Met with a mortgage broker last night

[memo]

We wanted to get a pre-approval letter from a broker last night to get the ball rolling on putting in offers. We both have really good credit, FICO scores > 750. We don't have any car payments, no student loan payments, we pay off our credit credits instantly pretty much, and rent currently for 1000 a month. We make about 110k gross.

Now I've been reading up online about the "28/36 rule", debt to income ratio, where 28% of your gross salary will go towards home debt and 36% of your gross salary will go into your home+other debt. I've always thought this was a pretty standard rule, but when meeting with him last night he said we should be spending about 55% of our gross income on home+debt. Is this something that is new? Is he just trying to get us to buy a bigger house for a fatter commission? Are we being told this because of our good credit history?

Thanks!

 

[newb111]

Only buy the amount of home you think you need. Don't get the bigger/more expensive house just because the realtor tells you that you can afford it.

 

[rasczak]

Originally posted by: newb111
Only buy the amount of home you think you need. Don't get the bigger/more expensive house just because the realtor tells you that you can afford it.

This is truth. I would walk away from that broker as he's not really gonna help you find a home that will fit you and still allow you to live comfortably.

Oh. Btw, 45% debt to income ratio is absolutely the highest you should go. This includes the mortgage in PITI (property tax and mortgage ins. impounded) as well as your outside bills.

Good luck in find a home!

Joe

 

[BigToque]

Originally posted by: newb111
Only buy the amount of home you think you need. Don't get the bigger/more expensive house just because the realtor tells you that you can afford it.

Exactly.

You know the sort of lifestyle you want to life, so find out what that costs you each year and then you know how much you have left that you can put towards a house + all it's associated costs.

I've got a friend who bought a 220K house and two cars with his wife and he almost never comes out because all his money goes to the house/cars.

 

[PricklyPete]

Agreed...45% is the max you really should do unless you want to become slave to your house. I know way too many couples who do that thinking they want the big house and then totally lose their social life and regret it down the road because they could never afford trips, going out, hobbies, etc.

 

[SpunkyJones]

Don't listen to him, when we went to get a loan, the bank kept telling us we can afford monthly payments that were twice what we were looking for. We got the loan we wanted, not what was being to be pushed on us. Don't let them get you into a loan you can't afford or are trapped by.

 

[memo]

Cool thanks for the replies. I figured we would be staying in the 36% range. I was just suprised what he was telling us and wasn't sure if he was trying to push us towards it for his benefit or ours. Obviously it was his

 

[Tsaico]

Originally posted by: SpunkyJones
Don't listen to him, when we went to get a loan, the bank kept telling us we can afford monthly payments that were twice what we were looking for. We got the loan we wanted, not what was being to be pushed on us. Don't let them get you into a loan you can't afford or are trapped by.

I would also agree with all these folks. I am currently a little over 50% right now, and it is pretty tight. Thank God I have a fixed loan. I love my house and justify it in my own mind, but I don't try to pretend that a little tear doesn't drop every month when I pay my mortage.

Unless you are 100% that is the dream house for you, I would go along with your orgional plan.

edit: oh yeah, and I would ditch that broker. He is just trying to keep himself in his own house. kick him to the curb.

 

[Dacalo]

What a douchebag, you two should look for a new broker. Amidst all the credit trouble, that moron apparently still hasn't learned the lesson.

 

[Squisher]

55% only if you give up something like eating, driving a car, or wearing clothes.

 

[kranky]

Let the broker pre-approve you for whatever amount he wants, it doesn't matter.

Don't be sucked in by the 28/36 rules of thumb either. Figure out, based on YOUR budget, how much you want to pay, then make your offers accordingly. If that's 10%, 20%, or 30%, it doesn't matter - it's what's right for YOU that matters.

Nearly everyone involved in the process makes more money if the sale price goes up, just keep that in mind.

I've had friends get pulled in to mortgages they shouldn't have taken based on that "36%" ratio. Like you, they had no debts, so that 36% was a pretty high number, and they bought houses based on the realtor's advice. Of course, once they got that house, they needed furniture, appliances, eventually needed to replace their car, and next thing you know "house + debt" was about 50% of their gross. They should have figured out their own budget instead of listening to the realtor, who - if anything - should have been using the 28% number.

