Can we afford $500k house? (mortgage, finance, real estate) (property tax, approve, credit)

[AZ Manager]

New mortgage is only $30.6k a year. Offset by that $300 you are currently carrying but ignoring the additional income you are talking about adding $27k to your budget on $175k a year that is only 15.4% you are adding in.

The PITI will go down when you change to a landlord insurance policy but at where it is now your rent is about $790 a unit or the $19k a year. You seem to be ignoring vacancies which at 10% brings you down to $17.1 a year. On a mortgage currently at $12.8 you have $4.3 to $6.2 in income on it (10% vacancy rate to 0%).

Back to your additional $27k you are down to adding in $20.8 - $22.7 to your annual budget. That is $1,734 to $1,892 a month in additional expenses. Seems very doable without the additional income you expect this year. Make sure you change the homeowners policy to a landlord policy, I know it cuts my policy down to about 60% when I do it. My current policy on my 2900 sq ft home is $875 and it's going down to $540 on a landlord policy.

[Jkgourmet]

Originally Posted by heresjohnnee

The higher salary is new just this past year. We're both self employed so 401k isn't an option. We do have Roth IRAs and definitely need to focus on funding them.

Contact your accountant and look into a SEPARATE plan as well as a Roth.

[heresjohnnee]

Originally Posted by AZ Manager

New mortgage is only $30.6k a year. Offset by that $300 you are currently carrying but ignoring the additional income you are talking about adding $27k to your budget on $175k a year that is only 15.4% you are adding in.

The PITI will go down when you change to a landlord insurance policy but at where it is now your rent is about $790 a unit or the $19k a year. You seem to be ignoring vacancies which at 10% brings you down to $17.1 a year. On a mortgage currently at $12.8 you have $4.3 to $6.2 in income on it (10% vacancy rate to 0%).

Back to your additional $27k you are down to adding in $20.8 - $22.7 to your annual budget. That is $1,734 to $1,892 a month in additional expenses. Seems very doable without the additional income you expect this year. Make sure you change the homeowners policy to a landlord policy, I know it cuts my policy down to about 60% when I do it. My current policy on my 2900 sq ft home is $875 and it's going down to $540 on a landlord policy.

I hadn't heard of a landlord policy. I wonder if the lender would find out and whether it would affect my loan since it would no longer be my primary residence? Also, water/sewer/trash for the rental would add $1730/yr to expenses. Thanks for the insurance tip.

[FalconheadWest]

If you are both self employed, your higher income isn't going to count. They're going to average your last 2 years' income. Does your lender know you're self employed or did they just ask your income?

[heresjohnnee]

Originally Posted by FalconheadWest

If you are both self employed, your higher income isn't going to count. They're going to average your last 2 years' income. Does your lender know you're self employed or did they just ask your income?

Excellent point. We are already prequalified. The lender averaged the last 2 years income and gave us the option for a conventional fixed or a portfolio ARM. Honestly I'm surprised he was able to get approval with the discounted income, but he did.

[ncole1]

Originally Posted by heresjohnnee

We've always been financially conservative people who live well within our means. We've lived in a 2-family flat, which we own, for 8 years where our tenant has been paying all but $300/mo of our mortgage. So taking on any size mortgage feels unfamiliar to us. We've worked hard to make sure we're in a good position for our next move and don't want to make a bad choice. When we move out of the 2-family, we'll keep it and it will provide positive cash flow.

We're in our late 30's, no kids (or plans for them) and very little debt. The house we want is bigger than we need but we can really see ourselves living there for many years to come. It doesn't have good schools working in favor of resale value, but it's in a stable area. I know we don't NEED the number of bedrooms or square footage. I know taxes and insurance will cost us more. It's definitely a WANT situation for us and we're ok with that as long as we're not taking on unmanageable debt.

Combined income is $175K and mine is expected to continue to rise (by at least $30k next year).
The house is $500k and we'd put 20% down.
Financed amount would be $400k.
Taxes $5200/yr, Insurance 1900/yr.

TOTAL DEBT
PITI would be $2550/mo (4.25% 30yr conventional fixed)
Cars total $500/mo
Credit cards $100/mo (paid to zero each month)
2-family PITI $1069/mo, income $19,000/yr (after we rent out our unit)

We are preapproved with our lender already.

We have about $160k in savings, and $85k in retirement.

Do we take the plunge before rates go up higher? Buy less house and focus on retirement savings? It seems that we can afford the house, it's just hard to tell whether we're being reasonable since we're coming from the perspective of living dirt cheap in our investment property! We could certainly buy less and save more but aren't sure whether it's critical to do so.



Thoughts?

The house itself doesn't seem too much for your income level, however, I'm a bit curious why your retirement account is so skimpy? Are you willing to sacrifice other things in your life for many, many years to catch up on the retirement while still having the $500k house? If so, go for it.

[loves2read]

House that large usually means family vs couple for resale
Fact that you know schools aren't that good means resale could be problamatic---w/o knowing the local specifics...

Personally as a couple who moved up to larger home after our kids were out of house--so similar situation--
We paid cash, area has decent but not the best rated schools, and neighborhood is good location, strong neighborhood values---we are considering selling and downsizing...
We basically live on ground floor....wasted space, money to heat/cool, higher taxes...

WHY do you want THIS house??

[Jkgourmet]

Originally Posted by Jkgourmet

Contact your accountant and look into a SEPARATE plan as well as a Roth.

SORRY. Freaking autocorrect. Should read SEP Plan.

[FalconheadWest]

Originally Posted by heresjohnnee

Excellent point. We are already prequalified. The lender averaged the last 2 years income and gave us the option for a conventional fixed or a portfolio ARM. Honestly I'm surprised he was able to get approval with the discounted income, but he did.

Pre-qualified doesn't mean approved. Once they fully look at your situation, numbers could definitely change if your income is a considerable difference.

If it's not that different, buying at $500k with $175k income is not over any limit by any means. In my area, with typical debts and good credit, you could qualify for $500k with less than $125k income if putting 20% down. You haven't said what the averaged income the lender is using.

[LifeIsGood01]

If that's the going rate for a nice home in your area then yes, but I would not buy in a marginal school district because when need to sell you may have problems finding buyers.