Unlocking the Mystery of Mortgage Legalese: How AI Legalese Decoder Can Help Determine if a 45% Net Income Mortgage is Right for You
- May 23, 2024
- Posted by: legaleseblogger
- Category: Related News
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## Searching for a Home in Utah: The Struggle Continues
My wife and I have been on the hunt for a new home in Utah, and it has proven to be quite a challenge. Recently, we came across some enticing new townhomes on the market for $379,000. The offer includes a special interest rate of 5.9%, and we have managed to save up $20,000 for a down payment. After crunching the numbers, we calculated that the mortgage would amount to $2,500 per month, while my net monthly income stands at $5,600. The location is promising, with potential for appreciation over the next five years, making it a tempting prospect. I wonder if anyone else has grappled with a mortgage-to-income ratio of this magnitude.
### Exploring the Details
– My gross annual income currently stands at $102,000, and I anticipate an annual increase of $5,000.
– The $2,500 monthly payment encompasses HOA fees, property tax, and insurance.
– My wife is on track to complete her RN degree within a year, and she presently earns $800 per month as a medical assistant.
– We are considering starting a family in a year and a half.
– At 27 years old, I am in the prime of my career.
– Currently, we are paying $1,500 in rent, with an average monthly savings of $2,000.
## How AI Legalese Decoder Can Help
AI Legalese Decoder can assist in navigating the complex legal and financial terms associated with purchasing a new home. By utilizing this tool, you can quickly decipher and understand any confusing jargon or fine print in the real estate contract. This can provide you with a clearer picture of the terms and conditions of the mortgage, helping you make more informed decisions about your housing investment. Additionally, AI Legalese Decoder can provide valuable insights and guidance on managing your mortgage-to-income ratio effectively, ensuring that you are well-prepared for any financial challenges that may arise.
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Keep in mind that insurance and taxes can go up over time, too.
EDIT: Not sure of your situation, but your household income could also obviously go up, too. Personally, we bought a house we could easily afford and didn’t give into the temptation to buy too much. As a result, our earnings have increased significantly and we continue to have a house we can easily afford while having the cash to make improvements on it. Please don’t underestimate the stress of living paycheck to paycheck, especially because there will ALWAYS be something with the house that will cost you money.
Be careful about your property tax bill with new construction. Depending on how fast the assessor updates your property value, you may be paying property taxes only on the vacant lot at first. Make sure you understand how much you will pay in property taxes on the full value of the home, or you will be in for a shock when your property tax bill jumps up by thousands.
“will definitely appreciate over the next 5 years ” is an assumption, not a fact.
As a percent of takehome(net) income 45% is fine. When they talk about DTI percents that is based off of gross income. Making ~96k/y pre-tax a 2500/mo mortgage is a 31% DTI which is fine so long as you don’t have other debts. With 5600 takehome-2500 you still have 3100 left for utilities, groceries and other life stuff.
I have a similar ratio now. My net monthly income is about 5,900 and my mortgage is about 2,100. If you add in the extra money I put towards the principal and my hoa fees, it’s about the same percentage as you. I’ve personally been fine with this but obviously ymmv.
The thread is really underselling the fact that your wife’s income is about to go way up.
Our payment is around that at $2300 but our take home is about $6400. Started off more tight though like this situation. My advice would be take it, you will both be getting raises Id hope and or able to work some ot.
Wait a year. There’s minimal risk in waiting.
You’ll have nearly double the income.
You’ll be able to buy more house.
You’ll save yourself a year of financial stress.
You’ll have more flexibility for your wife’s job search.
If rates go down, you’ll save on the cost of refinancing.
A couple of things to think about. There are many threads where in year two the escrow was way under because they didn’t plan for the higher taxes on the completed house vs. vacant property. And, there are a lot of municipalities that mis-managed their finances resulting in big real estate taxes increases. Then there is insurance. NC just proposed about a 50% increase in average state rates. Where I live it was proposed 97% increase. This after it went up 30% last month. When you think about whether 45% would be sustainable and what you predict you may have for raises, also consider these changes to taxes and insurance that can occur. And nothing is guaranteed. My company is simultaneously talking about planning merit increases for this cycle while they are also talking about cutting a large percentage of people who are getting those increases.