 

[thomsbrain]

I really don't know why you'd complain. What he's basically saying is that he is likely to pre-approve you for a bigger loan than you were expecting to qualify for. That doesn't mean you have to use that entire amount, it just means you have some breather space. This is not a bad thing.

I do think 55% of gross is pushing it. After taxes, that really won't leave much left over to live! But at least your broker is allowing you to make that decision on your own.

 

[KillerCharlie]

Wait, so about 30% of gross income? After I put away 12% into 401k that ends up being almost 50% of net... does that sound right?

I couldn't imagine 55% of gross... that'd be like 85% of net!

 

[thomsbrain]

Originally posted by: Dacalo
What a douchebag, you two should look for a new broker. Amidst all the credit trouble, that moron apparently still hasn't learned the lesson.

What lesson? That it is bad to make lots of money?

Why the fuck do morons expect brokers to magically be friendly little godmothers who will protect them from themselves?

 

[BigToque]

Originally posted by: KillerCharlie
Wait, so about 30% of gross income? After I put away 12% into 401k that ends up being almost 50% of net... does that sound right?

I'm not sure why people focus on gross income.

Net is what I've got in my pocket, so that's what I base all my decisions on.

 

[Dirigible]

Originally posted by: KillerCharlie
Wait, so about 30% of gross income? After I put away 12% into 401k that ends up being almost 50% of net... does that sound right?

Run the numbers. How much income you make. How much you need for car, food, utilities, savings, etc. Will you have enough $$ if you buy a house for X amount? That's what you should do. Rules of thumb are general. You have a specific situation. Ignore the rule of thumb, ignore percentages, and figure out what you can afford that'll leave you in good shape financially. And as others have said, don't automatically buy the most you can afford.

 

[BigToque]

Originally posted by: thomsbrain

Originally posted by: Dacalo
What a douchebag, you two should look for a new broker. Amidst all the credit trouble, that moron apparently still hasn't learned the lesson.

What lesson? That it is bad to make lots of money?

Why the fuck do morons expect brokers to magically be friendly little godmothers who will protect them from themselves?

People expect ethical business practice. If the broker understands that someone can only afford $200,000, it's unethical for him to push $400,000.

The associations these people belong to also expect ethical business. Pretty much every designation you earn has a requirement to conduct your business with ethical behaviour.

 

[Vic]

I'm a mortgage broker.
- 55% is way too high for a 1st-time purchase. I don't like to see DTI's above 50% and prefer below 45%. And that's "back end" DTI's with all debts included, not just the mortgage payment.
- Take the advice of posters' here and do what you want or feel comfortable with, not what someone tells you or according to some arbitrary number. A low DTI payment for some people is uncomfortably high for others. You're the one who is going to have to make the payment.
- The broker is trying to do you a favor, by getting you pre-approved for more than you need or want, although you should decline it if makes you feel uncomfortable, and should consider switching brokers if he refuses to take your feelings into consideration in this regard. If he won't listen to you now, he won't listen to you later either.

 

[KillerCharlie]

Originally posted by: Dirigible

Originally posted by: KillerCharlie
Wait, so about 30% of gross income? After I put away 12% into 401k that ends up being almost 50% of net... does that sound right?

Run the numbers. How much income you make. How much you need for car, food, utilities, savings, etc. Will you have enough $$ if you buy a house for X amount? That's what you should do. Rules of thumb are general. You have a specific situation. Ignore the rule of thumb, ignore percentages, and figure out what you can afford that'll leave you in good shape financially. And as others have said, don't automatically buy the most you can afford.

Yeah, I have, I was just looking at the 55% number to see how much it ended up being net income, which was a lot.

 

[rasczak]

Originally posted by: BigToque

Originally posted by: thomsbrain

Originally posted by: Dacalo
What a douchebag, you two should look for a new broker. Amidst all the credit trouble, that moron apparently still hasn't learned the lesson.

What lesson? That it is bad to make lots of money?

