How much mortgage does a 90,000 salary qualify for

Non-investing personal finance issues including insurance, credit, real estate, taxes, employment and legal issues such as trusts and wills
hoops777
Posts: 2210
Joined: Sun Apr 10, 2011 12:23 pm

How much mortgage does a 90,000 salary qualify for

Post by hoops777 » Fri Sep 14, 2012 6:11 pm

My son and his wife are looking to buy a home in the bay area.They earn 90k and have 170k for a down payment and have no bills other than basic expenses like food,gas,etc.They have no kids yet and are 29.Based on my internet research I came up with a max loan of about 300k.Property taxes are about 1.3 pct.They just sold their condo and it is in escrow and they are waiting for their funds before seeing what they qualify for.I believe they have unrealistic expectations.Any loan guys with a ball park estimate would be appreciated. :happy
K.I.S.S........so easy to say so difficult to do.

Stonebr
Posts: 1462
Joined: Wed Jan 21, 2009 11:19 am
Location: Maine

Re: How much mortgage does a 90,000 salary qualify for

Post by Stonebr » Fri Sep 14, 2012 6:55 pm

What the mortgage sellers say and what common sense tells you may be two different things.

The old common sense rule of thumb is: buy a house that's 2.5 times gross annual income, put 20% down. Therefore, mortgage is 2 times gross income.
"have more than thou showest, | speak less than thou knowest" -- The Fool in King Lear

sscritic
Posts: 21858
Joined: Thu Sep 06, 2007 8:36 am

Re: How much mortgage does a 90,000 salary qualify for

Post by sscritic » Fri Sep 14, 2012 7:12 pm

Bay area isn't normal; normal rules don't apply. You gave your own limit for them (170 + 300 = 470); what limit are they thinking of for themselves?

retiredjg
Posts: 32399
Joined: Thu Jan 10, 2008 12:56 pm

Re: How much mortgage does a 90,000 salary qualify for

Post by retiredjg » Fri Sep 14, 2012 7:38 pm

Stonebr wrote:What the mortgage sellers say and what common sense tells you may be two different things.
This was certainly true the last time I bought a home (2002). They would have given me a mortgage for a whole lot more than I thought was sensible. Seeing what happened after that, I'm glad I stayed with sensible (which is still a lot more than I need).

Obviously, that experience may not apply to current day or to a really expensive place like the Bay area.

User avatar
G-Money
Posts: 2864
Joined: Sun Dec 09, 2007 7:12 am

Re: How much mortgage does a 90,000 salary qualify for

Post by G-Money » Fri Sep 14, 2012 7:52 pm

Most lenders won't approve loans that would exceed a debt-to-income ratio of 36%. This would include property taxes, HOA, and insurance. So on $90,000, they likely wouldn't get approved for much more than $2,700/month. At current rates, they might get approved for around $500K on a 30 year loan, assuming $500/month for taxes and insurance. Added to a down payment of $170K, they could probably get a house for as much as $670K.

Of course, whether they can actually afford that much house, and whether they can still achieve their other financial goals after purchasing that much house, is an entirely separate matter.
Don't assume I know what I'm talking about.

madbrain
Posts: 4897
Joined: Thu Jun 09, 2011 5:06 pm
Location: San Jose, California

Re: How much mortgage does a 90,000 salary qualify for

Post by madbrain » Fri Sep 14, 2012 9:01 pm

hoops777 wrote:My son and his wife are looking to buy a home in the bay area.They earn 90k and have 170k for a down payment and have no bills other than basic expenses like food,gas,etc.They have no kids yet and are 29.Based on my internet research I came up with a max loan of about 300k.Property taxes are about 1.3 pct.They just sold their condo and it is in escrow and they are waiting for their funds before seeing what they qualify for.I believe they have unrealistic expectations.Any loan guys with a ball park estimate would be appreciated. :happy
$300k at 3.5% fixed 30 years is only $1347 per month, principal and interest. $90k income is $7500/month.
So we are talking about only 18% debt-to-income ratio. That is really not bad at all, and quite doable.
I have personally borrowed with far higher ratio.

Many lenders will do 30%, and some even 40% debt-to-income ratio if you have a 20% downpayment and solid credit. You would have to include property taxes in the payment to get the right DTI ratio.
So, I think they could probably borrow much more if they wished. Borrowing $500k is probably possible, and they may have to do that to get a decent single family home in the bay area.

ThatGuy
Posts: 817
Joined: Fri Feb 05, 2010 9:00 am

Re: How much mortgage does a 90,000 salary qualify for

Post by ThatGuy » Sat Sep 15, 2012 6:45 am

If you don't want to build your own spreadsheet, then the Mortgage Professor has the best calculators (and information) that I've seen.

But off the top of my head, $300,000 sounds way way low for a maximum value for a $90,000 income. Lenders tend to look at the total monthly debt payment, and want to keep that number under some percentage. Also, since interest rates are so low these days, less of that payment goes to paying back the bank and the end result is that the borrower can borrow more total money for a given monthly payment.
Work is the curse of the drinking class - Oscar Wilde

hoops777
Posts: 2210
Joined: Sun Apr 10, 2011 12:23 pm

Re: How much mortgage does a 90,000 salary qualify for

Post by hoops777 » Sat Sep 15, 2012 12:42 pm

Thank for all the input.When I went to some websites and played with the numbers,it came out very low as I stated.It seemed that the bottom line was the mort payment,prop tax and insurance as a pct of monthly income.They are looking at a new home for 630K.If they put down 170K that leaves a mort pay of about 2100,prop tax about 700,insur and the HOA about 300 which totals about 3100 per month for the house.Based on a 90K income using the calculators I was using,that did not compute.Both of their cars are paid for,and they have healthcare benefits which is only 50 bucks a month, so maybe there is hope.
K.I.S.S........so easy to say so difficult to do.

retiredjg
Posts: 32399
Joined: Thu Jan 10, 2008 12:56 pm

Re: How much mortgage does a 90,000 salary qualify for

Post by retiredjg » Sat Sep 15, 2012 12:56 pm

There is no way I would consider that much house on that salary. Especially with the $300 HOA fees.

