Low Rates Add $120K to the “Affordable” Home Price

As promised in yesterday’s affordability post, here’s an updated look at the “affordable home” price chart.

In this graph I flip the variables in the affordability index calculation around to other sides of the equation to calculate what price home the a family earning the median household income could afford to buy at today’s mortgage rates if they put 20% down and spent 30% of their monthly income.

King Co. Actual & "Affordable" Home Prices

The “affordable” home price has made some strong gains recently thanks to the combination of increasing incomes and decreasing mortgage interest rates. The “affordable” home price in King County hit an all-time high of $496,051 in April, with a monthly payment of $1,820.

If interest rates were at a more reasonable level of 6 percent (which is still quite low by historical standards), the “affordable” home price would be just $379,423—about $120,000 lower than it is today.

Here’s the alternate view on this data, where I flip the numbers around to calculate the household income required to make the median-priced home affordable at today’s mortgage rates, and compare that to actual median household incomes.

King Co. Home Price, Income Req. to Afford

As of April, a household would need to earn $70,439 a year to be able to “afford” the median-priced $480,000 home in King County. This is up from the low of $46,450 in February 2012, but still down slightly from the 2014 high point of $72,625 set in July. Meanwhile, the actual median household income is around $73,000.

If interest rates were 6% (around the pre-bust level), the income necessary to buy a median-priced home would be $92,091—27 percent above the current median income.

In other words (and I realize I sound like a broken record on this), ridiculously low rates are basically the only thing allowing home prices to be as ridiculously high as they are today.

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About The Tim

Tim Ellis is the founder of Seattle Bubble. His background in engineering and computer / internet technology, a fondness of data-based analysis of problems, and an addiction to spreadsheets all influence his perspective on the Seattle-area real estate market. Tim also hosts the weekly improv comedy sci-fi podcast Dispatches from the Multiverse.

55 comments:

  1. 1
    Mellon says:

    6% is only low by historical standards if you ignore everything before 1965. We’ve had a crazy ride to the peak in the 80s, and then back down to the ‘normal’ level. For the first half of the 20th century, 6% was nothing to brag about.

  2. 2
    A says:

    RE: Mellon @ 1 – Yep. And portion of the decline has been a normalization of the term premium, the residual spread, from its rise in the 70s. Low inflation expectations, lower volatility, and lower term premiums suggest that we should look at longer historical data points, as well as international experience, to figure out “normal”.

  3. 3
    ongsomwang says:

    The idea that someone making 70K a year could afford a home around 480K is pretty laughable in this day and age.

  4. 4
    John Wake says:

    “… ridiculously low rates are basically the only thing allowing home prices to be as ridiculously high as they are today”

    Only thing?

    What about the tech “bubble”? Could that be pumping money into Seattle to chase homes.

    Is Seattle the new Vancouver with tons of foreign investors bring in money to chase homes? That is, does Seattle have a higher number of foreign buyers than say a similar sized city like Minneapolis?

  5. 5
    Weasel says:

    By ongsomwang @ 3:

    The idea that someone making 70K a year could afford a home around 480K is pretty laughable in this day and age.

    I wonder what math Tim is using to arrive at that answer? Based on recent experience about half that figure – 250k is more realistic.

  6. 6
    Mike says:

    By ongsomwang @ 3:

    The idea that someone making 70K a year could afford a home around 480K is pretty laughable in this day and age.

    I have been seeing a lot more remodels and new builds around Ballard that include an ADU. Granted, they tend to be priced above $480K.

  7. 7
    Cornix says:

    Yes, 480K seems incredibly high for someone making 75K~ish a year, not to mention trying to save up 96K for a 20% down payment! It boggles me to think about trying to amass that money along with saving for retirement, having a decent emergency fund, and living regular life. This would be an extreme challenge to do alone without help, let alone with a family of any size.

