

Example: If you make $5000 a month, with 33/38 qualifying ratio guidelines, your maximum monthly housing cost should be around $1650. Including your consumer debt, your monthly housing and credit expenditures should be around $1900 as a maximum.

Using these guidelines you can see that this is more house than you afford and still live comfortably. My dad also said that an opportunity is only an opportunity if you can afford it. And like Linda said below whose to say the house won't appraise at $365,000 next monthly. Remember an appraisal is only an "opinion" of value.

Hope this helps..

Jason Stevens,GRI,ABR
1 vote Thank Flag Link Thu Apr 29, 2010
Unfortunately a decision only you can make--you, need to consider the economic factors of your lifestyle that would impact on your individual comfort level of affordability. A mortgage outside your budgetary constraints can dramatically alter your overall living conditions. So, be sure to factor micro and macro economic concerns into your mortgage amount deliberations.
1 vote Thank Flag Link Wed Apr 28, 2010
The question is what does you budget look like and do you have sufficient reserves for unanticipated events. Assumption is that you qualify for the mortgage. If you do not have sufficient reserves, you are setting yourself up for a very unhappy home where your budget is so tight you can't breathe. At a 3.25% mortgage rate, you are shopping about $50,000 above the price you had originally looked at. If you can afford it and you have genuinely expected increases in income in the future and the house is what you want, you may be OK. The caveat is still..Do you have enough reserves for unanticpated contingencies? A front ratio of 45.7% is incredibly risky and may not be approved by the bank. If you have other monthly obligations: e.g. car payment, student loan, credit cards, child support, daycare, etc. Walk away!
0 votes Thank Flag Link Mon Dec 3, 2012
Laurafrompa,

I do not like to deal in gross income. There are too many variables. I have a client who has a gross weekly income of about $630 per week. After health insurance, uniforms, fed - state - fica tax, 401k, his net is $411..........a difference of 219 per week $949.00 per month.

You as the consumer and the ultimate responsible party for paying this mortgage should take that into consideration regardless of what the bank says you can afford. Be proactive, not reactive.

And re-read the answers below.

It's your call.

Linda
Web Reference: http://www.lindacefalu.com
0 votes Thank Flag Link Thu Apr 29, 2010
I listed the information incorrectly. 4600 was our NET monthly income. Gross monthly income is $7000.
0 votes Thank Flag Link Thu Apr 29, 2010
Mack's right: "you're setting yourself up for failure."
0 votes Thank Flag Link Thu Apr 29, 2010
You're setting yourself up for failure.

Your monthly mortgage payment - 28% of your monthly gross - should not exceed $1288 a month, which services a loan of about $230,000. So you may not even qualify for financing on this property.

But, even if you did, you're being enticed by this $55,000 in "instant equity," which might be an illusion, because the appraisal might be, uh, wrong.

An appraisal is one person's opinion of value, and it's not a guarantee of value.

Even if you decide to strap yourself financially to take on this property, I suggest you scour the market to ensure that you really couldn't "touch a home like this" for under $375,000 - because you may find out that it isn't really worth anywhere near that. (Not many people give away equity, you know.)

All the best,
0 votes Thank Flag Link Thu Apr 29, 2010
Laurafrompa,

Good rule of thumb is absolutely no more than one third of your net (TAKE HOME PAY!) AND NOT A PENNY HIGHER. No one can guarantee that the home will appraise at $375K in a month or even a year from now. If you purchase under these tight conditions, I believe you are definitely setting yourself up for a possible failure. This is the type of thinking that helped get us into this mess in the first place.

And although it doesn't seem feasible today, the old equation used to be one month's rent or mortgage payment should equal one week's gross. I would like to see us return to a more conservative way of thinking in this area. Starting out in a little bit lesser of a home and doing some minor upgrades and enjoying your life while the home builds equity is the correct way to buy a home - always exceptions to that. However, then you may be in a position in 3-5 years to move up to the bigger and better house, living comfortably and having a little money left over to LIVE AND ENJOY LIFE!

Linda
Web Reference: http://www.lindacefalu.com
0 votes Thank Flag Link Thu Apr 29, 2010
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