However, I realize it is the Bay Area and I'm probably being naive.

kd2008
Posts: 549
Joined: Sun Feb 15, 2009 6:19 pm

Re: How much mortgage does a 90,000 salary qualify for

Post by kd2008 » Sat Sep 15, 2012 1:22 pm

You can try these calculators.

http://www.dinkytown.net/java/MortgageQualifier.html

http://mtgprofessor.com/ext/partners/qualification.aspx

Remember, interest rates are really low and the Fed is playing its cards knowing that there might be sustained inflation in future. So it wouldn't be bad to go to the limit now. Conventional wisdom doesn't hold in these times.

A year ago I bought a new car much against conventional wisdom, simply because a 2 or 3 yr old car would have cost more. Weird times we live in.

User avatar
DiscoBunny1979
Posts: 2007
Joined: Sun Oct 21, 2007 10:59 am

Re: How much mortgage does a 90,000 salary qualify for

Post by DiscoBunny1979 » Sat Sep 15, 2012 1:26 pm

hoops777 wrote:My son and his wife are looking to buy a home in the bay area.They earn 90k and have 170k for a down payment and have no bills other than basic expenses like food,gas,etc.They have no kids yet and are 29.Based on my internet research I came up with a max loan of about 300k.Property taxes are about 1.3 pct.They just sold their condo and it is in escrow and they are waiting for their funds before seeing what they qualify for.I believe they have unrealistic expectations.Any loan guys with a ball park estimate would be appreciated. :happy
-----------

It's my opinion that when qualifying for a loan, it should be based on ONE person's income so that if a job is lost, the bills can still be paid. That said, who makes the most money? I would then use the lowest salary to determine things from. For instance, if a couple makes $90K a year, each making $45K, then I would only use $45K as the basis for the loan EVEN though both names will be on title and qualify for the loan. I would then use 3x gross income. 3 x 45 = $135K loan. With a $170K down, the total price of the 'house' could be about $305k. One certainly can now find a foreclosure or some other smaller home in San Jose for that price - maybe not a pretty area of town, but stll do-able from what I've seen on Remax.com.

I personally would not put $170K down on a $500K or $600K house when most of the homes in the bay area are in need to some kind of fixing up. A remodel of kitchen can easily run $30K, bathrooms 10K. As I've stated on other posts, there are much better home buying opportunities throughout the country than the bay area. But that's just me.

The other issue is taxes - while Prop 13 allows for that 1% of purchase price, each year property taxes can increase by up to 2% each year. So for instance you buy a house for $300,000. Taxes at 1% for first year will be $3,000 plus bond issues (that other .3%). But next year, taxes will start at $3060 plus bond issues. IF you buy a house for $600K taxes would be double. $6,000 starting year and then $6,120 for next year (plus bond issues). Imagine what year 10 will be. The purchase price will be the most important thing in terms of keeping expenses low. Buy low or not at all.

Another way to think of CA property taxes is that they say it's only 1%. The problem - one's income. The OP makes 90K a year. But if they buy a $600K home, taxes will be at least $6,000 a year. That's 6.66% of income. That's the eroneous nature of the 1% property tax. You have to buy low in relationship to your total income to keep taxes in a good proportion to your income. 6.6% can easily be someone's yearly food budget. So, buy as low as possible without jeopardizing comfort and security.
Last edited by DiscoBunny1979 on Sat Sep 15, 2012 1:32 pm, edited 1 time in total.

NYBoglehead
Posts: 1588
Joined: Fri May 25, 2012 9:38 am

Re: How much mortgage does a 90,000 salary qualify for

Post by NYBoglehead » Sat Sep 15, 2012 1:29 pm

kd2008 wrote:You can try these calculators.

http://www.dinkytown.net/java/MortgageQualifier.html

http://mtgprofessor.com/ext/partners/qualification.aspx

Remember, interest rates are really low and the Fed is playing its cards knowing that there might be sustained inflation in future. So it wouldn't be bad to go to the limit now. Conventional wisdom doesn't hold in these times.

A year ago I bought a new car much against conventional wisdom, simply because a 2 or 3 yr old car would have cost more. Weird times we live in.
+1

Keep in mind the "rules of thumb" with how much house you can afford has been historicall based on higher interest rates. You can buy a lot more house with a 3.5% mortgage than you could at 6.5%, so some of the multiples of income need to be scrutinized given today's low rates.

User avatar
DiscoBunny1979
Posts: 2007
Joined: Sun Oct 21, 2007 10:59 am

Re: How much mortgage does a 90,000 salary qualify for

Post by DiscoBunny1979 » Sat Sep 15, 2012 1:52 pm

NYBoglehead wrote:
kd2008 wrote:You can try these calculators.

http://www.dinkytown.net/java/MortgageQualifier.html

http://mtgprofessor.com/ext/partners/qualification.aspx

Remember, interest rates are really low and the Fed is playing its cards knowing that there might be sustained inflation in future. So it wouldn't be bad to go to the limit now. Conventional wisdom doesn't hold in these times.

