Expert: Jessica Bryan - 6/4/2007

Question
Thanks for taking the time to lend some advice!

Recently married, my wife and I are currently renting a nice house from my family for fairly cheap (3/2 for $400/month).  My wife works 30 miles away, and we definitely do not intend to stay in this town to raise our family (town on the decline, poor schools, etc).  We intend to move to the town my wife works in and out of this town as soon as possible.

We have some debt (some furniture debt, one car payment, less than 2k in student loans).  We have a combined income of approximately $60-65k, I work in a family business that my income will only increase as I take ownership.  Both have excellent credit (when we bought a car in Jan. mine was 748 I think...hers is in the 700's as well).

While the housing prices are low (and our neighborhood declines), we are getting increasingly eager to purchase our first house.  We're also a little unsure about how much "house" we can afford.  We intend on staying in our next house at least 15 years.  Obviously you can't give us a real accurate answer since you don't know just how much debt we have currently, but I didn't know if there was a general rule of thumb.  We've seen houses from $126 to our favorite at $150k.  But we just don't want to get in over our head.

Due to her still in graduate college, and myself a year graduated, we have limited savings.  I have roughly 4k in savings bonds, and a couple thousand in savings.  I've heard varying opinions on 100% financing.  At first I thought it wouldn't be a good idea, but I've heard from others that we should take advantage of it (with our income plus our credit).

So, given the small amount of info I've given you, would you recommend against purchasing the $150k home?  What about the 100% financing? I've been told that an FHA loan would be good for us.  Or should we just hold off for a few years to try to save up at least a respectable downpayment?  Thanks so much!  

Answer
Dear Jeff;
I applaud you for your insightful question.  It is good to know that you are planning ahead.

Based on the information you have given me I estimate that your monthly income is a little over $5,000 per month. A lender will use a ratio when figuring your loan amount and what you will qualify for as approximately 25 percent
and 33 percent.  That means that your monthly principal and interest payment should be no more than around $1,250. Your monthly payment that includes house, taxes, insurance and other recurring payments such as loan debt and auto debt should be no more than approximately $1,650 per month.  This is a 'soft' ratio depending upon the type of loan you get and many other factors as well.  As for 100 percent financing this depends upon the area in which you are buying.  If you feel like prices are going up then it might be worth the risk to buy a home that will appreciate in value in a few years.  Certainly a home that you plan to live in for a long period of time will    most likely increase in value and you won't have to face selling at a loss or being upside down in your loan.  100 percent financing is not a good idea when someone buys in a questionable market.  Let's say, for example, you bought a home that was valued at $150,000 and the following year the value had dropped several thousand dollars.  If you had gotten 100 percent financing you would be making mostly interest payments the first year and would have paid off very little of the principal.  Then, let's say that the home sold for less than you owed on the home.  You would have to pay the bank the additional amount of money.  I think that it is safe to get 100 percent financing when you plan on staying in a home for a long time.  Your income will go up, you will pay off more of the principal, values will increase, and you will probably do improvements and updates to the home as well during that time.  I see no reason for you to wait. However, it is important for you to buy in a good neighborhood (preferably a new neighborhood that is not in a decline.)  Go to a lender and get pre-qualified for a loan.  Your lender will tell you exactly how much home you can afford.  However, I think that you will find that the interest rates being where they are right now will give you enough of a margin that will allow you to qualify for a loan of $150,000 without too much worry and stress.

Good luck and best wishes,
Jessica Bryan