A mortgage puzzle

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Georgie
Posts: 13
Joined: Wed Nov 08, 2023 8:19 pm

A mortgage puzzle

Post by Georgie »

My parents generously fronted $415K in cash so I could put in an attractive offer on a condo — and it worked, we got it! The goal is for me to take out a mortgage *and* have them gift me money to make the monthly payments affordable on a place I love but was slightly out of reach otherwise.

Now I need to figure out how much house I can reasonably affordable while still saving and having some left over for travel, etc. If we're sticking with the 30% rule, that would be about $2,600/month — but that's of course not including utilities (about $500/month) and the HOA fee (about $500/month) and other expenses.

Some background:
-Single income of $104,000/year
-Approved for a mortgage of $400,000, though that would be a stretch financially
-$80,000 in cash for down payment
-$100,000 offered as a gift from my parents

Right now, I'm thinking of accepting the full $100K gift to essentially make it a $315K house with $80K down payment. Does that math seem right (aka affordable/manageable)? I am talking to my mortgage lender about this but super curious to here thoughts from everyone here.
wunwun1
Posts: 115
Joined: Fri May 24, 2024 7:47 am

Re: A mortgage puzzle

Post by wunwun1 »

Bumping this.

Also for clarity. Are your parents giving you 100k or 415k? Or both?

The standard answer is mortgage no more than 2.5 your salary, so in your case no more than 250k. If your parents are giving you 400k, you can probably buy a property that costs $650k or less.
Last edited by wunwun1 on Mon Jul 08, 2024 7:13 am, edited 1 time in total.
Cecelio
Posts: 201
Joined: Sun Jun 06, 2021 10:19 am

Re: A mortgage puzzle

Post by Cecelio »

I also do not understand. If you already put in a cash offer on a condo and got it, why do you need to figure out how much house you can afford?

FYI, my grandma gave me money for a house so I could buy it with a cash offer, then get a mortgage to pay her back. The banks acted like that was fine and let me fill out an application, but stalled and never gave the mortgage.
bombcar
Posts: 2187
Joined: Sun Aug 12, 2007 6:41 pm

Re: A mortgage puzzle

Post by bombcar »

A mortgage is a loan against your income, secured by the house.

You have a generous offer to reduce the principal which is quite attractive. But you probably need to seriously consider what you’d do with a lower monthly payment - would you save it or spend it?

That HOA fee is giving me a rash. Given what you have listed I’d try to keep the payment around the $2600 but ouch. You’re going to go house poor if you pour everything in.

Do you forecast income increases above inflation in the near future?

Normally I’d say 20% down and pay the payments but the problem with that is unless you have a recast feature in your loan you may be in a cash flow problem even with the money in the bank.

What do the non mortgage carrying costs look like? Eg, owned free and clear you’d have HOA, insurance, property tax (maybe?).
ryman554
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Joined: Sun Jan 12, 2014 8:44 pm

Re: A mortgage puzzle

Post by ryman554 »

Georgie wrote: Mon Jul 08, 2024 2:16 am My parents generously fronted $415K in cash so I could put in an attractive offer on a condo — and it worked, we got it! The goal is for me to take out a mortgage *and* have them gift me money to make the monthly payments affordable on a place I love but was slightly out of reach otherwise.

Now I need to figure out how much house I can reasonably affordable while still saving and having some left over for travel, etc. If we're sticking with the 30% rule, that would be about $2,600/month — but that's of course not including utilities (about $500/month) and the HOA fee (about $500/month) and other expenses.
You are relying on your parents to help your mortgage while being able to afford luxuries such as travel? Create a budget for essentials and be up front and honest with your generous parents. I can guarantee that as soon as you take off for a vacation, your folks might... wonder. Put the ball in their court, but I would certainly be looking to pay back their generosity as soon as I can.

Do the detailed budget, and work with your parents about your repayment plan/their help.