A year ago I bought a new car much against conventional wisdom, simply because a 2 or 3 yr old car would have cost more. Weird times we live in.
+1

Keep in mind the "rules of thumb" with how much house you can afford has been historicall based on higher interest rates. You can buy a lot more house with a 3.5% mortgage than you could at 6.5%, so some of the multiples of income need to be scrutinized given today's low rates.
--------------

-2
I don't believe people should buy a house because of Interest Rates. You buy a house because it fits within the budget. For instance, I use 3 time gross income (althouugh more conservative folks on here use 2.5) OR 28% or so of gross monthly income to determine monthly payment. That's all you need to know regardless of rates. For instance, you make $100,000 a year. 28% of $100,000 divided by 12 is $2,333. That includes mortgage, insurance and taxes. Go to Bank rate dot com and you get a $1610 monthly mortgage payment on a $300,00 loan (3x gross). $1610 plus about $300 for property taxes plus about $175 for insurance = $2,085. Good approximation - but maxing out??? It's better to err on side of caution than overspending.
Last edited by DiscoBunny1979 on Sat Sep 15, 2012 1:58 pm, edited 1 time in total.

hoops777
Posts: 2210
Joined: Sun Apr 10, 2011 12:23 pm

Re: How much mortgage does a 90,000 salary qualify for

Post by hoops777 » Sat Sep 15, 2012 1:54 pm

Great comments.Thank you.The hoose they are looking at is brand new,and will not be finished until Feb/march.There are no houses in the San Ramon,Pleasanton area in the 500 k range that are worth buying,and anything that is decent has multiple offers.For those of you who do not live in Ca.,in our area here 550K will get you a 1300 sq. ft home built in 1960 if it is in good condition and a desireable location.You will also have to battle other buyers.It makes more sense to buy a new home in this environment.The home they are looking at is in Dublin and is in a high density type new development with no backyard.I do not like them maxing out like this,but they want to buy something they can stay in for 25 years with room for a couple of kids.It is really tough here.
K.I.S.S........so easy to say so difficult to do.

sscritic
Posts: 21858
Joined: Thu Sep 06, 2007 8:36 am

Re: How much mortgage does a 90,000 salary qualify for

Post by sscritic » Sat Sep 15, 2012 2:10 pm

There is nothing wrong with spending a lot on housing if you don't spend money on anything else. If they saved the $170k for the downpayment (rather than inherited it) on $90k a year, that's an indication that they aren't spending a lot on other stuff. You mentioned paid off cars, so my guess is that they don't buy the latest and greatest. It sounds as if they don't waste their money (but you would know much better than any of us) and have acted responsibly to this point, in which case you might consider just trusting their judgment. They are 29, so you don't have a lot of control over their lives anyway.

I wouldn't go past a word or two of caution about ongoing expenses, but after that, well, here I am moving into unwanted advice about how to be a parent, but I think you get my drift.

User avatar
DiscoBunny1979
Posts: 2007
Joined: Sun Oct 21, 2007 10:59 am

Re: How much mortgage does a 90,000 salary qualify for

Post by DiscoBunny1979 » Sat Sep 15, 2012 2:15 pm

hoops777 wrote:Great comments.Thank you.The hoose they are looking at is brand new,and will not be finished until Feb/march.There are no houses in the San Ramon,Pleasanton area in the 500 k range that are worth buying,and anything that is decent has multiple offers.For those of you who do not live in Ca.,in our area here 550K will get you a 1300 sq. ft home built in 1960 if it is in good condition and a desireable location.You will also have to battle other buyers.It makes more sense to buy a new home in this environment.The home they are looking at is in Dublin and is in a high density type new development with no backyard.I do not like them maxing out like this,but they want to buy something they can stay in for 25 years with room for a couple of kids.It is really tough here.
-----

The other issue is commute time and stress to do so. While the Bay Area historically hasn't had as bad of a commute as Los Angeles, or New York or other places, some folks that drive 1 1/2 hours one way to get to work eventually stop doing it....it gets old really quick.

Buying new has advantages over old - namely a new roof, new heating/air systems, new appliances, etc. If they do buy new, my suggestion is the highest quality carpeting (don't cheap out here), good tile for the flooring in kitchen/baths/laundry. Do not settle for vinyl flooring because it's 'cheaper'. It's easier to replace countertops if cost cutting needs to be done. The problem with buying new is that things do not last forever and the house will need some replacements (ie faucets or other things) after a few years. Don't think buying new will be void of problems. Make sure there is an excellent homeowners policy that covers the roof and all aspects of construction. You won't notice any 'short cuts' taken in building until you want to make an 'improvement'. I'd make sure that during construction phase, they are able to dictate where they want cable connections and CAT5/Internet options.

The other issue here is the "room for kids". Kids aren't cheap and therefore the 'budget' should keep this in mind - where are the schools in relationship to the house and commute. Public Transportation system?

hoops777
Posts: 2210
Joined: Sun Apr 10, 2011 12:23 pm

Re: How much mortgage does a 90,000 salary qualify for

Post by hoops777 » Sat Sep 15, 2012 2:30 pm

Buying new does cut down on having to replace things quickly.The house comes with granite countertops,tile floors and cheap carpet.I am in the flooring business so I will take care of that.I know they can afford it today but when you add kids down the road,hopefully they will be making more money in their jobs.They work for well established companies that will not be going out of business unless the world ends. :happy
K.I.S.S........so easy to say so difficult to do.

User avatar
damjam
Posts: 837
Joined: Thu Mar 25, 2010 7:46 am

Re: How much mortgage does a 90,000 salary qualify for

Post by damjam » Sat Sep 15, 2012 2:34 pm

The typical debt ratios that banks use are 28%/36%. That's 28% for PITI (Principal, Interest, Taxes & Insurance), 36% including PITI and all other debt. Some banks will go higher but I wouldn't recommend it.
So on 90K that's $2100 per month for PITI. That would be the maximum PITI amount I would consider.

Right now I'm paying in that range (28% of gross) and in a high cost of living area I find it hard to save much. It has worked out OK but that is mainly because we had several years of earning significantly more than we do now and we banked the excess. So I think if they go this route (of maxing mortgage debt) it's going to be tight unless they expect significant increases in salaries in the future.
Last edited by damjam on Sat Sep 15, 2012 5:21 pm, edited 2 times in total.