  8. 8
    Cap''n says:

    6 percent is not normal going into the future. Those type of returns on a mortgage with the higher lending standards of today is too much return for the lower risk. Only way rates go back up that high is if risk increases with shady lending practices, at which point there is more demand in the market and prices do not drop. So, whether you think it “normal” or sane, the fact is those are not the rates the market has set and what this analysis shows is that median price and income considering lending costs are in harmony. Not a bubble.

  9. 9
    Aaron says:

    Tim,

    Thanks for the info. One question on the calculation for the historical “affordable” home price – Are you using a constant interest rate (i.e. today’s rate) for all of the past years or are you using the prevailing interest rate from each past year in calculating the historical “affordable” home price for that year? It seems that the later is the most appropriate to show the actual affordable home price for a given historical year (since today’s rates were likely not available during that historical year).

    I only ask because the wording “to calculate what price home the a family earning the median household income could afford to buy at today’s mortgage rates which makes it seem like you used a constant rate (today’s rate) for the historical values.

    Thanks in advance,
    Aaron

  10. 10
    herrbrahms says:

    I think the data is missing a key element – the monthly costs of property taxes and homeowners insurance that get rolled up into escrow. Nothing about those expenses is voluntary. 10 – 30% of the monthly bill can be escrow, so let’s not pretend like it doesn’t exist as its own strain on the mortgagor.

    Or are we to believe that a real monthly payment that demands 35 – 40% of the household’s gross income is affordable? It certainly doesn’t sound like it to me — what if these poor people need a new roof one day?

  11. 11
    Erik says:

    RE: Cornix @ 7
    These are trust babies like the commenter named “3rd Generation.” I railroaded him off this site, but he was handed a trust fund and a real estate business that he was slowly losing it. He probably made less than 75k per year and lived in a 480k home.

  12. 12
    scaredy cat says:

    RE: herrbrahms @ 10

    I’d agree leaving out tax and insurance seems to overstate what someone could actually hope to carry.

  13. 13

    By scaredy cat @ 12:

    RE: herrbrahms @ 10

    I’d agree leaving out tax and insurance seems to overstate what someone could actually hope to carry.

    It’s an excellent point, and one I don’t recall anyone making before, which is odd for a recurring piece.

  14. 14
  15. 15
    shelby says:

    I found this on another national blog, found it very interesting.

    http://finance.yahoo.com/news/why-1-4-silicon-valley-135956332.html;_ylt=AwrXgSMGNl9VUToAdSmTmYlQ;_ylu=X3oDMTByNzdqbzZjBGNvbG8DZ3ExBHBvcwMzBHZ0aWQDBHNlYwNzYw–

    An excerpt:

    “At a recent conference, the founder of one technology titan asked another if it was even possible to build a platform-technology company outside of Silicon Valley. It was a fair question, given the dominance of Google (GOOGL), Facebook (FB) and Apple (AAPL). But from where I sat, it seemed easier to build a company of that size today almost anywhere except Silicon Valley.

    Others have had the same thought. A spate of start-ups and now venture funds have recently left Silicon Valley for LA ( Snapchat ), Chicago (Keepsake), Seattle (Sherbert) and even Ohio (Drive).

    The company where I work, Redfin , understands this impulse better than anyone. We are real estate brokers, with technology used by 10 million-plus people each month looking to move. And the simplest trend we see in American life is that Silicon Valley is no longer just the place talented people move to; it’s the place those people are moving from. (Tweet this)

    In 2011, 1 in 7 people in the Bay Area searched Redfin.com for homes outside of the Bay Area. Now it’s 1 in 4. As Adam Wiener, our chief growth officer, announced to other executives last month: “The dam has broken.”

    In the past four years, the number of Bay Area people searching for Seattle homes has quadrupled; for Portland homes, that number has quintupled. For every 13 Bay Area people searching for a home, one is now searching in the Pacific Northwest alone.”

  16. 16
    Sisyphus says:

    What about Chinese investors? They’re buying houses with cash. They don’t care what mortgage interest rates are.

    The BIG question I have: now that the Chinese economy is on the skids, with the Chinese real estate bubble starting to burst – how will that impact US real estate? Will the Chinese sell their US houses in order to liquidate assets? Or, will they accelerate home purchases here, to get their money out of China in a “flight to safety”?

