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I live in Indiana where homes are relatively cheap. I've ran the numbers for a couple who makes 100k a year total, which should be easy in Indiana and has $1000 in monthly debt. So maybe 2 car payments and credit cards. Then I put in a 10k downpayment. Well the mortgage came out to 300k, which is a nice home! That would buy a nice home in Indiana! Help me understand what I'm missing.
Seems like it is easy for most household to buy and qualify for a 300k home, so why don’t they?
Because a jumbo mortgage isn't something to be proud of. It's not a status symbol.
Some people don't look at life in terms of how much debt they can "afford," i.e. "two car payments and some credit cards." That's like a dieter obsessing over how much food they "are allowed" to eat when eating is the exact opposite thing they should be doing.
People usually have other expenses that factor in to the actual affordability of a mortgage, plus many people can't muster up even $10K for a down payment.
I knew two nurses who made a good combined income (much more than my single mediocre salary) and couldn't get a mortgage because they couldn't ever save a penny, had huge credit card debt and had bad credit scores.
With today's low interest rates, the rule of thumb is that one would qualify for a mortgage that's about 5-6x one's annual income. And I know people who have to do that, because the cost of housing is so high where they live. For those of us who don't live in such high cost housing areas, I know families who bought right up to the max, and I know people like me, who bought houses that were about 1-2x household income, because I am financially cautious, and an average house was enough for my family.
It's really no different from cars. Some people buy big fancy, with big loans, some buy outright used cheap, with no loan. Some people die in the black, leaving money for their heirs, some die deep in the red, and the entire house of cards collapses with their death, leaving the heirs a messy load of debt. Some of those people even make it right to the top of the heap on a messy load of debt - like our president. It's all in how people choose to live their lives.
Debt service, including both mortgage and car loans, CC debt, etc, should not exceed 30% of income.
Many people are not able to save the money for a 20% down payment. If you pay less than 20% down, you also have to include PMI with the mortgage. There are also many other expenses involved in home ownership over and above the mortgage that also need to be considered...HO insurance, property taxes, repairs and maintenance, increased utilities versus a rental (most renters don't pay sewer/water/garbage and have smaller places, so less elec/gas), furnishing the home, doing or hiring yard maintenance. It's also important to have an emergency fund in place for the $12,000 needed to replace your HVAC system when it blows up in February.
Two income families often also have childcare costs in excess of $1000/month. Don't forget medical/dental insurance costs if the employer doesn't pay those (could be up to $2000/month without subsidies). Add into all this that many people have bad credit ratings, less than a year in their current job, insecure marital situations or other family issues. It's actually really easy to see why so many people don't own homes.
Last edited by TheShadow; 01-19-2020 at 11:22 AM..
If you live in a low cost of living area, and you could qualify for a $300,000 mortgage, and you will be well satisfied living in the house you can buy with a $150,000 mortgage, why would you want to spend all your money just because you can?
OP, are you suggesting that people SHOULD buy the most expensive house they can afford?
Some of us don't like the idea of spending every dime the instant it comes in.
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