Mudpuppy
Posts: 5889
Joined: Sat Aug 27, 2011 2:26 am
Location: Sunny California

Re: How much mortgage does a 90,000 salary qualify for

Post by Mudpuppy » Sat Sep 15, 2012 5:14 pm

hoops777 wrote:Great comments.Thank you.The hoose they are looking at is brand new,and will not be finished until Feb/march.There are no houses in the San Ramon,Pleasanton area in the 500 k range that are worth buying,and anything that is decent has multiple offers.For those of you who do not live in Ca.,in our area here 550K will get you a 1300 sq. ft home built in 1960 if it is in good condition and a desireable location.You will also have to battle other buyers.It makes more sense to buy a new home in this environment.The home they are looking at is in Dublin and is in a high density type new development with no backyard.I do not like them maxing out like this,but they want to buy something they can stay in for 25 years with room for a couple of kids.It is really tough here.
I live in CA and frankly, with a 90k salary in San Ramon/Pleasanton/Dublin, it's time to for them to be renters again, or perhaps another condo/townhouse if one can be found for around a 300k mortgage. There's no way I'd take out a 500k mortgage on 90k salary around here, absolutely no way. Between the utility bills, P&I, property taxes and especially the insurance (particularly if they want earthquake insurance), it will leave almost no money left over for retirement saving or even just unexpected expenses if they took out a 500k mortgage. They may want to be homeowners, but I don't think it's fiscally wise to get that large of a mortgage on that small of a salary.

Just as a comparison, I live in CA and make a similar salary. My housing expenses are $1900 a month (P&I, insurance, taxes), my PG&E bills average $250 a month even though I do my best to avoid hitting Tier 4 prices (average electrical usage is 185% of baseline over the years I've owned the house), and my water bills are another $50 a month (but it looks like water rates are twice as much in Dublin). I chose an area without an HOA to avoid those fees, but I do have earthquake insurance which has a monthly premium that might be comparable to HOA fees in certain parts of CA (a little bit cheaper here since it's not as dense of a population area). Even with these much lower costs than your son and his wife are considering, I still spent years feeling like I was hemorrhaging cash every time the mortgage payment came due. It's taken me years of budget analysis and cuts to be able to start contributing more than the minimum required by my employer to my retirement plans.

Even if I stopped all retirement contributions, I just don't see how I could pay $3100 a month in housing expenses, on top of all the other costs of living in CA. And I live in a relatively low COL area in CA compared to the area of CA your son and his wife are considering. But the food is still expensive (even if you cook at home), the utilities are expensive, the water is expensive, the sewage/trash is expensive, the taxes are expensive.... last thing you need to do is pile on an expensive mortgage on top of everything else.

DualIncomeNoDebt
Posts: 436
Joined: Wed Jul 18, 2012 3:38 am

Re: How much mortgage does a 90,000 salary qualify for

Post by DualIncomeNoDebt » Sun Sep 16, 2012 1:23 am

I second these comments. Crazy to buy a $630k house on the incomes you referenced. Advise them to rent a cheap, liveable place as close to work as possible, within walking distance to at least one of their jobs. Sell the second car -- stop paying grossly inflated California gas tax, car registration, and insurance - this alone will save them tens of thousands of dollars over a period of years.

Then, with all the money they've saved: invest. Invest hand-over-fist for five years, and follow this forum's guidelines. By the time they are in their mid-30s, it is likely they will have saved enough money to be well on their way to true financial independence. They'll have liquid, income producing assets and will have vaulted far, far ahead of their peers. We're talking the "F-you" or walkaway money many people desire, but so very few achieve.

If they do this, by their mid-30s they can put some money in an income-producing fund or asset and treat themselves each month or quarter without touching capital (let the rest compound to really bolster their accounts). That's exactly what I did, and let me tell you how gratifying it is to receive enough money every quarter to go on a really nice vacation (think first-class 5-star without breaking a sweat), or treat yourself with a reward -- paid for by earnings on capital of just a small portion of your portfolio. And if they don't want to spend it, good -- invest it right back into something productive, do a little speculating, etc.

I speak from experience as a CA resident. I walked this walk. I avoided the housing and dot-com bubble; I still rent a home and drive a Hyundai sedan. Keeping expenses low and no kids has allowed me to retire at 40 if I wish, to opt-out completely from the shitty rat race wheel so many sheeple find themselves stuck on. And it all started with avoiding an expensive house and expensive cars, two great wealth killers that seriously impede real financial independence.

ThatGuy
Posts: 817
Joined: Fri Feb 05, 2010 9:00 am

Re: How much mortgage does a 90,000 salary qualify for

Post by ThatGuy » Sun Sep 16, 2012 8:30 am

It wouldn't be Bogleheads without the judgement...
Work is the curse of the drinking class - Oscar Wilde

User avatar
bottlecap
Posts: 5491
Joined: Tue Mar 06, 2007 11:21 pm
Location: Tennessee

Re: How much mortgage does a 90,000 salary qualify for

Post by bottlecap » Sun Sep 16, 2012 8:51 am

I wouldn't take even a $300k mortgage with a $90k salary. I don't care where you live, you still need to save outside of principal, pay income tax and living expenses. Things will be so tight, they won't be happy.

JT

sscritic
Posts: 21858
Joined: Thu Sep 06, 2007 8:36 am

Re: How much mortgage does a 90,000 salary qualify for

Post by sscritic » Sun Sep 16, 2012 9:05 am

DualIncomeNoDebt wrote: I speak from experience as a CA resident. I walked this walk. I avoided the housing and dot-com bubble; I still rent a home
I don't understand your pride in not making any money in real estate while other were making millions. You didn't buy in the 50s, 60s, 70s, 80s, 90s, 00s, or 10s because you saw the crash of 07 coming? If you bought in the bay area in 1995, say, before that dot-com bubble you were busy avoiding, you would be doing OK today.

Case-Shiller SF June 95 = 67.50
June 2012= 139.01

This exceed inflation over the period (106% vs roughly 50%), and that ignores the leverage you would have had in the house. With 20% down, your 13.5 down would have grown to 125.51 in equity, up 830%.