  17. 17
    Wanttobuybutnotatthatprice says:

    I am working with a real estate broker and he also does loans. He has helped me be more flexible in thinking about the price. It’s really more like an equation with 3 key elements: The home price, the taxes and the interest rate. Each part really makes a difference for example having high property taxes or even .5 % higher on your interest rate can lower your purchasing power by hundreds of dollars on your payment. For example the first lender we tried before we met our current broker was offering 205k @ 4.5 % which we thought was high and sent us looking other places. If the rate was 4% we would get 230k loan and pay just about the same payment.! We also with the new lender are qualified for up to 300k at 4%. Really does pay to shop around! Being at the bottom line for a single family home 230k-275k I can tell you that will be just about the right payment for our single income family that makes about 60k a year. That would be about the same as rent. So 70k salary buying over a 400k priced home seems off. I should also mention we have very little debt and I believe most people do so again I don’t think the guy that makes 70k can’t afford that kind of payment because he might have student loans, credit card debt etc.

  18. 18

    RE: shelby @ 15
    When They Leave the Silicon Valley

    Where will they get jobs? Searching Redfin doesn’t mean landing a job in Seattle.

  19. 19
    herrbrahms says:

    Maybe I’m old fashioned, but the thought of buying a home in a new geographic area immediately upon moving there seems an awful idea. Not only have you not answered the obvious questions for yourself of whether you want to plant roots, but you probably also don’t know the area well enough to avoid properties that will aggravate your pet peeves.

    Say that you’re an emergency room physician. You come and buy a gorgeous house on a steep hill in July, when the birds are singing and the mountains are visible in the distance. Then December brings one of our occasional snowstorms, and since you’re from back east, you didn’t know that Seattle waits for sidestreets to melt out… even if it takes weeks. You can’t telework, so you’re reduced to having a coworker pick you up at the bottom of the hill each day.

    Some people would blame the house for that, but was it the house’s fault?

  20. 20
    wreckingbull says:

    RE: Wanttobuybutnotatthatprice @ 17 – He forgot to tell you the fourth – maintenance. Over the long run, the rule of thumb is about 1% of home value, per year, and given the quality of Seattle homes, this is probably about right.

    Of course, add a fifth, which is improvements. #4 and #5 have added quite a bit to my ownership costs, even when 98% DIY. I have saved every receipt over the years, and I wince when those file folders come out of the cabinet.

  21. 21
    Erik says:

    RE: shelby @ 15
    It’s a Chinese and Californian invasion! I welcome them to bring their pots of loot.

  22. 22
    redmondjp says:

    RE: herrbrahms @ 19 – “On a steep hill” – in Seattle, that’s code for “May slip down the hill during heavy rains and/or an earthquake.” I suggest hiring a geotechnical engineer to assess such a situation before buying. Yes, it will be costly,. but the alternative could cost much more.

    RE wreckingbull @20: Floodplain/flood insurance is another potential issue to add to the list. How about HOA dues? Or sewer capacity charges (for homes that weren’t connected to the KC sewer system before 198x). There are hidden costs coming out of the woodwork everywhere you look!

  23. 23
    Mike says:

    By wreckingbull @ 20:

    RE: Wanttobuybutnotatthatprice @ 17 – He forgot to tell you the fourth – maintenance. Over the long run, the rule of thumb is about 1% of home value, per year, and given the quality of Seattle homes, this is probably about right.

    Of course, add a fifth, which is improvements. #4 and #5 have added quite a bit to my ownership costs, even when 98% DIY. I have saved every receipt over the years, and I wince when those file folders come out of the cabinet.

    Maybe they’re not planning on doing any maintenance. A lot of people don’t.

  24. 24
    Wanttobuybutnotatthatprice says:

    I have money for maintenance but your right most people would not account for that. RE: Mike @ 23

  25. 25

    RE: Wanttobuybutnotatthatprice @ 24 – I think he meant a lot of people don’t do any maintenance. So if they did plan for it, the cost would be zero. Unfortunately, he’s right!

