Pre-qualified first time home-buyers (private mortgage insurance, loan officer, interest rate, property tax)

[tracenat]

Hi, and thank you in advance to anyone who gives us advice.

My husband and I are first time home-buyers. We make a little over $90,000 a year combined. Jobs are safe and we are quite young (mid-20's) with no large debt. We were pre-qualified to buy a home up to $271,000 in the Dallas-area through FHA. We want to put 3.5% down. The loan officer we are working with said we could certainly go above that, decent credit scores, though we took a small hit due to our car being completely totaled when we were t-boned by a dump truck and bought a new car, and I had bought a new car right around then. Anyway, husband's credit score is a 730-740 depending on the credit bureau and I'm a 670-680. We aren't buying until May-October because we are going to work to save more and get our credit scores up some.

Anyway, here's the question (finally), if we have $800 a month in bills (credit cards, car payments, student loans), in your opinion, are we safe spending around $200,000 on our first home? We have no kids yet, though plan to start trying within the next year or so. We want to be conservative and have "a life" outside of our financial obligations. The loan officer said we are absolutely within our means. We just want to be smart about our first purchase!

Thanks and we appreciate any input! We trust our loan officer and realtor but want to be smart!

[Okey Dokie]

Pay absolutely NO ATTENTION WHATSOEVER to what a loan officer tells you can afford. This is partially what caused the mortgage mess we are in now.

How much are you paying in rent right now? Are you "on fumes" the last week of the month or do you have plenty left over?

Factor in higher utilities with a house, homeowners insurance and taxes, and expenses from appliance, furniture and lawn care stuff purchases. Figure out what sort of payment you can comfortably afford and no more. Now get a mortgage calculator and see how much mortgage you can get with that much money.

That's how you figure out how much house you can afford. Not what some mortgage guru tells you.

[karen_in_nh_2012]

Here's one way to think about it using debt/income ratios.

Combined income is $7,500/month. The maximum total-debt-to-income ratio in my area (New Hampshire) seems to be 41%. This includes housing (PITI -- principal, interest, tax, and insurance) plus all other debts. 41% of $7,500 = $3,075 for all debt including PITI. Subtract $800 (your current monthly non-housing debt) from that and you get $2,275 for PITI. That should be, according to this debt-to-income guideline, the MAXIMUM mortgage you get, and again, don't forget that that has to include your property taxes AND home insurance.

Up here in New Hampshire, it's often the property taxes that are the killer. In my town, for example, on a $200,000 house you are going to pay about $7,000 A YEAR in property taxes -- that's almost $600/month just in taxes on a rather modest house. Add another $50/month for insurance and you have about $650/month of the PITI taken up by TI, leaving -- for someone making $7,500 gross per month -- only about $1,625 for the principal and interest ($2,275 minus $650). Granted, interest rates are low right now which will buy you "more house," but still!

In New Hampshire property taxes are really high because we have neither a sales nor an income tax. I am not sure how bad property taxes are in Texas, but you need to look for that number in the listing of any house you like.

Keep in mind that the 41% guideline is the MAXIMUM number. If you plan to start a family in the relatively near term (next 2-3 years), your finances could take a huge hit. Kids are wonderful but expensive!!

Good luck with your search!

[Sizzle-Chest]

200k sounds reasonable for your situation but only you will know for sure. Just treat it like gambling and be sure to stay close to whatever number you decide on ahead of time. Once you start looking and see what an extra 70k can buy, you may be temped by that number your loan officer gave you.

[tracenat]

We have plenty left-over. And, thank you all for your input! Much appreciated. Our debt-to-income ratio is below 41% by quite a bit, it's 11%.

Property tax in our area is between 2.1%-2.54%.

[redbean]

If I were you I would try to keep it around what you could afford on just one income. What if one of you loses a job, wants to stay home with kids, or go back to school? You never know. For a 200k home, sounds like your total note with insurance, taxes, etc. could be right around $1700 per month (with PMI). I would definitely want to see what was out there in the 150-180k range and compare.

[EdwardA]

Originally Posted by redbean

If I were you I would try to keep it around what you could afford on just one income. What if one of you loses a job, wants to stay home with kids, or go back to school? You never know. For a 200k home, sounds like your total note with insurance, taxes, etc. could be right around $1700 per month (with PMI). I would definitely want to see what was out there in the 150-180k range and compare.

I think redbean is on to something here. Especially since you mentioned wanting to start a family. A co-worker of mine mentions how she regrets trading up from the townhouse she bought before she met and married her husband and had kids. They bought a bigger house that they can only afford with two incomes, like most people. According to her if she kept her townhome she would be able to stay home with the kids.

The freedom to not necessarily be a wage slave and live the life you want is priceless.

[2011littlehouse]

Originally Posted by tracenat

We have plenty left-over. And, thank you all for your input! Much appreciated. Our debt-to-income ratio is below 41% by quite a bit, it's 11%.

Property tax in our area is between 2.1%-2.54%.

That's not possible - it seems you misunderstood DTI.
See Karen's explanations - the DTI (that cannot exceed 41%) will be formed by (all debts, including mortgage) divided by $7500 or whatever your gross monthly income is.

all debts = your current non-mortgage debt ($800)+ mortgage payment + mortgage insurance (if <20% down payment) + property taxes + home insurance.

Right off the bat (just the $800 debt and a $1200 monthly mortgage payment) will put you at 27% DTI or so.
Add to the debt PMI, taxes, insurance, it will likely become high 30% or so.

[karen_in_nh_2012]

2011littlehouse, I think they were saying their current non-housing debt of $800/month equals 11% of their income, leaving 30% for housing expense.

I must say that when I first read that post I thought, "Wow, I wish my ratio were 11%!" Even as a single person, my ratio is good (low 20s) mostly because I bought 10 years ago -- but it's not 11%. <sigh> Then I realized what they meant. Oops.

Still, 30% of $7,500 leaves $2,250 for housing to stay at 41%. But again to the OP, keep in mind that that is the MAX, and if you have a low down payment (like 3.5% FHA) you have to pay private mortgage insurance (PMI or I think it's called MIP for FHA?). I think you are being smart by thinking that $200k might be more affordable than the $271k your loan officer says you qualify for. Best of luck to you in your search!

[tracenat]

Yes, sorry, Littlehouse. That is what I meant! We are not planning on going above $200,000, so this makes me feel much better. We are actively looking at $150,000, actually.