User avatar
scubadiver
Posts: 845
Joined: Sun May 04, 2008 9:48 pm

Re: How much mortgage does a 90,000 salary qualify for

Post by scubadiver » Sun Sep 16, 2012 9:15 am

I'm going to throw in another vote for "keep on renting".

A $90K / year income is not enough to support homeownership in the Bay Area. We have family that lives in San Francisco. They have no debt, a $200K annual income, and a sizeable downpayment and decided to keep renting rather than buy right now. Every house they found in their price range either had major drawbacks or was quickly bid out of their range by competing offers.

From what I understand, the path to homeownership in CA is to get a job with a start up and wait for a stock option windfall. At least this worked for friends of ours who otherwise would never have been able to buy a house despite a decent six figure salary.

My wife has a friend from high school who just moved from San Francisco to Brooklyn because the cost of living was cheaper there and she and her husband wanted to start a family --- they couldn't afford for her to quit her job in CA if she wanted to stay at home with their kids.

Honestly, I don't know how people afford to live in that state. Beautiful to visit and if you're a 20 something working for a start up I'm sure it's a blast. But raising a family? Good luck.

snyder66
Posts: 1055
Joined: Tue Feb 02, 2010 12:46 pm

Re: How much mortgage does a 90,000 salary qualify for

Post by snyder66 » Sun Sep 16, 2012 9:51 am

How much can they afford? That is all that really matters.

hoops777
Posts: 2210
Joined: Sun Apr 10, 2011 12:23 pm

Re: How much mortgage does a 90,000 salary qualify for

Post by hoops777 » Sun Sep 16, 2012 11:51 am

So the vast majority of you think they are out of their minds.Thety will have about 3K a month after housing costs.They have no debt and pay only 50 dollars a month for their health ins thru work.They are young and their incomes will increase.After paying for food,gas,car insur,utilities,etc.,they still have at least a 1000 cushion.By the time they have kids they will be earning more money.That is their argument.I worry that if something goes wrong like 2008 and one of them gets layed off or whatever....if they lost the house they have also lost their life savings that they put down,including the 40k I was giving them, which is part of the 170k down payment I did not mention before.The way I see it , in a perfect world going forward with pay increases,no 2008 like events,etc they will be fine.They are young and positive about the future and think in optimistic terms.I do not see the future in the same way and to me it is almost akin to gambling in this economic situation.The problem is the new house is actually the best value for the money in our area.Again,a 50 year old 1300-1500 sq ft house for 550K or more vs 2070 sq ft brand new for 630K.Renting is not an option.The one positive is the low interest rates which is also a reason to buy now.
K.I.S.S........so easy to say so difficult to do.

User avatar
damjam
Posts: 837
Joined: Thu Mar 25, 2010 7:46 am

Re: How much mortgage does a 90,000 salary qualify for

Post by damjam » Sun Sep 16, 2012 1:36 pm

There is a reason why banks use the housing and debt ratios that they use. A typical homebuyer that exceeds those ratios will eventually get into trouble and not be able to pay the mortgage. This is bad for the borrower and bad for the bank, so banks try to avoid it.

Never count on future increases in salary, there are just too many reasons why they may never happen.

They haven't started a family yet, why the rush for a bigger house? Have the baby first then, when incomes warrant it, buy a house. In other words don't take on more expense in anticipation of need, wait until the need exists.

Savings requirements should be taken off the top. I recommend the book "You Money Ratios" by Charles Farrell. In his opinion, someone without a pension to fall back on should be saving at least 12% of gross income for retirement at 29 years old and should ratchet that up to 15% at age 45 or so. I think it's a recommendation that makes sense. It may seem extreme to you, or not, but it's the reality of what is needed at a minimum.

I understand what it's like to live in an expensive housing area but that does not change the other facts of the situation and your son would be wise to take the entire situation into consideration.

Best of Luck.

namaste
Posts: 308
Joined: Wed Mar 31, 2010 4:56 pm

Re: How much mortgage does a 90,000 salary qualify for

Post by namaste » Sun Sep 16, 2012 1:56 pm

Their finances would be very tight. It doesn't seem they saved up the 170K but got it from a generous parent and also the sale of their condo. Real estate taxes, home insurance, and mortgage payment should ideally not be more than 25% of income. They'll have 25% federal tax bracket + 8% marginal CA tax rate, 6.25% OASDI. That roughly makes their take home 4500/month. They should consider not just the mortgage payment, but taxes, insurance in their home costs. A1.3% property taxes that's roughly $700 month. Utilities will likely be higher than they anticipate in a home much larger than their condo. What if one of their cars needs to be replaced? Are they planning on saving for retirement? Add kids in the mix and they could really be in trouble. Are they planning to save out a 6 month emergency fund from their 170K savings? Do they have a savings plan? Have they figured out their food expenses? What about gas expense?
Last edited by namaste on Sun Sep 16, 2012 2:07 pm, edited 1 time in total.