  26. 26

    By redmondjp @ 22:

    Or sewer capacity charges (for homes that weren’t connected to the KC sewer system before 198x).

    Parts of Tukwila are brutal. If your house is on septic and you sell, you have to connect and pay the city a connection charge in addition to the KC capacity charge, and sometimes/usually/often that charge cannot be paid over time. You have to do that even if the septic is still fully functional. It can easily wipe out any equity of owners of houses in that area.

    On the bright side, the city apparently thinks a foreclosure also triggers the requirement to hook up and pay. Ken Harney recently had an article claiming that giving HOAs a super-priority over the mortgage debt for 6-9 months dues might impact the willingness to loan. I really doubt that, but these sewer connection charges very well might.

  27. 27

    RE: Kary L. Krismer @ 26
    Speaking of Bankrupt HOAs

    They finally fired my HOA board over lying about the imminent water main breaks occurring over a year ago, needing the $300-400K loan requiring liens on the units….LOL

    Here’s what they legally should/can do for maintenance contingencies…..they can like raise our HOA’s dues $80/mo [temporarily I pray] and in 4 years the 110 units save up the $300-400K cash. Now you can fix everything with cash, no bank loan or long winded consultant report with attorneys’ fees needed.

  28. 28

    RE: Kary L. Krismer @ 26
    My Foreclosure in Kansas City

    The $26K foreclosed home was hit with some upkeep bills [which I gladly paid]…Code Enforcement ordered the backyard totally landscaped and the eaves and trim replaced and painted…the bottom line, about $4k in maintenance. Backed up with receipts. I thanked Code Enforcement for their suggestions; the four dead trees were huge in the backyard [$500/piece to remove] and getting them cleared out removed a safety and environmental hazard removed….these problems had festered for 5-10 years….Code Enforcement doesn’t go after the locals….LOL

    I’m going up there next month, the 1/2 acre oak shaded landscaped backyard will need a picnic table and barbeque now…..Ahhhhh….my vacation property. I just hired mowers and trimmers for $35 a pop to keep it looking nice :-)

    Oh, I forgot I’m giving it to my daughter….LOL

  29. 29
    Cornix says:

    No matter how slovenly you are, there will be upkeep of at least minimal/disaster reaction nature to keep the toilets flushing and walls standing. I’m from rural Appalachia and know the charm of blue tarps and orange foam repairs, but those don’t fly long term in city limits.

  30. 30
    Mike says:

    By Cornix @ 29:

    No matter how slovenly you are, there will be upkeep of at least minimal/disaster reaction nature to keep the toilets flushing and walls standing. I’m from rural Appalachia and know the charm of blue tarps and orange foam repairs, but those don’t fly long term in city limits.

    Some people are allowed to get away with them. It’s up to neighbors to report code violations, so a lot of stuff doesn’t get reported. I can assure you there are no shortage of hillbillies living in Seattle doing tarp and foam repairs (or less) to their homes adjacent to the ‘super wealthy’. It’s actually a bit of a Seattle tradition.

  31. 31
    Cornix says:

    By Mike @ 30:

    :
    Some people are allowed to get away with them. It’s up to neighbors to report code violations, so a lot of stuff doesn’t get reported. I can assure you there are no shortage of hillbillies living in Seattle doing tarp and foam repairs (or less) to their homes adjacent to the ‘super wealthy’. It’s actually a bit of a Seattle tradition.

    That is actually strangely comforting to me. Now if we can only have all the hunting dogs bust out of the pen one day and chase all the neighborhood kids I’ll feel right at home.

  32. 32
    scaredy cat says:

    RE: Cornix @ 31

    We have chickens in our neighborhood that get out every couple of weeks and wander around does that help?

  33. 33
    Cornix says:

    By scaredy cat @ 32:

    RE: Cornix @ 31

    We have chickens in our neighborhood that get out every couple of weeks and wander around does that help?