There may very well be gift tax implications on your parents part already. It's just a form, but.... "paying them back" does not absolve them of giving the gift in the first place without a contract in place.
bonesly
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Location: WA

Re: A mortgage puzzle

Post by bonesly »

Georgie wrote: Mon Jul 08, 2024 2:16 am My parents generously fronted $415K in cash so I could put in an attractive offer on a condo
Does "fronted" mean that they loaned you $415K or was that a gift (which they'd have to report to the IRS on Form 709 as it's in excess of the $36K MFJ joint annual exclusion)?
Georgie wrote: Mon Jul 08, 2024 2:16 am The goal is for me to take out a mortgage *and* have them gift me money to make the monthly payments affordable ... Now I need to figure out how much house I can reasonably affordable while still saving and having some left over for travel, etc. If we're sticking with the 30% rule, that would be about $2,600/month
This part in red makes it sound like the $415K is a loan, not a gift; the gift part will be their contribution to your monthly payments (and they might want that to be less than $36K/yr to avoid gift tax filing, although perhaps they're OK with reducing their lifetime exclusion now rather than later). They should have a note that you have signed indicating the principal loan amount and repayment term (typically no interest and some number of months/years). This documentation helps them prove the $415K was not a gift in the unlikely event they get audited (assuming they did not file Form 709).

Is this what you mean by "make monthly payments affordable" and "how much house[monthly payment] I can reasonably afford?? The repayment of the loan + the mortgage (principal, interest, taxes, insurance) must be less than $2,600/mo? Or is it less than $1,600/mo (given utilities + HOA)?

I also concur with @ryman554, that it seems like you "bought too much house" if you took a loan to make the offer and need a gift to be able to make the payments? It's not uncommon for parents to make a gift toward the down-payment for a child's home, but perhaps your parents are exceptionally wealthy; could afford to buy your condo outright but want you to have some stake/responsibility in it. If that's the case, you'd do best to lay out your finances (monthly income & expenditures including savings) and share with them what you can afford. If they're wealthy enough that they could afford to buy your property outright without adverse impact to their own financial health, then it doesn't really matter what we suggest or what you eventually agree to with your parents.

I guess my only caution would be if you've considered your parents situation? Do you 100% for sure know this is not a reduction in their lifestyle to support yours? In addition to so-called helicopter parents that hover over their children, there are also snowplow parents that feel a need to sacrifice their own situation to remove all financial obstacles in their child's path. If you're certain it's no impact to them, then consider it an early inheritance, and just pay what you think is reasonable (because the actual amount doesn't really matter).

Look at your budget, consider cutting back on travel and other discretionary spending, and see what you can afford for the payments (seems like something between $1,600 and $2,600 per month). Reducing discretionary spending may be a useful exercise in becoming independent. Your parents are likely wealthy if they can front $415K and even with generous gifts during their lifetime you could still receive a sizeable inheritance, but them removing any financial hurdles from your path means you never really learn to overcome those hurdles yourself. Perhaps a non-issue if you have financial discipline if/when you do receive a large inheritance, but your current line of questioning suggests you're living beyond your means and it is certainly possible to squander a windfall of almost any size without knowledge, experience, and discipline to be independent.
Don't do what Bogleheads tell you. Listen to what we say, consider other sources, and make your own decisions, since you have to live with the risks & rewards (not us or anyone else).
sjt
Posts: 418
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Location: NC

Re: A mortgage puzzle

Post by sjt »

bonesly wrote: Mon Jul 08, 2024 1:05 pm
Does "fronted" mean that they loaned you $415K or was that a gift (which they'd have to report to the IRS on Form 709 as it's in excess of the $36K MFJ joint annual exclusion)?

Perhaps it means the $415k was used so OP could make an attractive "cash offer" on the unit, but now intends to take a loan instead.

Everybody is different, but for me personally, that is way too much house for the income provided. When you consider $2600 +$500+$500 = $3600 monthly, this totals $43k annually for housing. Keep in mind taxes and insurance increase over time. On an income of $106k, this is simply too much - What are your other normal/regular expenses per month - about $2k? Does not leave much for other expenses (travel, retirement savings etc).