Mudpuppy
Posts: 5889
Joined: Sat Aug 27, 2011 2:26 am
Location: Sunny California

Re: How much mortgage does a 90,000 salary qualify for

Post by Mudpuppy » Sun Sep 16, 2012 2:03 pm

hoops777 wrote:So the vast majority of you think they are out of their minds.Thety will have about 3K a month after housing costs.They have no debt and pay only 50 dollars a month for their health ins thru work.They are young and their incomes will increase.After paying for food,gas,car insur,utilities,etc.,they still have at least a 1000 cushion.By the time they have kids they will be earning more money.That is their argument.I worry that if something goes wrong like 2008 and one of them gets layed off or whatever....if they lost the house they have also lost their life savings that they put down,including the 40k I was giving them, which is part of the 170k down payment I did not mention before.The way I see it , in a perfect world going forward with pay increases,no 2008 like events,etc they will be fine.They are young and positive about the future and think in optimistic terms.I do not see the future in the same way and to me it is almost akin to gambling in this economic situation.The problem is the new house is actually the best value for the money in our area.Again,a 50 year old 1300-1500 sq ft house for 550K or more vs 2070 sq ft brand new for 630K.Renting is not an option.The one positive is the low interest rates which is also a reason to buy now.
I think that math needs a little reworking. The house sells for 630k, but as many have told you, they'll need to reserve some of the 170k downpayment for standard new-home customizations. Even precluding remodels (since it is new construction), they will need furniture, window treatments, preferred plants for the yard, and so on. Window treatments and furniture in particular can really eat up a budget, so let's set aside 15k for such items. There are also closing costs that they will need to pay, so let's also set aside 15k for closing costs. That leaves a 140k for the downpayment, which means they would have to take out a 490k jumbo mortgage. Let's assume it's a 30 year mortgage at 3.5%. P&I would be $2200, insurance would be at least $150 a month, property taxes in Dublin are about 1.2% which would be $640 a month, the additional charges on the property tax bill (sewer, trash, mosquito etc) are another $130 a month, and we'll assume the HOA is the $300 per month figure you cited. That is a total (minimum, since there is no earthquake insurance) housing cost of $3420, not $3100.

Their gross take-home pay is $7500 a month. Assuming that the house is their biggest deduction on their taxes (since no children or health issues have been mentioned), they would have about $15k for the mortgage interest and about another $7750 for the property taxes. Since you haven't broken down their wages individually, I'm going to assume only one of them works for the calculations of net pay. The standard W4 calculations would set their withholdings to 5 given the mortgage interest and property taxes (2 without the house). Assuming that the Social Security payment goes back to normal, but that the tax cuts are extended, that would mean they would pay about $715 in federal taxes, $240 in CA taxes, $465 for SS, and $110 for Medicare. I did not include CA SDI, but that might also be applicable depending on their job. This means their take-home pay is $5970, not $6100 as you assumed in the above reply. It could easily be a couple of hundred dollars LESS if the tax cuts are not extended, and that needs to be accounted for in planning.

So, we have an income of $5970 and base housing expenses of $3420. Now let's add on the other monthly costs. The rule of thumb is to set aside about 1% of the house's price each year in a house repair fund, so that would be $500. Let's assume a new home is "cheaper", so you can get away with setting aside $250. The monthly water bill will probably be around $100 (although Dublin pays on an every-other-month schedule). Assuming they are covered by PG&E and not one of the municipal utility districts, you should budget at least $250 per month for electricity and gas. Grocery bills in that area of CA for a family of two will be $300-400 a month, so let's split the difference and put that at $350. Unless they are right next to the BART station and plan to use that for commuting to work, one should budget at least another $500 a month for gas, auto insurance (it's expensive in CA, my 13 yr old car is $80 a month), parking and toll fees, plus another $150 a month for auto maintenance on both cars. I'm going to assume they want Internet, but not cable TV, so that's another $50 or so. If they each have smartphones, there's another $100 (assuming $50 each on a cheaper carrier like TMobile). Then there are the various miscellaneous and sundry charges for clothing, toiletries, cleaning products, etc., so let's set aside $500 a month for that. That brings us to a sum total of $5670 a month, and we haven't even started saving towards retirement or other savings goals. And that extra $300 could easily be eaten up if the tax cuts are not extended.

Now can you see why people living in CA say this is stretching it? We know how expensive it is to live here. The costs associated with a car alone could practically buy a house in other parts of the country.

User avatar
interplanetjanet
Posts: 2226
Joined: Mon Jan 24, 2011 4:52 pm
Location: the wilds of central California

Re: How much mortgage does a 90,000 salary qualify for

Post by interplanetjanet » Sun Sep 16, 2012 2:53 pm

hoops777 wrote:Renting is not an option.
I won't argue on this but I will say that I think they are overextending themselves by trying to buy. I earn more than they do, quite a lot more, am older with three children (two of whom are teenagers) and live in an area that's somewhat lower in cost...and renting is absolutely the right thing for me to do, right now.

It's not necessarily financial suicide for them to stretch like this, but I really think it's overreaching. It just seems like too much house for a young couple with no children. 2000 square feet?

-janet
Last edited by interplanetjanet on Sun Sep 16, 2012 4:15 pm, edited 1 time in total.

User avatar
interplanetjanet
Posts: 2226
Joined: Mon Jan 24, 2011 4:52 pm
Location: the wilds of central California

Re: How much mortgage does a 90,000 salary qualify for

Post by interplanetjanet » Sun Sep 16, 2012 3:06 pm

scubadiver wrote:My wife has a friend from high school who just moved from San Francisco to Brooklyn because the cost of living was cheaper there and she and her husband wanted to start a family --- they couldn't afford for her to quit her job in CA if she wanted to stay at home with their kids.

Honestly, I don't know how people afford to live in that state. Beautiful to visit and if you're a 20 something working for a start up I'm sure it's a blast. But raising a family? Good luck.
One thing that helps is that most of the state is cheaper than the Bay Area, and almost any part of the state is cheaper than San Francisco proper. Coastal California (the closest 40mi or so to the coast) can be crazily expensive, much of the rest really isn't. If you can make a good living that's not tied to the urban areas on the coasts, cost of living can be quite modest (reasonable houses from 150-200k, etc). I live in an area that's more expensive (still considerably cheaper than the Bay Area, though!) but I value some other qualities of the community.

-janet

ResNullius
Posts: 2091
Joined: Wed Oct 24, 2007 3:22 pm

Re: How much mortgage does a 90,000 salary qualify for

Post by ResNullius » Sun Sep 16, 2012 4:06 pm

I feel sorry for your kids, just as I worry about mine. Bottom line: Don't overextend yourselves on housing. Always be prepared for something bad to happen. Save and invest as much as you can. Live a good life, but don't forget to be prepared for a downturn or a job loss. That's just the way it is today. Good luck.