I’m at 46% currently because I lost my job and had to take a lower paying one. It’s been fucking miserable. I have maybe a couple hundred (between $300-$700) after expenses each month, and my mortgage is my only debt. Can’t do much with that couple hundred each month, and my house has expensive repairs that need to be done.
I do not think it is a good idea, OP.
edit: I also have no kids. Just me. If you add kids to a situation like mine it would be beyond miserable given how expensive kids can be.
Call me dumb for asking this, but WILL homes and properties keep reliably appreciating? Their values swelled soooo much, so fast recently that they seem sillily overvalued. Whether markets correcting undervaluation or simply greed doing it’s thing, it feels like “there’s only going up from here” no longer applies and definitely not at the rate it had in decades past.
Values seem more in danger of falling (due to insert national stressor) or at best hovering where they are now over reliably going up yearly. But I also personally feel like we’re surrounded by so many overlapping, taut financial bubbles and mounting consumer stressors (plus growing AI job displacement), that the fake-propped booming economy is only going down from here very very soon
The amount of risk on this thread is insane.
Would you still be able to contribute to retirement with that?
I live in a high cost of living area with no kids, and I wouldn’t be comfortable going over 40%. I think you’ll be house poor.
There’s 0 guarantee the price will appreciate, so only $20k down could mean you’ll be underwater for a while.
OP, currently renting with similar numbers- between paychecks I’m sometimes negative a few hundred.
Does it make any sense? Absolutely not. However, as others have stated, there are arguments to be made that it might end up working out in your favor in the future. However, it’s an extremely risky thing to do.
Don’t forget property taxes and insurance. My escrow goes up every year. We’ve had our home 5 years and our total payment is probably at least $200 more than when we purchased the home. If you don’t expect your income to go up, that extra could start to hurt pretty quickly.
Is your wife able to work if things get too hard?
Honestly, only you can answer this. Do a budget and determine whether you can live on $3100/month for all other expenses. Keep in mind HOA and property taxes if those aren’t included in your mortgage number. A new build might not have property tax accurately calculated yet. Don’t forget heating/cooling costs. If you can manage the rest of your expenses with whatever is left over, then go for it.
Do you have 20,000 to put down before or after closing costs? If that is before closing costs your down payment could pretty easily get wiped out. Also there is no such thing as a property that will “definitely appreciate.” It could be a great desirable neighborhood but a major recession could hit and property prices could go down widespread. Maybe you are right and it does appreciate but don’t buy a house with the assumption that it will go up in the next 5 years, that is timing the market
Worse case scenario is the two of you can go to a blood bank 2x a week and donate blood for $50 each.
My husband and I did it while I was in nursing school. Our ratio was like yours. Your wife’s income will go up…..a lot. We refinanced once and took out a home equity loan. Now we only have a few months left to pay our mortgage. We took a risk and it worked. We were lucky and our timing was right because now it’s difficult to find a house where we live, they cost over a million.
I did it. I was around 60%, but you should only do it if you have an idea your income will increase at a steady pace. There’s a lot of unknowns, but in your industry you should have an idea.
I was at 60% lol. Just ramen and played video games in a high end luxury condo. But my income rose over 8 year so when I sold it I was around 15% of my income.
Does that mortgage figure include PMI, taxes, insurance, HOA? Your phrasing makes it sound like wife doesn’t work; could she add to the household income at least temporarily? The first year of homeownership for me was *expensive*, everything was breaking or needing a new motor, water was leaking from the shower through the back wall into the back of a crowded kitchen cabinet unbeknownst to us for months and molding… I feel like people compare “how much I spend on rent” to “how much this mortgage calculator says I will pay the bank” without really grasping that you are now on a new planet, financially and responsibility wise.
45% is very tight.
We’re at 40% right now, but our payment should drop here in a few months.
As many people are talking about paying for this house is *possible* but you need to have a serious talk with your wife and decide if this is what you *want*.
Have you always dreamed of living in this type of neighborhood and this is your dream home? Then it might be OK to devote half your income to housing.