    What neighborhood are you in? Because throw a cow or a goat in the road occasionally and I’m in! All I need is 2x our income saved up as a down payment and an extra 50 k to tear out the newspapers and coffee cans someone stuffed in there as insulation and I’m gold.

  34. 34

    RE: Cornix @ 33 – Years ago for a short time there was a chicken roaming First Hill near Broadway and Pike. Also I saw one of the biggest raccoons there I’ve seen in my life–much bigger than anything you’d see in the woods around here.

  35. 35
    greg says:

    >>>>Or are we to believe that a real monthly payment that demands 35 – 40% of the household’s gross income is affordable? It certainly doesn’t sound like it to me — what if these poor people need a new roof one day? <<<<<<<

    say I make $200k I can pay 60% of my income and still be fine. That 30%-40 % really relates to lower income buying more home than they can afford…

  36. 36
    greg says:

    Great Post Tim, It makes it clear to pretty much anyone.

  37. 37

    By greg @ 35:

    say I make $200k I can pay 60% of my income and still be fine. That 30%-40 % really relates to lower income buying more home than they can afford…

    That’s another good point I don’t recall having been made before in this series. Odd.

    Just to clarify it a bit, it’s sort of the inverse of the argument regarding sales taxes being regressive. Sales taxes are regressive because lower income people have to pay a higher percentage of their income on things that are subject to the tax.

    Switching back to housing, the higher your income, the higher the percentage of your income you could have left and still meet your other monthly expenses. So let’s say someone was netting $100,000 a year, and paying $40,000 of that to housing. That would leave $60,000 for other expenses. If their net income somehow doubled, they could pay 70% for housing ($140,000) and still live the same lifestyle with the same $60,000 for other expenses.

    And the reason this is important is by definition the median is half the sales, so the upper half of the sales are likely going to be by people who are in the higher incomes and able to pay a higher percentage of their income.

  38. 38
    boater says:

    RE: Kary L. Krismer @ 37
    in theory that’s true but from what I’ve seen in practice it’s not.
    Oh now i have enough money to pay someone to clean the house, so the gardening. Well maybe i want the more expensive car. Targets got lame clothes lets go to Nordstroms. I’ll eat out more. You rarely “upgrade” just one part of your lifestyle.

  39. 39
    Rudolfo says:

    RE: boater @ 38
    But do all aspects of your lifestyle upgrade equally?

    Of course not.

  40. 40
    boater says:

    RE: Rudolfo @ 39
    No they don’t march in lock step but that doesn’t mean that housing will automatically get the increase. People will still do the calculation of ‘I could buy this house and be stretched or I could but another house, go on two more vacations a year, get a house cleaner and yard guy and drive a more expensive car.’

    People making more money generally want to feel like they are making more money and eating raman in an expensive house just doesn’t feel like you’re living the dream. If you’re really smart and you want to feel rich the most effective way to do that is move to a cheaper neighborhood. That’s not what most folks do but if I recall correctly psychological studies show happiness correlates well with earning more than $70k a year and living better than the folks around you. The $70k has to do with meeting basic expenses like shelter, health care, nutritious food, reliable transportation etc. The living better than those around you satisfies a need to feel successful and cuts down on the keeping up with the Jones’ problem.

  41. 41
    Kyle says:

    Does anyone knows the origin of the “30% of gross income” rule of thumb used for determining an affordable mortgage? Specifically, I’m curious if it was formed when retirement pensions were prevalent and student loan debt was much lower.

    Seems a better rule would be based on a household’s net income less debt and retirement contributions. Essentially cash available for a mortgage.

    Anecdotally, our first home mortgage was about 18% of our annual income. We recently sold and are budgeting for a mortgage payment of 15%-16% on the next one. 30% would be extremely tight for us.

    I’d be interested to hear what % others dedicate to their mortgage. Maybe a poll?

  42. 42
    Rudolfo says:

    I do not know the history, but lenders cap your total monthly debt obligation at 36% (of your gross income).