Honobob
Posts: 992
Joined: Sat Sep 26, 2009 7:43 pm

Re: How much mortgage does a 90,000 salary qualify for

Post by Honobob » Sun Sep 16, 2012 4:13 pm

DiscoBunny1979 wrote:

The other issue is taxes - while Prop 13 allows for that 1% of purchase price, each year property taxes can increase by up to 2% each year.
Prop 13 limits the increase of "assessed value" to 2% per vear.
It's slowly dawned on me that we won the real estate lottery!

Lollytiger
Posts: 164
Joined: Sun May 08, 2011 10:12 pm

Re: How much mortgage does a 90,000 salary qualify for

Post by Lollytiger » Sun Sep 16, 2012 4:50 pm

I don't understand why the rules would be different in the Bay Area (or any other place with high home costs). If it's not financially safe to go beyond X mortgage to income ratio, that should hold true regardless of where in the US you are. If houses are so expensive that the only way to buy them is to take on a >X mortgage to income ratio, that doesn't mean it suddenly becomes safe, it just means that buying a house is not within one's financial capability without significant risk. An exception would be if rent costs are similarly astronomical, but even then, you take on a much smaller burden at a time with renting than with a mortgage.

I wouldn't count on income increases over time. IMO when taking on some kind of large debt or obligation the question is what are you going to do if you lose your job, have to take a lesser paying job, etc. If the answer is that you will be forced to sell the house at whatever price you can get for it, I could see this being a really significant financial hit.

Honobob
Posts: 992
Joined: Sat Sep 26, 2009 7:43 pm

Re: How much mortgage does a 90,000 salary qualify for

Post by Honobob » Sun Sep 16, 2012 4:53 pm

I second that to continue to rent in the Bay Area is NOT an option. I've been a homeowner in the Bay area since 1986. Since that time my home has appreciated from $86,000 to over $600,000. I rented the exact same type of home for $600 prior to buying. That rent has increased to over $2400 a month. Because of Prop 13 I'm paying taxes for a $140,000 house. My home doubled in value by 1988. I think we'll see another doubling in the next few years. Plenty of people in the Bay Area sacrafice the first few years to buy a home. Plenty of people get second jobs or just do without. $90,000 salary is low for two people. Are they just starting their careers?

My concern would be more about the NEW house. I always advise people to buy in an estabilished area because you pretty much know what you're getting. New looks great but what will it look like 5 years from now? Some new developments do well some not so much. If they insist on new I'd check the builders reputation. There are lots of buildings in SF built since 2000 that are redoing windows, siding, etc. Google builder defect in Bay Area. I'd also think about resale since more than likely more of these will be on the market when they want to sell. Why would someone want THEIR unit over the other 5 for sale at the same time? Is this even the type of property that will be in demand 5-10 years down the road? You think it makes sense to buy new because the demand is high for the smaller/older properties. Think about that!
Last edited by Honobob on Sun Sep 16, 2012 4:54 pm, edited 1 time in total.
It's slowly dawned on me that we won the real estate lottery!

NYBoglehead
Posts: 1588
Joined: Fri May 25, 2012 9:38 am

Re: How much mortgage does a 90,000 salary qualify for

Post by NYBoglehead » Sun Sep 16, 2012 4:53 pm

I agree with the posters who say don't count on salary increases. Salary increases are likely tied to increases in the cost of living, they shouldn't be used to say that a house that is unaffordable now will suddenly become more affordable as salary increases make the mortgage a lesser percentage of income.

hoops777
Posts: 2210
Joined: Sun Apr 10, 2011 12:23 pm

Re: How much mortgage does a 90,000 salary qualify for

Post by hoops777 » Sun Sep 16, 2012 6:04 pm

According to their figures,after housing expenses and all the everyday living expenses,they have at least an 800 dollar surplus.They have a short commute,no debt and good benefits.The other little problem is my wife is supporting this idea.If it was up to me I would limit the house to 475K max,which is still too high.They sold their condo about 3 months too late.Now there is nothing worth buying under 600K in terms of single family homes.I am debating whether or not to show them this forum so they can read all of the comments from experienced people with no emotion involved.It is difficult to get a young person to prepare for or expect the worse case scenario like 2008 or losing a job.
K.I.S.S........so easy to say so difficult to do.

retiredjg
Posts: 32399
Joined: Thu Jan 10, 2008 12:56 pm

Re: How much mortgage does a 90,000 salary qualify for

Post by retiredjg » Sun Sep 16, 2012 6:28 pm

Maybe I missed it, but I didn't see anything in your financial summary about saving for retirement.

Your numbers did look pretty rosy. I think something is way out of whack though. Not sure what it is. But something just feels all wrong about this potential purchase.

Honobob
Posts: 992
Joined: Sat Sep 26, 2009 7:43 pm

Re: How much mortgage does a 90,000 salary qualify for

Post by Honobob » Sun Sep 16, 2012 6:38 pm

http://www.realtor.com/realestateandhom ... 9321-88847

2600 sf home on a 2600 sf lot!

http://www.realtor.com/realestateandhom ... 6207-52646

I think I'd take the smaller cheaper home just by the looks.
It's slowly dawned on me that we won the real estate lottery!

sscritic
Posts: 21858
Joined: Thu Sep 06, 2007 8:36 am

Re: How much mortgage does a 90,000 salary qualify for

Post by sscritic » Sun Sep 16, 2012 6:46 pm

With four stories and a basement, you can put a 10,000 sq ft house on a 2000 sq ft zero-lotline lot.* 2600 on 2600 is nothing.

* think how much you save by not needing a gardener (this is CA, so no one cuts their own grass).