Do you want to go on vacations, eat out, and take an occasional non-paid days off work to do fun stuff? Then living in a less expensive house is wise. You might be happier being the bigger fish in a smaller pond.
Of course, you are only 27, basically staring your career. If you are sure you will have a significant pay raise in the next few years you can have both.
Id’ do it. Your wife is going to make more. Both of you are going to make more. You’re basically locking in at $2500/month. When we bought our home it felt a little high, 5 years it felt super comfortable, 10 years feels like nothing and we bought a much nicer house. One of my biggest regrets is were a bit too careful buying our first home, chances are in 8 years your household income well be well over 2x what is is now but you’ll be paying barely more than $2500 with propery taxing going up a bit. Really question is can you get by for first 1-3 years where it feels like a bit much. Numbers yo ugive make it sound pretty doable. And if you’re thinking maybe just wait 1-3 years to play it safe, well in 1-3 years yes you’ll be making more, but houses will cost more, interest rates may be higher, and you’ll find you’re in same exact situion you were 1-3 years ago. Just buy now.
Income is never guaranteed. I believe that’s why you should be conservative with a home mortgage. Would suck to lose your living space because of a job loss.
There is no guarantee that your townhome will increase in value. While it is possible that it will, the townhome market is a bit different than the home market. A lot of people will not consider a townhome which shrinks your pool of potential buyers.
I guess what I am trying to say is look at it like a home instead of counting on a big investment that you will get a windfall from in 5 years. On the off chance that you don’t make anything on it, or even lose money, do you still want it?
My biggest problem would be HOA fees and governance. How much is the fee? Is it worth it? It could go up if a board voted for it. Can you swallow that uncertainty?
Assuming your wife will actually work, it’s doable….
I’d wait until your wife is an RN. That will totally change your household financial situation if it all works out
Where on earth did you find a townhome in Utah for that price?
The rule of thumb I’ve always used was 28% of my pre-tax income all in on PITI. By the quick numbers, it looks like you may be able to make that work. However, if your other expenses are high, it’ll be harder to swing.
Definitely check to be sure the property taxes are correct since they’re new builds. Though Utah is a low tax state, all things considered, it still could hurt you. I know people who have done new builds and then get shocked when they’re reassessed, and their taxes skyrocket because it’s being taxed as a home and not a piece of land.
Taking on a mortgage that consumes 45% of your net monthly income is risky, as experts recommend keeping housing costs below 30-35%. However, with your wife expected to increase her income soon, your current ability to save $2,000 monthly, and the property’s potential appreciation, it might be manageable. Keep in mind future expenses like having a child, which will raise costs. It’s essential to assess your budget, ensure you have an emergency fund, and possibly consult a financial advisor before proceeding.
one thing to consider is what your income will do ofer the next few years. are you expecting promotions or significant raises? it’s entirely possible to live tight for a year if you’re expecting big changes (someone is finishing a degree, you’re on the cusp of getting a promotion, you started a business and it’s starting to turn a profit, etc)
remember that mortgages mostly stay flat (except tax increases) while almost everyone in a white collar job experiences some % pay growth every year
No. That’s called house poor, and you will very quickly become actual poor.
Let’s just say my income was double yours and I still wasn’t able to pull the trigger on a home in that price range. I have different financial goals than most people though, but looking at your numbers I would be very uncomfortable in that situation.
What are you and your wife’s prospects to increase your income? If they are good, then go for it, but be sure to have 3-6 months expenses in an emergency fund on top of the down payment.
Personally I wouldn’t do it, too risky and there is not enough margin there. I have also never bought without having saved the 20% for a down payment though.
It’s going to be very tight obviously. With a new build you’re far less likely to run in to expensive repairs. If your wife not working? Can she even if it is part time? It would make the situation much less fragile
It’s going to be hard to save with that ratio, but home ownership is a great net worth builder. Personally I would go for it if the following is true:
-you don’t have any other debt
-you have a stable income
Likely rates will come down at some point and you can refinance awhile taking advantage of home prices rising.
I would ask where you are? That will dictate a lot about building equity. No guarantees. But if you live in a growing city, or desirable city, history points strongly to values going up in the long run obviously. My home’s equity has increased by about 40% since 2020. But that won’t be everyone’s experience.