Fiancee and I stretching to buy a house. OK in our situation? (Boston: real estate, lease)

[canwedoit]

Hello! I hope to make this brief for everyone.

My fiancee and I have put an offer on a house, which they countered at $540,000 (so the ball is in our court, we have until Wednesday to decide). Together before tax we make ~$120,000. We know that purchasing the house is a bit of a stretch, so let's just get that out of the way.

Currently we are renting a room very close to the house for $1000. We are capable of paying for the house (though it'll be tight) without any roommates or anything but we plan on renting out 3 of the 5 rooms. This particular house, due to the school district, location to jobs and what not would be a house we would live in permanently. We wouldn't sell the house for 30 years at least, unless there's like a disaster or something.

Anyway, we were looking at mortgage tax deductions and a bank rate calculator said that we would save about $7,000. Does that mean we would get a tax return of $7,000 back, in addition to what we normally get now?

I do welcome anyone to talk us out of it. However, if you try keep in mind that we would be living here for at least 25+ years and it's a super tight market (Boston).

[chicagoliz]

No one here can really tell you. The key financial consideration is not just the cost of the house and your income. What's most key is your monthly income and your monthly mortgage payment, as well as your ability to pay for upkeep on the home. If that works, do it.

But don't be dependent upon renting out 3 of the 5 rooms. Be sure you can pay the mortgage even if none of the rooms are rented.

[rethcir]

As a homeowner, i can tell you this. You WILL end up spending a lot more money on maintenance, customization, etc. Regardless of the home. I'd be even more fearful of this if I had tenants. You want a good buffer.

I don't think I'd be comfortable at that budget.

[bugelrex]

There is "general" rule of thumb. 3-4x income which means you can afford up to:

360k or 480k

But this does not consider important facts such as:
- current debt load?
- rich parents?
- potential for increase in income
- condition of the house

The deduction simply works like this:
- you make 120k now, prob at a tax rate of 28%? Once you get married, you may get hit with the marriage penalty tax which bumps your tax rate to 33%? (just guessing)
- if you pay 8k in property taxes and 20k in INTEREST on the mortgage then your taxable income becomes
120k - (28k) = 92k

so instead of paying 0.28 * 120 = 33.6K (very simplistic calculation, its more complex than this)
you pay 0.28 * 92k = 25.76k
so a savings of 7.8K

Someone correct me if I'm wrong, this would be the most 'simple' way of explaining it...


Now, if you are willing to rent 2 rooms out, it gets even better:
- you get to depreciate the % of the house which is rented.. lets say 20% of the sq ft is rented out
- its a 1000 sqft house. so 200 sqft is rented
- the house STRUCTURE is worth 100k (do not include the land cost), so 20 of it is 20k
- you get to depreciate 20K spread over 30 years on your taxes. but you HAVE to pay income taxes on the rent you receive. and the 20k gets calculated back from any profit when you sell... but inflation in 30 years will make that minuscule


The summary is, you have to reveal your current expenses, work industry and debt load

[miu]

Have you even approached a bank to ask them how much they would be willing to finance you for? How much of a down payment would you be putting down?

And I don't think that banks take into consideration the possible income from having housemates. It's not the same as having a multi family house where you would have tenants on a signed lease.

[canwedoit]

Some more info:

1. We're putting 20% down (most of our savings, not including retirement)
2. We're a teacher and software engineer. I intentionally took a lesser paying job as it has a history of never doing layoffs/more relaxing. Might look into studying up to do one of the more competitive jobs. Salary increase potentially is 50 - 100%. Teacher's get a pretty regular increase of about 3-5%
3. We're preapproved for 600k but obviously wouldn't go that high.
4. Interest rate is 4%

5. We have connections to get Teach for America folks in the house pretty consistently for at least 5 years, but are not really taking that into consideration. We assume we would have no tenants.

The house is in Milton if that makes any difference.

[CaseyB]

Milton has zoning laws, have you looked into them? Is this a multi-family home? What gave you the idea you can rent rooms out to random people?

[North Beach Person]

If the only way you can buy it is by renting out rooms (which, depending on local Zoning, may turn it into a boarding house possibly triggering additional expenses) you can't afford it.

[canwedoit]

more info:

debt to income ratio would be 36%. we can pay the mortgage, utilities, tax, insurance, etc (that's where the 36% comes in). main thing to note is that savings would temporarily be depleted. but then again, housing would never be a problem again. I dunno. will real estate appreciate more than our collective income, you think?

[BostonMike7]

I think you are stretching to buy this house. You might be able to buy it, but where I'd worry is after you buy it. I'd look at it from a financial perspective of not renting the rooms out. Would you be able to afford it then, and also afford maintenance and utilities? Can you still save $$? What if it needs a new roof in 10 years? That's a $10K+ bill there that you'll need to put money aside for.


Also, life plans? You are banking on roommates to help cover the bills, but what if you decide to have kids one day (unsure if you do so forgive my assumption) and need to eliminate one (or all) of the roommates and all the sudden get a nice $1200/month day care bill to add to your expenses.


Of course, I'm also looking at this from my perspective, imputing info from my own life into the situation, and after doing that, I personally would not feel comfortable buying a $540K house on $120K/year...even with 20% down.