Posted on: 16th Feb, 2011 09:12 am
friends:
i am looking for advice on how to finance a new home as soon as possible. here is as detailed a description as seems reasonable:
-i will finish law school in may 2011. i will then take the bar in july. i will be studying for the bar in june/july.
-my salary will be $100,000 + benefits at my job when i get my bar results back late september (assuming i pass, which should not be an issue)
-prior to getting my bar results, i will make about half that salary (with no benefits). i plan to work may, august, and september at this rate.
-my girlfriend of 3 years and i are planning to move in together. she is a phd student and makes only $12,000/y as a stipend, but she will contribute $700/m to rent.
-i have no savings. i will finish school with about $122,000 in federal student loan debt. i also have a car lease for $320/m that will expire 3 years from now. i have a credit card with a $10,000 limit that i completely pay down each month.
-my credit score is about a 750 (maybe a little higher -- i checked recently).
-my student loan payments will start in october, and i will need to pay about $1,050/m for 10 years.
-i will save approximately $2,500 per month, after taxes, if i stay in my current home.
-i conducted an extremely thorough analysis of my finances. i would be able to take out a 5/1 arm and afford a $418,000 home, based on current average apr rates if i were making $60k/y. i used $60k/y because in a catastrophic situation where i would lose my job, i could definitely find a new one with a salary of $60k. at $100k, i could afford a higher payment, but i do not want to go above $400,000.
-i am considering buying a home on the market, building a stick-built home, or building a modular home. i could build my dream house for $400k (with a 5/1 arm), although i would be in a slightly better financial position in 5 years if i would purchase a home for $230k and take out a 15y fixed mortgage. (i've investigated all of this in great detail and don't want this to be the focus -- the savings in principal and monthly payment reduction only slightly outweighs the expected difference in appreciation between the homes)
-if it makes a difference, last summer i was making $80k/y pro-rated.
-my employment is at-will
so, the obvious question is, how do i qualify? i have no savings. 3x my salary would be $300,000, but after subtracting my student loans, it seems like i would qualify for a mortgage of only about $180,000. but, i can't come close to affording a traditional down payment. it would take me 18 months from october to save up enough money for a $45,000 down payment (20% of $225,000), and i would like to purchase a home that is about 44% more expensive.
my concerns are:
(a) interest rates are expected to rise about 3% between now and when i am able to buy my home (2.5% between october and when i am able to buy my home).
(b) home prices are expected to increase about 2% between october and when i am able to purchase my home.
(c) i will need to find a new home to lease by early 2012 and will not get the extraordinary deal that i have in my current lease, which will mean i will actually only save about $1,800/m from that point forward, which means it would actually take 25 months to refinance, which would mean about a .5% additional rise in interest rates and 2% additional rise in home prices. and, i'd like to start paying off principal immediately (i'm really in a better position financially if i move into a new home than if i continue this lease because of tax benefits, home appreciation, and principal payments).
(d) i would really like to build a house for $400,000. $225k does not buy much in my city (and the alternative is to commute an hour to work each day).
so, is there any way around this? my goal is to buy a home (ideally for $400,000) as soon as possible, even if it means a bit of an increase on my interest rate (given that i think rates will rise dramatically anyway based on current forecasts). i am not sure that i can get a co-signor, but my parents might be willing to do it. they also might be able to lend me money. but, their credit is about the same as mine and so is their combined income which has not been steady recently. they own their own business that just started and could probably lend me some money (probably no more than $20k). i have nobody else that could co-sign.
also, ideally, i would like to purchase in april or may because of how much interest rates are expected to increase between may and october.
i appreciate any help or guidance.
i am looking for advice on how to finance a new home as soon as possible. here is as detailed a description as seems reasonable:
-i will finish law school in may 2011. i will then take the bar in july. i will be studying for the bar in june/july.
-my salary will be $100,000 + benefits at my job when i get my bar results back late september (assuming i pass, which should not be an issue)
-prior to getting my bar results, i will make about half that salary (with no benefits). i plan to work may, august, and september at this rate.
-my girlfriend of 3 years and i are planning to move in together. she is a phd student and makes only $12,000/y as a stipend, but she will contribute $700/m to rent.
-i have no savings. i will finish school with about $122,000 in federal student loan debt. i also have a car lease for $320/m that will expire 3 years from now. i have a credit card with a $10,000 limit that i completely pay down each month.
-my credit score is about a 750 (maybe a little higher -- i checked recently).
-my student loan payments will start in october, and i will need to pay about $1,050/m for 10 years.
-i will save approximately $2,500 per month, after taxes, if i stay in my current home.
-i conducted an extremely thorough analysis of my finances. i would be able to take out a 5/1 arm and afford a $418,000 home, based on current average apr rates if i were making $60k/y. i used $60k/y because in a catastrophic situation where i would lose my job, i could definitely find a new one with a salary of $60k. at $100k, i could afford a higher payment, but i do not want to go above $400,000.