Also consider a mortgage is a huge commitment - 15 or 30 years. I would recommend having a long think about whether this is something you want to commit to.
"The one who covets is the poorer man, | For he would have that which he never can; | But he who doesn't have and doesn't crave | Is rich, though you may hold him but a knave." - Wife of Bath tale
Oddball
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Re: A mortgage puzzle

Post by Oddball »

Seems like the parents put up $415k to get the condo, and expect $315k back. The OP has $80k in cash for the down payment, making the total amount for the mortgage of $235k. Guessing on taxes/insurance/APR, and including the $500/month HOA, the monthly payment should be around $2600 a month. I normally would not include bills as part of the housing budget, and $500/month for 1 person (or is 2 people with just 1 income?) in a condo seems really high.
Georgie wrote: Mon Jul 08, 2024 2:16 am
Now I need to figure out how much house I can reasonably affordable while still saving and having some left over for travel, etc. If we're sticking with the 30% rule, that would be about $2,600/month — but that's of course not including utilities (about $500/month) and the HOA fee (about $500/month) and other expenses.
How did you come to put in an offer on a place before you knew how much you could afford? I think you can do buy the condo but you will need to watch other expenses like going out to eat often, etc.
bonesly
Posts: 1659
Joined: Mon Dec 18, 2017 9:28 pm
Location: WA

Re: A mortgage puzzle

Post by bonesly »

Georgie wrote: Mon Jul 08, 2024 2:16 am Right now, I'm thinking of accepting the full $100K gift to essentially make it a $315K house with $80K down payment. Does that math seem right (aka affordable/manageable)? I am talking to my mortgage lender about this but super curious to here thoughts from everyone here.
Just to follow up on this specific question, you should probably play with a mortgage calculator. Navy Federal has several calculators for different aspects of taking on a mortgage that are useful regardless of what financial institution you eventually take your loan with.

A $315K "house" with an $80K down payment is a $235K loan, which at 5.75% interest for a 30y term is about $1,400/mo. If you can sustain $1,600/mo (not including HOA + utilities + property taxes + insurance), then you could afford $351.5K rather than $315K. In your earlier discussion you only mentioned HOA + utilities, but not property taxes nor insurance, so you need to get estimates for those last two.

As an aside, I agree with @Oddball that $500/mo for an HOA seems abnormally high, when this article from USA Today suggests the typical range is $200-300/mo.
Don't do what Bogleheads tell you. Listen to what we say, consider other sources, and make your own decisions, since you have to live with the risks & rewards (not us or anyone else).
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8foot7
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Re: A mortgage puzzle

Post by 8foot7 »

I can’t imagine having the entitlement to expect to travel while my parents pay part of my mortgage. The down payment gift is one thing but subsidizing your ongoing ownership while you want funds “leftover for travel” is an anathema to me.

You should consider your HOA fee part of your required monthly mortgage payment. You don’t have a choice in paying it and the HOA will take your condo if you don’t pay, so add that in. It will also go up. Newton's Third Law of Thermodynamics says that HOA fees always go up; they never come down.

You really shouldn’t be paying more than about $2000/mo for your house on that income as a single person if you want to save for retirement.
BirdFood
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Re: A mortgage puzzle

Post by BirdFood »

I feel that the decision about how much gift to accept depends in part on how your parents see this. Are they seeing it as a situation where you will be stretching every dollar as far as you possibly can to afford this place, but you can't quite afford it without them? Or are they assuming that they should make the payments completely comfortable for you, without any sacrifice needed on your part?
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8foot7
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Re: A mortgage puzzle

Post by 8foot7 »

sjt wrote: Tue Jul 09, 2024 7:30 am

Everybody is different, but for me personally, that is way too much house for the income provided. When you consider $2600 +$500+$500 = $3600 monthly, this totals $43k annually for housing. Keep in mind taxes and insurance increase over time. On an income of $106k, this is simply too much -
100% agree. Our income is multiples of OP and our annual housing expense is "only" $39k.
KlangFool
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Joined: Sat Oct 11, 2008 12:35 pm

Re: A mortgage puzzle

Post by KlangFool »

OP,

1) How much is your current annual expense?

2) How much is your current annual savings/investment?

3) How much is your current rent?

4) How much is the mortgage payment?

Let's assume that you saves 20K per year (2) and your current rent is 10K per year (3), that means the maximum mortgage payment that you can afford is less that 10K + 20K = 30K per year.

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