  43. 43
    Kyle says:

    RE: Rudolfo @ 42

    Interesting. So assuming 30% goes to mortgage that leaves 6% for other debt. For a $70k income that is $4.2k (or $350/mo). Basically a car payment. And this is at the MAX level of lending

    This rule of thumb seems far too aggressive.

  44. 44

    RE: Kyle @ 43

    Historically the conventional loan ratios were set at 28% gross for PITI (Principal, Interest, Taxes and Insurance) called the Front End and 36% for housing plus debt payments (car, credit cards, student loans). If you had less than 10 months to pay off a debt, then they often excluded that one and clearly if the payoff was 6 months or less away.

    If you had 10% debt then your front end dropped to a 26% allowance for house payment. If you had 12% debt then your front end dropped to a 24% house payment. So the reason for the back end was to establish a max total debt and limit your ability to purchase a house accordingly. It did NOT work in reverse for conventional loans (only VA loans with 40/40 ratios) so that if you had zero debt, your front end max stayed at 28%, as the lender assumed at some point in 30 years you would acquire debt.

    You can google for historical information using “DTI” – Debt to Income Ratios or “28/36 Rule”

    More important than when it began is when did lenders loosen up on this decades old standard and why. Mostly this started during the double digit inflation years when lenders were recommending that buyers go to their max given income was increasing at a rate of 10% to 18% per year at that time. The income was increasing while the mortgage payment stayed constant. Abnormally high interest rates,, up to 18%, were impacting affordability at time of purchase. The mortgage could be refinanced down to a lower rate when the double digit years were behind us. That’s when they expanded to 33% front end and a 38% back end and 28/36 rule turned into 33/38 in many cases. That did not change the fact that there is to this day a “28/36 rule”, it only increased the instances where people did not follow the rule. The rule itself is still in existence to this day.

    Then the problem became the increase in the price of cars and the 1 car family norm changing to a 2 car family norm. Young people who already had two new car payments found themselves too debt heave to buy a home. That issue was not resolved by changing the home purchase ratios as much as it was relieved by car companies offering lease programs to greatly reduce the problem of car payments being too high to fit the 28/36 rule.

    The exotic loan years that caused the credit crisis was about sub-prime ratios of as much as 50/75 as to front end back end and high rates on top of that. The only way they could get away with that was to go to zero down with no private mortgage insurance on the top 20% of the purchase. PMI companies would never have approved a 50% front end ratio and a 75% back end ratio. So the lenders became self insured and financed 100% or more of the purchase to get around the PMI companies’ more conservative stance.

    http://en.wikipedia.org/wiki/Debt-to-income_ratio

    http://www.investopedia.com/terms/t/twenty-eight-thirty-six-rule.asp

    I didn’t read the info in those links as I’m heading out to meet clients at a house. But I’ll assume they basically say what I just said unless someone notes in a subsequent comment otherwise.

  45. 45
    whatsmyname says:

    RE: Kyle @ 43
    I think the 30% rule has always been more of a top limit, rather than the ideal number. It also doesn’t differentiate for cash rich or cash poor balance sheets. I agree it is not a good number for what most people should do, but it is helpful for determining what motivated people could do. And that is helpful to set a limit in expectations for the inexperienced.

  46. 46
    Kyle says:

    RE: Ardell DellaLoggia @ 44

    Wow. Thank you for taking the time to post that. Incredibly informative and interesting to see the links between these financing instruments. And very well written to boot! Thanks again

  47. 47
    Kyle says:

    RE: whatsmyname @ 45

    Could just be me but I’ve never heard it presented as a top limit. Always as a “rule of thumb”. Every realtor I’ve dealt with has used this to set our target home price.

    I actually think it’s a dangerous guideline for the inexperienced in that it sets a false sense of security. Tim’s analysis is a good example. Conclusion is that, on average, a $70k income household with a 20% down payment can afford a median home in Seattle. I just don’t believe that’s true. Not to say it can’t be done (e.g. single guy, no kids, ~$400/mo other debt) but those are the exceptions. The vast majority of $70k households should set their target home price well below the median.