-i am considering buying a home on the market, building a stick-built home, or building a modular home. i could build my dream house for $400k (with a 5/1 arm), although i would be in a slightly better financial position in 5 years if i would purchase a home for $230k and take out a 15y fixed mortgage. (i've investigated all of this in great detail and don't want this to be the focus -- the savings in principal and monthly payment reduction only slightly outweighs the expected difference in appreciation between the homes)
-if it makes a difference, last summer i was making $80k/y pro-rated.
-my employment is at-will
so, the obvious question is, how do i qualify? i have no savings. 3x my salary would be $300,000, but after subtracting my student loans, it seems like i would qualify for a mortgage of only about $180,000. but, i can't come close to affording a traditional down payment. it would take me 18 months from october to save up enough money for a $45,000 down payment (20% of $225,000), and i would like to purchase a home that is about 44% more expensive.
my concerns are:
(a) interest rates are expected to rise about 3% between now and when i am able to buy my home (2.5% between october and when i am able to buy my home).
(b) home prices are expected to increase about 2% between october and when i am able to purchase my home.
(c) i will need to find a new home to lease by early 2012 and will not get the extraordinary deal that i have in my current lease, which will mean i will actually only save about $1,800/m from that point forward, which means it would actually take 25 months to refinance, which would mean about a .5% additional rise in interest rates and 2% additional rise in home prices. and, i'd like to start paying off principal immediately (i'm really in a better position financially if i move into a new home than if i continue this lease because of tax benefits, home appreciation, and principal payments).
(d) i would really like to build a house for $400,000. $225k does not buy much in my city (and the alternative is to commute an hour to work each day).
so, is there any way around this? my goal is to buy a home (ideally for $400,000) as soon as possible, even if it means a bit of an increase on my interest rate (given that i think rates will rise dramatically anyway based on current forecasts). i am not sure that i can get a co-signor, but my parents might be willing to do it. they also might be able to lend me money. but, their credit is about the same as mine and so is their combined income which has not been steady recently. they own their own business that just started and could probably lend me some money (probably no more than $20k). i have nobody else that could co-sign.
also, ideally, i would like to purchase in april or may because of how much interest rates are expected to increase between may and october.
i appreciate any help or guidance.
I think you're aiming too high, too quickly.
Assuming your intuition on rate and price increases is accurate, you'd be in a worse position than at current when the time comes for a purchase. Not having 20% down payment is critical in 2011 (2012, 2013...). You may well be able to finance more than 80% of a purchase price, but you'll find the monthly expense more difficult to handle.
The student loan payments you've noted represent 10% of your gross monthly income, it appears. That's going to cause a severe reduction in what a typical lender might allow for qualifying for a new mortgage. Your auto lease will also hamper you.
It'd be a worthwhile exercise to actually sit down with a loan professional and run your numbers. That way, you can avoid some of the namby-pamby advice you're likely to receive in the next few days online.
Assuming your intuition on rate and price increases is accurate, you'd be in a worse position than at current when the time comes for a purchase. Not having 20% down payment is critical in 2011 (2012, 2013...). You may well be able to finance more than 80% of a purchase price, but you'll find the monthly expense more difficult to handle.
The student loan payments you've noted represent 10% of your gross monthly income, it appears. That's going to cause a severe reduction in what a typical lender might allow for qualifying for a new mortgage. Your auto lease will also hamper you.
It'd be a worthwhile exercise to actually sit down with a loan professional and run your numbers. That way, you can avoid some of the namby-pamby advice you're likely to receive in the next few days online.
To give a greatly abbreviated explanation of my estimations based on a 400k home and a 5/1 ARM @ 4.45% APR:
Monthly take-home salary = $8,333
Home mortgage payment + insurance + property taxes - $700/m payment = $1,837
Utilities = $250 (home would have solar panels)
Federal + State Taxes + Entitlements = $1,955 (home mortgage interest saves me $570/m in federal taxes)
Car Insurance = $50
Dry Cleaning = $50
Loan Payments = $1,028 (I can make these income-based and lower the monthly payment to $547 if I made only $60k)
Gym Membership = $25
Food = $400
Lunch = $150
(Car) Gas = $150
Car Lease = $320
Discretionary Expenses = $500
Health Insurance and Cell phone covered by job.
Total = $7,262 (Savings of $1,071/m)
Total at 60k (Reduction in student loans and taxes) = $5362 (I would need to cut another $300 worth of expenses per month, which could come out of discretionary expenses and food)
Both forecasts assume higher rates of discretionary spending and food spending than I currently make.
So, I feel confident that I will be able to pay for this, I just don't know how I will get a bank to give me a loan.
Also, here is why I save more if I were able to get this house now.
