debt to income ratio

About 36% debt to income max. Also consider assets after closing. Retirement assets are discounted by about 30%.

I know this may sound absurd to some people but we can up to a 45% debt to income ratio sometimes higher. Along with good credit (above 720) we are looking for 12-24 month post closing reserves. sunny.hong@bankofamerica.com

"I know this may sound absurd to some people but we can up to a 45% debt to income ratio sometimes higher. Along with good credit (above 720) we are looking for 12-24 month post closing reserves. sunny.hong@bankofamerica.com"

Sunny, you'd better change your calendar. It's not 2005 anymore.

To answer your original question:

$400,000 down. $9,000 monthly mortgage payments, combined with your $3,000 tax and CC brings you to $12,000/month total carrying costs.

You'd need to make $540,000 per year to comfortably afford this home.

Matt, shah was asking what the banks consider and in 2010 they consider 45% debt to income ratios. Now whether the borrower feels comfortable with that is a different story. And if shah were buying a coop then it wouldn't really matter what the bank allows.

"Matt, shah was asking what the banks consider and in 2010 they consider 45% debt to income ratios. Now whether the borrower feels comfortable with that is a different story. And if shah were buying a coop then it wouldn't really matter what the bank allows."

So I suppose, then, that banks STILL haven't learned their lesson.

Unbelievable.

Perhaps what we need is LESS federal regulation for banks -- and therefore less federal PROTECTION for banks' obscene risk-taking.

Depends on your cash.

If you put 30% down, you can probably do it on $300K a year = $25K a month. That would put you at 44% if you pay out about $11K in housing costs, which means you have $8K for mortgage payments, which means you need a 5.25% rate.

I defer to Sunny whether that 5.25% rate is achievable for a Jumbo loan (over $729K), and whether you can borrow even $1.4M if you only stake $600K at this point.

Note that in my scenario, you'd also need about 10% in closing costs, which is $200K, and around $150K in post-closing reserves, so you'd have to start with nearly a million in cash.

ali r.
DG Neary Realty

Ali,

Why encourage someone to pay 44% of their income for housing?

Our jumbos have been performing unbelivably well therefore they continue to stick with the same ratios. But I agree a 45% DTI ratio is high (especially it being calculated off gross income).
As far as rates, 5.25% on a 30 yearfixed mortgage may be tough but certainly available on ARMs. Sorry I said the word.

this is one of the many reasons the correction hasn't really corrected. 28/33% maximum people. worked relatively well for years.

fp, it may be good for your business that the lending standards have loosened, but the way in which they have loosened are likely not good for the buyers. even if they can remain current on their loans, i wonder if they have any idea the lifestyle implications.

is it really worth it to spend 44% of income on a place to live when rentals are abundant and relatively inexpensive? off soapbox.

"is it really worth it to spend 44% of income on a place to live when rentals are abundant and relatively inexpensive?"

Is it really worth it to spend 44% of income on housing PERIOD?

Would it really kill the $500K/year earner to live in a home that's "only" worth about a million? Or even -- gasp! -- LESS than a million? And my goodness -- they'll actually have money -- get this -- LEFT OVER FOR SAVINGS each month!

Quite a concept, no?

You also have to take into account the raw dollar amount left over each month. Many people's spending increases with income, but not everyone's does. My monthly expenditures have stayed pretty consistent, even after several big salary increases.

I admit, 45% DTI does sound crazy and I'd not do it myself. However, if the OP is living well below his/her means, has a multi-year track record of monthly rent + monthly savings that exceed what the total housing payment would be, and has plenty of reserves, I could at least understand his/her reasoning.

lad, i can't. i can't see justifying it. maybe if a virtually guaranteed promotion is upcoming. but retirement is no joke. and i can't see that scenario working for just about anyone.

obviously it does, because plenty of people have been doing it.

matt, that was inherently my point.

Thanks all for responding. I'd like to summarize the discussions, and please let me know whether I am missing something. One issue is how much one can borrow and the other issue is whether that is recommeded. My question was more for the former. How much should I make to be able to borrow for a $2M condo (20% down, monthly CC/tax $3000, credit 800, available cash for the closing cost and 2 year reserve, 401K 200,000+).

@ar, I'm not encouraging OP to go to 45% DTI. The question was merely what's possible. (Although, as an aside, the people who are horrified by someone spending such a high percentage of their income on housing are generally people who are so rich that they can spend a lower percentage of their income on housing and still get decent housing).

And that leaves me with my question for @Sunny: can you borrow $1.6 million at this point putting only $400K down? Can a borrower really secure that loan at only 20% down?

oh, and @shah: Your 401K is not liquid, and thus should not be counted as a post-closing reserve. When we say "post-closing reserves" that should be money in your checking or savings account.

ali

ali, many of the people who spend such high income percentages on housing could get "decent" housing at lower costs.