Why the fuck do morons expect brokers to magically be friendly little godmothers who will protect them from themselves?

People expect ethical business practice. If the broker understands that someone can only afford $200,000, it's unethical for him to push $400,000.

The associations these people belong to also expect ethical business. Pretty much every designation you earn has a requirement to conduct your business with ethical behaviour.

Ethics was a HUGE part of the R.E. Exam I took. Ethics + Integrity ensures business for the future. Something the OP's broker lacks.

 

[Vic]

Originally posted by: BigToque

Originally posted by: KillerCharlie
Wait, so about 30% of gross income? After I put away 12% into 401k that ends up being almost 50% of net... does that sound right?

I'm not sure why people focus on gross income.

Net is what I've got in my pocket, so that's what I base all my decisions on.

Lenders are not allowed to calculate on the basis of net income. That would be a violation of ECOA, because your net income involves calculations based on the borrower's marital status, number of children, etc etc.

 

[jarfykk]

Originally posted by: BigToque

Originally posted by: KillerCharlie
Wait, so about 30% of gross income? After I put away 12% into 401k that ends up being almost 50% of net... does that sound right?

I'm not sure why people focus on gross income.

Net is what I've got in my pocket, so that's what I base all my decisions on.

One reason some folks use gross income is that with our tax system, you get a tax deduction from mortgage interest paid, which lowers the effective income tax you're paying. So if your take home is $3600/month (Grossing ~$70k in a state with income tax, like California, NY, etc.), it is fairly doable to take out a mortgage costing you 50% of that because you'd effectively pay much less income tax with the mortgage deduction, essentially 'increasing' your take home. Now EVERYONE should reconcile those very rough percentage guidelines with your real world situation and take home *is* a good starting place for doing that.

 

[BigToque]

Originally posted by: Vic
Lenders are not allowed to calculate on the basis of net income. That would be a violation of ECOA, because your net income involves calculations based on the borrower's marital status, number of children, etc etc.

I guess that's pretty good justification

Originally posted by: jarfykk
One reason some folks use gross income is that with our tax system, you get a tax deduction from mortgage interest paid, which lowers the effective income tax you're paying. So if your take home is $3600/month (Grossing ~$70k in a state with income tax, like California, NY, etc.), it is fairly doable to take out a mortgage costing you 50% of that because you'd effectively pay much less income tax with the mortgage deduction, essentially 'increasing' your take home. Now EVERYONE should reconcile those very rough percentage guidelines with your real world situation and take home *is* a good starting place for doing that.

Do you really get tax deductions from the interest on a mortgage? I didn't know that... and it sounds awesome

 

[Dirigible]

Originally posted by: BigToque

Originally posted by: Vic
Lenders are not allowed to calculate on the basis of net income. That would be a violation of ECOA, because your net income involves calculations based on the borrower's marital status, number of children, etc etc.

I guess that's pretty good justification

Originally posted by: jarfykk
One reason some folks use gross income is that with our tax system, you get a tax deduction from mortgage interest paid, which lowers the effective income tax you're paying. So if your take home is $3600/month (Grossing ~$70k in a state with income tax, like California, NY, etc.), it is fairly doable to take out a mortgage costing you 50% of that because you'd effectively pay much less income tax with the mortgage deduction, essentially 'increasing' your take home. Now EVERYONE should reconcile those very rough percentage guidelines with your real world situation and take home *is* a good starting place for doing that.

Do you really get tax deductions from the interest on a mortgage? I didn't know that... and it sounds awesome

It's possible to get federal income tax deductions from mortgage interest as well as property taxes you paid. Need to itemize deductions, and it needs to make more sense to do that than take the standard deduction.

Of course, with the high salaries and high housing costs out here in CA, it's extremely common for those tax deductions to be wiped out by AMT.

 

[kranky]

For first-time buyers, determining the impact of deducting mortgage interest is tricky. Not every dollar of mortgage interest will come off your taxes. When you didn't itemize, you used the standard deduction. When you itemize (which is necessary if you want to deduct mortgage interest), the net effect on your taxes is only (itemized deductions - standard deduction).