    Just want to add that its clear the analysis is not intended to make any financial recommendations, simply applying the guideline to the data. The quotes around affordable in the article were probably no accident

  48. 48

    RE: Kyle @ 47

    The other rule of thumb is 3 to 4 times gross income. 3.5 times gross income of $70,000 loan amount $245,000. The payment $1,150 principal and interest plus $250 a month taxes and insurance or $1,400 a month. $70,000 divided by 12 is $5,833. $1,400 divided by $5,833 is 24% of gross income. 4 times gross only works when rates are abnormally low. 4X gross of $70,000 would be a $280,000 loan, $150 more on the payment or $1,550 or 27% of gross income.

    So 4 X gross income and 28% front end are about the same right now. That changes as rates change. You can use either one.

    Going to max a lender will allow, which is much more than that, is usually done if there is an unreported or not counted by the lender extra income component. Counting only one spouse on the loan because the other has a lower credit score, but the other spouse does have an income you are not using to qualify, is an example of why one would push the loan limits to the max on the one of two incomes you are using to qualify. A first year doctor. A relocated couple where the “trailing spouse” doesn’t have a job yet in the new location, but will.

    When you move to much above or below the 28/36 rule there should be a good reason why you are doing that. Going lower than 28% might be because you pay for private school or you have a child with Olympic level talent that is an extra expense. (Had a client that had an Olympic level skater as example with lots of travel and training expense.) Could be a handicapped child…many other reasons. Lower than 28% should have a good reason as much as higher should have a good reason. But that reason should come from you vs someone else, and be a sound basis.

    Knowing the 28/36 Rule puts you in the driver’s seat as only you know if your situation is likely to improve or get worse. If you are counting a couple of years of overtime as example, or bonus income, you might want to exclude that and not bet that it will continue for the life of the loan. The juggling up and down from 28/36 should be done by the borrower based on their knowledge and predictions of their own family income, and not by a lender just because they can.

    Always qualify yourself and tell the lender what the loan amount and home price will be, not the other way around. Do however get the pre-approval letter at the max they will lend, as a pre-approval that is much higher than your offer price could help you win in multiple offers. Sellers don’t like people who are barely qualified to buy their home. No one likes a nail biter to the day of closing.

  49. 49
    Drshort says:

    Assuming your credit is good, you can typically go up to 43% debt to income (“back end”). That’s the new standard per the consumer finance protection bureau (CFPB):

    http://www.consumerfinance.gov/askcfpb/1791/what-debt-income-ratio-why-43-debt-income-ratio-important.html

    The 28/36 rule is as old and outdated as Ardell’s NKOTB mix tapes.

  50. 50

    RE: Drshort @ 49

    Almost all of my clients purchase below the 28/36 rule and they are half my age. You must be a lender. :)

  51. 51

    Disability Nursing Care

    It may seem a long way off, but just as college loans and 2nd mortgages need to be paid off ASAP, you’ll need a plan for when you get sick [not if]. This will occur in your 40s and 50s [strokes, diabetes, cancer, heart disease….], hopefully you’ll have a spouse [who doesn’t divorce you] that can care for you at your house. Medical expenses can eat up what’s left of your pay.

    Start saving.

  52. 52
    Blurtman says:

    “…This will occur in your 40s and 50s…”

    Maybe in Alabama and Mississippi, and Fall City, too.

  53. 53
    David B. says:

    RE: boater @ 40 – I’m glad I’ve never really had the “keeping up with the Jones'” problem. It’s probably added years to my life in terms of reduced stress.

  54. 54

    RE: softwarengineer @ 51

    I’m turning 61 in a couple of weeks. Guess I’m beating the odds. The only medical expenses I have had in my life have been when having children. I plan to just bite on one of those suicide capsules that make you foam at the mouth and die within 10 seconds like you see in all the spy movies. I’m a control freak. I’ll just keep one in a ring on my finger and pull the plug when the time seems right. :)

  55. 55
    boater says:

    RE: David B. @ 53 -I’m not sure there is anything better for your financial and emotional health than being secure and happy with what you have and ignoring what you don’t have.

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