AR that is a great question and of course the answer is yes they could. But it will mean moving into a neighborhood suitable to your income, if not quite your "taste".
I could afford to live in a downtown hood (my taste) but I would have to spend more of my income than I want to, along with sacrifice on space. I opted to move to a neighborhood where my dollars go a lot further and I have to travel 40 blocks to get a decent bagel (but the cafe con leche is plentiful and cheap (:

(My kids are both in college so I don't have the school worry. That said there are also nabes with good schools and affordable housing.)

Keith my problem with allowing higher dti, particularly for the lower end of the market, is that this in and of itself causes prices to rise. without this purchasing power prices would be lower. hence it just diminishes quality of life. I stretched, and nowhere near this degree when we were certainly not "rich" and I can attest to how fragile aneconomic situation that can create. it's a mortgage development that I feel has been of great harm to many.

Bingo, Aboutready.

"oh, and @shah: Your 401K is not liquid, and thus should not be counted as a post-closing reserve. When we say "post-closing reserves" that should be money in your checking or savings account"

It's even worse than that, your 401K is tax exempt as long as it remains so, pulling out the 200K for some unfortunate turn in events would be taxable income making it in the neighborhood of 120K after taxes.

Ideal ratio is 25%,and 35% max. More than that and you are too much at the mercy of economic climate(s) and askinf for trouble.

truthskr: you are talking about 25% of gross income, correct?

Yes

Hey, I wrote a book where I recommended that buyers not load up on too much debt, so don't everybody jump on me at once. But I would like to point out that while we collectively have passed judgment on OP's question, we still haven't answered it.

As far as picking a cheaper neighborhood, Keith, it's not just about taste, it's about being near work. I really enjoy the fact that hubby and I have moved uptown and gotten more space for our money, but our commutes are longer now, and it's tough to get dinner on the table before nine p.m. I can see how with kids it would be a real burden to have a long commute to work.

ar, I thought your husband did biglaw? did you buy when he was in school?

ali

ali

Thanks again all. It seems that I opened the floor for your discussion. Most of the answers were not to my question. You are all again advising me doing or not doing the high debt to ratio. Whether or not I would suffer from it or my quality of life changes, all I would want to know is how much I can borrow. I don't want advice on whether to cash my 401K or not. I want to know what the max that a bank would lend me money? Thanks for whoever that answers this question.

Amendment... for borrowing $1.8M with the other factors described above (good credit, CC/tax $3000 monthly, etc.) how much should I make?

ali, we bought a condo (900 sf, awesome view of the olympic peninsula, original restored bathroom with claw foot tub, stained glass, new kitchen) in seattle right before he started law school (i think $65,000). then we sold and bought a 2/1 in an underpriced building in gramercyish for $105k in 1995. renovated and made a lot. then in 2001 we bought a condo in chelsea for $800k. he was at a biglaw firm at the time, that saw fit to virtually eliminate bonuses that very year despite no decline in profit.

btw, this has to make you laugh, our costs for our seattle apartment? with 5% down? about $500 a month. including taxes and common charges, after taxes.

356,293/year is the minimum salary required.

This would give you a D/I ratio of .45 (the max a bank would allow assuming you could get the loan) on a loan of 1.8M at an interest rate of 5.625 with additional monthlies of 3000. The mtg would yield a cost of 10,361 and the total debt burden, after 3000 monthly, is therefore 13,361. From there you just need to cross multiply to figure it out.

Thanks rsm321. I assume, I get some money back as tax retrun (~3500). Does bank consider the tax return?

Given the initial assumptions (ie. 5.625 interest rate on 1.8M)
around 8400 of the 10300 mtg payment is interest (this interest is deductible). However, the government only allows for a deduction of up to 1M of mtg debt: around 4680 given this interest rate. Let's also assume that around 1500 of your 3000 monthly is real estate tax (this too is deductible). Add the 4680 to the 1500 and multiply that amount by your net effective tax rate (probably around 40 percent) and that's what you can get back as a tax incentive. In other words, you'll back around 2470/month. Obviously, there are quite a few assumptions embeded in this but now you have the methodology to figure it out with the real figures.

Bank doesn't get into any of that and it won't influence your borrowing power

Given the income level, the re tax is probably not deductible right?

I'm not sure that the AMT influences real estate tax bit I'm not sure

it does

Ok, ar, I'm moving to Seattle.

Shah, we still have not got our mortgage banker back on this board, but I reiterate: double-check with one. I don't think you can borrow $1.6mm against a $400K down payment in the current climate. I think borrowing $1.5 mm against a $500K down payment, or $1.4 mm against a $600K down payment, is more likely.

ali r.
DG Neary Realty

My client just received a commitment letter for a $1.725M purchase with 25% down.

ali, moving to Seattle is the easy part, but have you figured out how to travel back in time?

sunday, so true. but i was recently searching the seattle listings and you'd be amazed at what you can get for a mere million. retirement, maybe.

My retirement plan consists of a Yurt.