How much should be spent for a house... (Worth, Mark: 2014, foreclosure)

[asliarun]

The thumb rule that I follow is that the monthly expenditure on the house should not exceed 30% of the monthly net income. One could probably stretch it to 35% or even 40% I guess if the location reduces other expenses (such as travel, needing to own multiple cars, really good school district, etc.).

I think that using gross or pretax income etc. is meaningless. What really matters is how much money we get in hand every month. Why I also say this is because many people are very aggressive in putting away money towards long term funds such as retirement, college fund etc. But loss of job etc. affects us in the short term, and daily life is all about the money "in hand" so I feel it is not good to over-extend oneself. Spending anything that is close to half one's net income on housing is getting into the dangerous territory.

Just my views. I know many people think differently and they are right in their viewpoints as well. It is all about one's appetite for risk. To me, taking one-shot risks is doable. Like say, investing a bit of money on a risky stock. But setting oneself for a 30 year loan and overextending on that means setting oneself for ongoing month-on-month risk. There is simply too much probability over this long a period of time - that something could go wrong. Job wise, health wise, family situation wise, etc. And it is too much mental tension to live with.

The one exception to this rule would be a situation where either salaries are likely to increase rapidly over time (say someone starting one's career on a lower pay scale and is confident that they would get to higher salary bands over the next few years). Or when one is in a red hot property market. If the property price increases, it has a multiplying effect on the profit one would make when selling the house at a higher price. But it should be viewed the same as the risk one takes when borrowing money to buy a red hot stock. We're basically speculating with borrowed money which could either mean a windfall if we are right, or could ruin us if we are wrong.

[BrianHunter]

Originally Posted by Runuova

Not everyone saves 20% down!

In my opinion if you cant put 20% down you should not be able to get a loan to buy a house. Banks giving out loans with little or no down payment is one of the factors driving the house prices up. When the crash happened a law should have been enacted to prevent people from getting a loan without at least 10%, preferably 20% down.

[Lookout Kid]

If everyone had to put down 20%, the housing market would crash quickly in areas with high housing prices. Very few buyers have $200,000 cash to put down on a $1 million house, but they may have $300,000 per year incomes.

We just put down 10% on our current house, got a 30-year fixed for 80%, and took out a piggy-back loan for the remaining 10%. We were offered other loans with 90% financed and PMI, but decided on the piggy back loan since it could be paid off earlier and was tax-deductible (PMI is not).

Why didn't we have 20% to put down even though we were long time home-owners? Our equity was wiped out in our previous home due to the housing crash, so we walked away from the sale with very little cash. We had to re-save for a down payment, and had absolutely no problem securing financing from multiple sources.

So yeah, if your credit is good and you have a decent income, you don't need 20% to put down.

[BrianHunter]

Originally Posted by Lookout Kid

If everyone had to put down 20%, the housing market would crash quickly in areas with high housing prices. Very few buyers have $200,000 cash to put down on a $1 million house, but they may have $300,000 per year incomes.

We just put down 10% on our current house, got a 30-year fixed for 80%, and took out a piggy-back loan for the remaining 10%. We were offered other loans with 90% financed and PMI, but decided on the piggy back loan since it could be paid off earlier and was tax-deductible (PMI is not).

Why didn't we have 20% to put down even though we were long time home-owners? Our equity was wiped out in our previous home due to the housing crash, so we walked away from the sale with very little cash. We had to re-save for a down payment, and had absolutely no problem securing financing from multiple sources.

So yeah, if your credit is good and you have a decent income, you don't need 20% to put down.

I just think the borrowers need to have more skin in the game or we are going to be back where we were in 2008. Good credit is fine but alot of people with good credit walked away from houses and just decided to bite the bullet and live with bad credit for a while.

[Foques]

I would suggest that you speak with a specialist who can look at your financials and give you an idea.
That's what I did, and between what I thought I could afford based on my math, and what the real picture happened to be... the numbers were VERY different.
If you don't mind my suggesting a such contact, PM me and i'll be happy to forward their info..

[Minntoaz]

We put out about 16% of our current income (will increase by 250% in the next year) annually on; mortgage, monthy HOA and taxes. It's just two of us and we knew it would be a no more than 5 year place for us then turn into a rental. Turns out it'll only be a 1.5 year place then rental. Point is: you never know where life will take you and what can come up so crunch numbers and see what you are entirely comfortable with. Treat it like an investment because of the aforementioned.

[Runuova]

Originally Posted by BrianHunter

In my opinion if you cant put 20% down you should not be able to get a loan to buy a house. Banks giving out loans with little or no down payment is one of the factors driving the house prices up. When the crash happened a law should have been enacted to prevent people from getting a loan without at least 10%, preferably 20% down.

Which is why I'm glad you don't make the rules. Under a 20% rule I would not have been able to purchase my home 2 years ago.

[JTW2013]

Originally Posted by BrianHunter

I just think the borrowers need to have more skin in the game or we are going to be back where we were in 2008. Good credit is fine but alot of people with good credit walked away from houses and just decided to bite the bullet and live with bad credit for a while.

Borrowers have plenty of skin in the game regardless of how much they put down. Illinois is a recourse state which means you don't walk away from your mortgage without declaring bankruptcy. It's far more than just living with bad credit for a while. People had to declare Chapter 7 or Chapter 13 bankruptcy with everything that goes along with that. It's not something that people did lightly.

The average buyer does not put down 20%, even in upscale neighborhoods.

[Lookout Kid]

Originally Posted by JTW2013

The average buyer does not put down 20%, even in upscale neighborhoods.

Yeah, especially first-time home buyers. Trade-up buyers often have no problem with sizeable down payments.

The largest demographic bulge in the history of America, the "Millenial Generation" who even outnumber the "Baby Boomers", are entering the age of homeownership in America, and most will be first-time home buyers. I am very frightened of a lending system that would lock them out of the housing market forever.

[BrianHunter]

Originally Posted by JTW2013

Borrowers have plenty of skin in the game regardless of how much they put down. Illinois is a recourse state which means you don't walk away from your mortgage without declaring bankruptcy. It's far more than just living with bad credit for a while. People had to declare Chapter 7 or Chapter 13 bankruptcy with everything that goes along with that. It's not something that people did lightly.

The average buyer does not put down 20%, even in upscale neighborhoods.

I do not believe the average buyer does not put down 20%. Do you have any published stats to back that up? That would be scarey if that were the case.

There are too many people out there that have less than 20% down and yet they go on expensive vacations, buy new cars every few years etc. You want to own a house, give up the vacations and new cars for 10-15 years and save the down payment.