Extra payments per month = $1,737
Monthly Increase in Home value (assumes 3.5% annual increase) = $1,167 ((400000*.035)/12)
Mortgage interest tax savings = $570
Monthly principal payments = $250
$1987 > $1737, and I get to live in a much nicer place. Even if you assume I could invest the $1737 and gain an annual return of 5%, that's only $8 more per month.
Monthly take-home salary = $8,333
Home mortgage payment + insurance + property taxes - $700/m payment = $1,837
Utilities = $250 (home would have solar panels)
Federal + State Taxes + Entitlements = $1,955 (home mortgage interest saves me $570/m in federal taxes)
Car Insurance = $50
Dry Cleaning = $50
Loan Payments = $1,028 (I can make these income-based and lower the monthly payment to $547 if I made only $60k)
Gym Membership = $25
Food = $400
Lunch = $150
(Car) Gas = $150
Car Lease = $320
Discretionary Expenses = $500
Health Insurance and Cell phone covered by job.
Total = $7,262 (Savings of $1,071/m)
Total at 60k (Reduction in student loans and taxes) = $5362 (I would need to cut another $300 worth of expenses per month, which could come out of discretionary expenses and food)
Both forecasts assume higher rates of discretionary spending and food spending than I currently make.
So, I feel confident that I will be able to pay for this, I just don't know how I will get a bank to give me a loan.
Also, here is why I save more if I were able to get this house now.
Extra payments per month = $1,737
Monthly Increase in Home value (assumes 3.5% annual increase) = $1,167 ((400000*.035)/12)
Mortgage interest tax savings = $570
Monthly principal payments = $250
$1987 > $1737, and I get to live in a much nicer place. Even if you assume I could invest the $1737 and gain an annual return of 5%, that's only $8 more per month.
Also, to be clear, I understand that not having 20% down payment means I'm going to be either not qualifying for a loan, or taking a higher rate. With 20% down, I'd be saving about $345/m (based on 7% interest rate). I think that by the time I save $45,000, I will be looking at a 3% rate increase.
So, right now for $225,000, if I made no down payment and the rates were 5%, I'd be looking at a monthly payment (after including property taxes and insurance) of $1,422 based on a 30y fixed. If I saved up $45,000 for a down payment and then took a mortgage of $180,000 with an interest rate of 8% (which is a little disingenuous because by that time home prices are expected to increase) then I would be looking at a monthly payment of $1,508. Additionally, I would have given up a savings of $200/m for about 25 months.
That said, I do realize that it sounds like I would either not qualify for a mortgage or would be subjected to a high rate increase. I would at some point be able to refinance if my projections were wrong (I'd have saved up money for a down payment and the home would probably appreciate in value so I'd be able to provide the banks with an equity cushion).
So, again, I guess I really just want to know whether there is any way to qualify for a mortgage ASAP and what the best way is to keep the rates down.
So, right now for $225,000, if I made no down payment and the rates were 5%, I'd be looking at a monthly payment (after including property taxes and insurance) of $1,422 based on a 30y fixed. If I saved up $45,000 for a down payment and then took a mortgage of $180,000 with an interest rate of 8% (which is a little disingenuous because by that time home prices are expected to increase) then I would be looking at a monthly payment of $1,508. Additionally, I would have given up a savings of $200/m for about 25 months.
That said, I do realize that it sounds like I would either not qualify for a mortgage or would be subjected to a high rate increase. I would at some point be able to refinance if my projections were wrong (I'd have saved up money for a down payment and the home would probably appreciate in value so I'd be able to provide the banks with an equity cushion).
So, again, I guess I really just want to know whether there is any way to qualify for a mortgage ASAP and what the best way is to keep the rates down.
Also, to be clear, I understand that not having 20% down payment means I'm going to be either not qualifying for a loan, or taking a higher rate. With 20% down, I'd be saving about $345/m (based on 7% interest rate). I think that by the time I save $45,000, I will be looking at a 3% rate increase.
So, right now for $225,000, if I made no down payment and the rates were 5%, I'd be looking at a monthly payment (after including property taxes and insurance) of $1,422 based on a 30y fixed. If I saved up $45,000 for a down payment and then took a mortgage of $180,000 with an interest rate of 8% (which is a little disingenuous because by that time home prices are expected to increase) then I would be looking at a monthly payment of $1,508. Additionally, I would have given up a savings of $200/m for about 25 months.
That said, I do realize that it sounds like I would either not qualify for a mortgage or would be subjected to a high rate increase. I would at some point be able to refinance if my projections were wrong (I'd have saved up money for a down payment and the home would probably appreciate in value so I'd be able to provide the banks with an equity cushion).
So, again, I guess I really just want to know whether there is any way to qualify for a mortgage ASAP and what the best way is to keep the rates down.
