$130,000 home with $21,000 income? Can they really qualify?

[amarinth]

@Colophon

Does America do interest-only mortgages? They were very common in the UK until recently, so lots of people bought houses way out of their price range. The assumption, of course, was that by the time you had to pay off your mortgage, the amount of debt would have inflated away to nothing in comparison to the value of the house.

From what I’ve read and understand, mortgages in the US work differently than mortgages pretty much anywhere else in the world. An example of an “interest only” mortgage here would be a 10/20 where the first 10 years of the mortgage would be interest only, the last 20 years would be principal & interest combined. The interest rate would be higher than a standard 30 year-fixed mortgage. Those don’t exist as much after the housing bubble as they did pre-2008.

[usedtobe]

Is this 2004 again?

Those sucker mortgages used to sell $300,000 houses to people because, hey! the payment’s only $500/mo - you can handle that! And, yeah, that number goes away in a year, but who cares? Just get another loan or sell and make $100,000 profit! Can’t lose!

Those were “buy downs” - the builder or other seller pre-paid the interest for the first year. It cost something like 10-15K for a $500,000 house. By making the payments so low, people who could never afford the note could.

And this wasn’t limited to buyers - there was a monster apartment complex on the edge of SF where the rents were $2000/mo on the contract, but hey! That number is just to make the owners look good, the real rent is only $1000 - here’s the coupons for your first year - send in a coupon and $1000, and it’s yours!
A year later: Coupons? Sorry, no more coupons - the guy who told you there would be more coupons? He’s no longer with us. Now, about that $2000 rent you owe - see your signature here where it says $2000?

[MandaJo]

@Doctor_Jackson

That is a very general rule of thumb. The actual ratios are that your mortgage payment should not exceed 28% of your gross monthly income or 35% of net. The gross monthly income of the couple in the example is $1750. $450 is 25.7% of that, so it is feasible. What is missing from the story is the amount financed.

Related question: what is “net income”? Traditionally, it’s Income-taxes, but where do health insurance premiums fall? My “taxable income” is substantially lower than my gross income because of my insurance costs.

All this is academic for us, but I am always curious how our finances compare.

[Doctor_Jackson]

@MandaJo

Related question: what is “net income”? Traditionally, it’s Income-taxes, but where do health insurance premiums fall? My “taxable income” is substantially lower than my gross income because of my insurance costs.

All this is academic for us, but I am always curious how our finances compare.

To be more accurate I should have typed “debt to income ratio” instead of net income. Your DTI ratio is all debt payments (credit card, student loan, alimony, child suppport, car loans, etc) including the potential mortgage payment divided by your gross income. It does not include insurance premiums of any kind.