Curbed University delivers insider tips and non-boring advice on how to buy, sell, or rent a home or apartment. And March is Curbed University month! For the next few weeks, we will be rolling out new content about buying, selling, and renting in the Hamptons. Each Friday we will have an open thread in which a local real estate professional will answer your questions. Also, feel free to email Hamptons@Curbed.com with your questions or put 'em in the comments.
Today we will discuss how much house people looking for their primary residence can afford. Tomorrow we'll examine whether you can afford a Hamptons vacation house.
Unfortunately, there is no easy answer to this question, because everyone's circumstances are different. Factors to consider include your income, location, your tolerance for risk, your savings, and your family obligations. If you are blissfully childfree, you can spend more on housing than the parents of six college-bound kids. If you are a fit, handy youngster with weekends free, you can take on a lot more maintenance chores than an older or infirm person or someone with a very demanding job.
How much debt do you have? That means not only the amount on your Bloomie's charge but also college loans, car note, and that grand you owe to your college roomie. Most mortgage lenders want to see no more than 36% of your income used to pay down debt, including mortgage payments, car loans, student debt and so on (this is called debt to income ratio). There is some wiggle room in high-cost areas like ours, though.
A good place to start to figure out how much you can afford is the calculator at Bankrate. Let's go over some of the terms they use.
Annual income: money from all sources before taxes, including salary, commissions, bonuses, overtime, tips, rental income, investment income, alimony, child support, and so on.
Down payment: obvious. At least 20% is best. But make sure you have a cushion of cash, because trust us, the minute you move in, the water heater will break, the fence will blow down, or you'll need a new fridge. It never fails.
Monthly debt: minimum monthly credit card payments, car payments, student loans, alimony/child support payments, and so on.
Interest rate: currently, historically low rates are available, but the rate you will be offered will vary based on your credit rating and other factors.
Income taxes: check your latest tax return to see what you really pay in taxes. It's probably less than you think, and you will probably be able to deduct your mortgage interest and points once you buy a house, making your tax rate even lower. Don't forget about New York state income tax, either.
Property taxes: based on home value; the Hamptons has fairly low rates compared to the rest of the metro area, but fairly high nationally.
Homeowners' insurance: most lenders require insurance, and you wouldn't want to be without it anyway. You could lose everything without it.
Mortgage insurance (PMI): if your down payment is less than 20% of the house's purchase price, your lender will probably require you to carry PMI, to protect them if you default on the loan. Which you won't, of course, because you'll be a Curbed U graduate!