Apr 23 2009

How much can we spend on housing?

I’m going to figure out how much I think we can afford, which I can almost guarantee you will be a lower amount than what the lender will say we can get.
We want to make sure to have enough money to save with each paycheck for things like home improvements, maintenance, saving for another car someday, saving for travel, furniture, Johnny’s college and all the other things we could want.
Our current housing expenses:
  • Rent $770 (this will go up to $790 in June. If we go month to month on our lease, it will be an additional $50 per month).
  • Laundry $30-40 per month
  • Electric $80 is the “budget bill” amount
  • Renter’s insurance $105 annually, or $8.75 monthly
  • Total: About $920/month on housing-related things. This figure is with our new rent increase and not with the month-to-month lease. 
With those expenses we live comfortably with room to meet our savings goals. We don’t feel deprived. If we want something, we budget for it and buy it. 
I do think we can increase how much we pay for our overall housing costs. You see, right now, we’re in “save for down payment” mode. 
Once we actually get a house, we won’t need to save for a down payment, since that payment would have already happened, ya know?
I think we can have our overall housing costs at as much as $1,300 per month and still be reasonably comfortable. Here’s what I’m including in those housing costs:
  • Mortgage (principal and interest) $525 
  • PMI $60*
  • Property taxes about $250 per month depending on municipality and assessed value. Insanity, I tell you.
  • Homeowners insurance $50/month? Help me out, what number should I include in my preliminary estimate?
  • Gas & electric $250/month with a “budget bill” plan. This will vary by house. I will request to view utility bills for summer and winter for houses listed for sale. Pittsburghers, am I on target? I do know that winters can produce $300-$400/month gas bills in an older house around here.
  • Water & sewer $50 
  • Trash $15
  • Maintenance $100 [Is this reasonable? We’d set aside money each month to put toward maintenance, so it wouldn’t necessarily be spent each month. Some months would be more, and of course we have an emergency fund to cover crazy things like an exploding water tank or something]
  • What else?
Total = $1,300
* When I spoke with a loan officer yesterday, I was told that we qualify for an FHA or a conventional mortgage. With the FHA, we could expect to pay around $40 per month in PMI and around $60 per month with a conventional, based on her calculations. 
If we can get a mortgage at 5 percent interest, we can afford a house around $100k to $105k, assuming my assumptions are correct. This will vary, depending on the specific property taxes of the municipality and the utility costs.
I told the loan officers that I thought $105k was our upper limit, and they approved us for the amount. They told me that we could probably qualify for a lot more, but I wasn’t interested to find out how much. No need to be tempted, since I know what we can comfortably afford — not them. And, I wouldn’t want our real estate agent to know we qualify for more either. Don’t show me what I can’t afford, lady!
So ah…to all the people who say when you rent, you’re throwing away money, I say look at how much money you’re throwing away when you buy. Mortgage interest, PMI, property taxes, more expensive homeowners insurance, closing costs, maintenance and all the extra utilities you’re on the hook for … goodness. Seems like you’re “throwing away” just as much if not more with a mortgage in the early years. The benefit is that equity that someday you might be able to see again, if things go right.
One final point: If we increase our monthly expenses by $400 or so, as I’m predicting we might, we’ll need to increase our emergency fund by $400 per month as well. For a six-month emergency fund, we’d need an extra $2,400.

Apr 22 2009

Our first steps of buying a house

I consider myself to be pretty cautious when it comes to spending money. I want to make sure I know all aspects of what I’m getting into. 

That’s why I want to make sure we aren’t rushing into this “let’s buy a house” thing. We have about seven months before we’d need to close on a house. That should be plenty of time to research the process and make level-headed decisions.
We need to be prepared to walk away at any time. 
If it’s November 20 and the house we want hasn’t passed inspection and there’s no way we’ll be able to close on November 30 — we’re done. Getting the $8,000 first-time homebuyer tax credit is a huge reason for why we want to buy now instead of waiting. If we don’t make a purchase that qualifies for that, then we’re going to keep on renting, even if that means we’re saying buh-bye to a great house. 
The question I have to keep in mind is, “Will someone else want to buy this house too someday?”
When looking at all houses, I want to remember that someday, I’ll probably want to sell the house. If the house is too quirky or has traits that would make it generally un-sellable, then I should look elsewhere. If the neighborhood isn’t so good or the schools are lousy, I can’t waste my time there.
Finally, we need to be really real with ourselves. Can we seriously afford such a huge undertaking at this time?
We’re crunching numbers, and then crunching them some more. I’ll share my findings and ask for your input soon. If it seems like a decent house would be too much of a stretch for our budgets, we’re not going to do it.
We don’t want to contribute to a “housing crisis: the sequel.”
As I share this possible house-buying journey with you, please keep me in check. If I’m saying crazy things, call me on it. 
Our next step is getting pre-approved for a mortgage. I spoke with a loan officer over the phone and he took basic financial info from me and ran our credit reports while we were on the phone. He said that everything looked good and he expected that we would be approved.
Pre-approval means they take a look at your credit reports and other tangible financials to see your debt situation . We were also asked to supply the last two year’s worth of W2s, a pay stub from the last 30 days and Shane’s transcript from college. Durn it, I’m going to have to order the transcript because I can’t find it anywhere.
We’ll see what kind of loan we might be approved for and then take it from there.
I pulled my credit report from the three reporting bureaus to make sure there were no errors. Shane will do that on his own report when he gets home.
A real estate agent is coming over later this evening to speak with us. So yay, things are moving along!

Hey! I'm Kacie, wife and mother of 3. I write about my family's finance: how we save money, improve our spending, and plan for the future.

I hope I can inspire and encourage you to improve your situation. See disclosure.

I'm adopting a much slower-paced posting schedule, and treating this as a hobby blog now.

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