Honobob
Posts: 992
Joined: Sat Sep 26, 2009 7:43 pm

Re: How much mortgage does a 90,000 salary qualify for

Post by Honobob » Sun Sep 16, 2012 6:57 pm

sscritic wrote: 2600 on 2600 is nothing.
Except when the guy on the right and left and the back and across the street have the same then I'd rather live in a fishbowl. You'd have more privacy in a condo without all the exterior maintenance.
It's slowly dawned on me that we won the real estate lottery!

hoops777
Posts: 2210
Joined: Sun Apr 10, 2011 12:23 pm

Re: How much mortgage does a 90,000 salary qualify for

Post by hoops777 » Sun Sep 16, 2012 7:11 pm

Retired jg,
I have been working thru the expenses I will have in retirement,so I agree with what their basic expenses are according to them.The husband makes 52k and takes home 3500 per month.The wife makes 38K and her take home is 2500.If you have food ,gas,car insur,utilities,etc and no debt like student loans and credit cards,it is actually pretty easy to have an 800 dollar surplus.They are putting something in his 401K,but their retirement is not on the top of their list,although it should be up there somewhere.
K.I.S.S........so easy to say so difficult to do.

Mudpuppy
Posts: 5889
Joined: Sat Aug 27, 2011 2:26 am
Location: Sunny California

Re: How much mortgage does a 90,000 salary qualify for

Post by Mudpuppy » Sun Sep 16, 2012 7:42 pm

hoops777 wrote:Retired jg,
I have been working thru the expenses I will have in retirement,so I agree with what their basic expenses are according to them.The husband makes 52k and takes home 3500 per month.The wife makes 38K and her take home is 2500.If you have food ,gas,car insur,utilities,etc and no debt like student loans and credit cards,it is actually pretty easy to have an 800 dollar surplus.They are putting something in his 401K,but their retirement is not on the top of their list,although it should be up there somewhere.
Are they basing their everyday expenses on CA prices? Have they remembered to include the other costs of home ownership like water, sewage, trash, gardener, and home maintenance? Are they remembering to exclude closing costs (which are high for a jumbo loan because many lenders require points for jumbo loans) and home move-in costs (furniture and window coverings don't grow on trees, at least not since being turned into decor items) from their down payment, which would increase their mortgage and all associated monthly costs? Have they accounted for the higher price of electricity and gas on a larger home? Have they remembered to include all of the potential tax increases and Social Security increases currently slated to hit in 2013 in their planning process?

Something tells me that the answer to one or more of these questions is "No" and that is why they are having the disconnect between what they think they can afford and what they actually can afford. But all you can do as the parent is ask them if they have considered these questions in their planning process. If they still opt to make the poor decision, then that is their prerogative as adults. However, you should probably talk with your wife about just how much (or how little) you two will contribute to help them out if they end up hurting financially as a result of buying too much house.

Edit: Fix typo

User avatar
kenyan
Posts: 2921
Joined: Thu Jan 13, 2011 12:16 am

Re: How much mortgage does a 90,000 salary qualify for

Post by kenyan » Mon Sep 17, 2012 11:08 am

$3100/month plus maintenance, utilities, upgrades = possibly north of $3500/month on housing which sounds absolutely insane to me on a $90K salary. Then again, some people are willing to be insane, and some times it works for them, so who am I to judge.

Maybe they can stretch and afford it now, but they will be "house-poor" and in slavery to their house. Freedom to do things like vacations, have kids, change jobs, etc. will be lost. Just my opinion.
Retirement investing is a marathon.

hoops777
Posts: 2210
Joined: Sun Apr 10, 2011 12:23 pm

Re: How much mortgage does a 90,000 salary qualify for

Post by hoops777 » Mon Sep 17, 2012 12:52 pm

Thanks again for all the great comments.I had a good talk with them last night and they agreed that this was a bad idea.I stressed to them the importance of retirement savings as well as the negatives about being stretched to the limit.I also made some points about need vs want.I would venture that the vast majority of the boglehead community over the age of 50 grew up in a house much smaller than 2000 sq.ft. :happy
K.I.S.S........so easy to say so difficult to do.

User avatar
Clearly_Irrational
Posts: 3087
Joined: Thu Oct 13, 2011 3:43 pm

Re: How much mortgage does a 90,000 salary qualify for

Post by Clearly_Irrational » Mon Sep 17, 2012 1:45 pm

From what I can tell home prices in that area are pretty high, although I don't often recommend this I think they might be better off renting. Rents in that area for decent homes seem to be 30% - 40% less than home mortgage payments for comparable properties.

hoops777
Posts: 2210
Joined: Sun Apr 10, 2011 12:23 pm

Re: How much mortgage does a 90,000 salary qualify for

Post by hoops777 » Mon Sep 17, 2012 2:40 pm

No actually rents are very high,but they are going to live with the wifes parents for awhile now and save some more money.
K.I.S.S........so easy to say so difficult to do.

retiredjg
Posts: 32399
Joined: Thu Jan 10, 2008 12:56 pm

Re: How much mortgage does a 90,000 salary qualify for

Post by retiredjg » Mon Sep 17, 2012 3:19 pm

hoops777 wrote:No actually rents are very high,but they are going to live with the wifes parents for awhile now and save some more money.
I think this is very wise.

User avatar
Clearly_Irrational
Posts: 3087
Joined: Thu Oct 13, 2011 3:43 pm

Re: How much mortgage does a 90,000 salary qualify for

Post by Clearly_Irrational » Mon Sep 17, 2012 3:40 pm

The might also consider moving to an area with lower housing costs. Even with a salary cut they could end up ahead. Just for example, the Portland Metro area where I live (in Oregon) decent housing is probably half what they're seeing and we're not even a cheap housing area. Some places in Texas they could probably buy a home outright with the money they've been saving up.

MoneyOCD
Posts: 281
Joined: Sun Nov 08, 2009 8:56 pm

Re: How much mortgage does a 90,000 salary qualify for

Post by MoneyOCD » Mon Sep 17, 2012 3:56 pm

I can not believe what I am reading here...
And silly me was thinking that NO WAY we can afford $750k house on 200k pay :?

Feel old and grumpy now compare to this "young optimistic couple" (and we are only 43)
:(

Post Reply