So, right now for $225,000, if I made no down payment and the rates were 5%, I'd be looking at a monthly payment (after including property taxes and insurance) of $1,422 based on a 30y fixed. If I saved up $45,000 for a down payment and then took a mortgage of $180,000 with an interest rate of 8% (which is a little disingenuous because by that time home prices are expected to increase) then I would be looking at a monthly payment of $1,508. Additionally, I would have given up a savings of $200/m for about 25 months.
That said, I do realize that it sounds like I would either not qualify for a mortgage or would be subjected to a high rate increase. I would at some point be able to refinance if my projections were wrong (I'd have saved up money for a down payment and the home would probably appreciate in value so I'd be able to provide the banks with an equity cushion).
So, again, I guess I really just want to know whether there is any way to qualify for a mortgage ASAP and what the best way is to keep the rates down.
I'm sorry, Open; but I can't fathom your math here. In reviewing the potential of a borrower to achieve a purchase, the majority of your calculations wouldn't bear any relevance. Lenders don't look at your food, gas, lunch (something other than food?), dry cleaning, car insurance, etc. as part of their calculation.
As for your monthly payment calculation, I'm not convinced that those numbers are accurate, but of course I'm not privy to real estate tax rates in whatever section of the country you occupy.
I don't know what interest rate you're assuming, either (APR of 4.45 could be 4%, 4.125%, 4.25%, 4.375%), but using 4.25% and a loan amount of $320000 (20% down which you don't have), I get a monthly P&I payment of $1574 for 30 years...excluding taxes, insurance, etc. Are taxes really that low in your neck of the woods? Your g/f's contribution isn't going to be taken into consideration with any lenders either, so that $700 you subtracted isn't relevant. Of course, she could conceivably be a borrower, but stipends aren't generally given a whole lot of credence either.
I don't have the wherewithal to calculate for you - hey, I don't even originate anymore - so your best move is to pick up the phone and call, or drive to, a mortgage loan originator and go through the exercise with that person.
There may be others who stumble upon this thread who can be of additional assistance to you, so keep your eyes peeled for that. Frankly, I don't feel up to the task given my lack of current resources, so I'll bow out now, but again state that I'm skeptical about your reasoning.
As for your monthly payment calculation, I'm not convinced that those numbers are accurate, but of course I'm not privy to real estate tax rates in whatever section of the country you occupy.
I don't know what interest rate you're assuming, either (APR of 4.45 could be 4%, 4.125%, 4.25%, 4.375%), but using 4.25% and a loan amount of $320000 (20% down which you don't have), I get a monthly P&I payment of $1574 for 30 years...excluding taxes, insurance, etc. Are taxes really that low in your neck of the woods? Your g/f's contribution isn't going to be taken into consideration with any lenders either, so that $700 you subtracted isn't relevant. Of course, she could conceivably be a borrower, but stipends aren't generally given a whole lot of credence either.
I don't have the wherewithal to calculate for you - hey, I don't even originate anymore - so your best move is to pick up the phone and call, or drive to, a mortgage loan originator and go through the exercise with that person.
There may be others who stumble upon this thread who can be of additional assistance to you, so keep your eyes peeled for that. Frankly, I don't feel up to the task given my lack of current resources, so I'll bow out now, but again state that I'm skeptical about your reasoning.
To be clear, I was stating that I have calculated in great detail what I will be able to AFFORD to pay, along with the most profitable long-term route if I could qualify for a loan at an average rate. I do not know a whole lot about how I would be able to qualify for a loan, aside from the fact that I understand the rules of thumb for generic underwriting procedures.
The calculation was:
$400,000 with 4.459 with 1.5% property tax and .5 PMI for 30y loan = $2,517/m - $700 (payment received per month) = $1,817.
The actual average interest rate on 5/1 ARMs right now is 3.63%, but I assumed that if I got $0 on each of closing costs, origination fees, and Discount Points, my rate would jump to 4.459% (this jump was relatively theoretical)
The calculation was:
$400,000 with 4.459 with 1.5% property tax and .5 PMI for 30y loan = $2,517/m - $700 (payment received per month) = $1,817.
The actual average interest rate on 5/1 ARMs right now is 3.63%, but I assumed that if I got $0 on each of closing costs, origination fees, and Discount Points, my rate would jump to 4.459% (this jump was relatively theoretical)
Also, I did make a mistake. If I paid 20% of a home's value, I would probably not need to make PMI payments. I also imagine PMI would be much higher than .5 if I took out a very low money down mortgage.
Still, in my opportunity cost, I would be accruing interest on the $45k I would not need to make as a down payment, I would still have that $45k, and I would have saved $200/m for 25 months to come out to $5,000 extra.
Thank you for the help.
Still, in my opportunity cost, I would be accruing interest on the $45k I would not need to make as a down payment, I would still have that $45k, and I would have saved $200/m for 25 months to come out to $5,000 extra.
Thank you for the help.