Can a family of 5 afford a mortgage that's 50% of their income?

In My Humble Opinion
1

My wife’s cousins emigrated from Australia over a year and a half ago. Now they want to buy a house rather than rent. In fact, they refuse to entertain the possibility of renting. While I understand their reasoning, I don’t think it’s realistic for them to do so.

Hawaii is rather expensive and they are obviously looking at low-end houses about 45 minutes outside of town. They really can’t go any cheaper than they’ve found for a 3 bedroom place. However, the condo they are looking at will give them a mortgage roughly 50% of their income.

The banks said no, although I don’t know if that’s just because there’s no credit history from Australia… or would they also take income into account? At any rate, my parents-in-law have agreed to help with the down payment (75% of it) and put the house under their name. Then the Australians are to pay the mortgage, maintanence fees, utilities, everything as if it’s their house.

While a magnanimous gesture, we’re worried that the Australians will not be able to make those payments. Post-mortgage will leave them with about $1500 a month for utilities and fees, cable, phone, credit cards, food, gas, entertainment, things for the kids, savings, never mind actually furnishing the place (they don’t have anything, having lived at my parents-in-law’s house).

In your opinion, can this be done with 3 children (18, 14, 10)?

We tried to bring this up to the Australians, but they just wave it away with a “we’ll just have to tighten our belts”, but I don’t think they have a realistic expectation of how much it will be. We want to talk to our parents-in-law before they go through with this so they don’t get burned if it cannot be done, especially since it is under their name.

2

The U.S. Department of Housing and Urban Development defines 30 percent of gross income as the maximum that all but wealthy households can pay in housing costs (mortgage payment or rent plus utilities) without creating an excessive housing cost burden.

One thing to note is even without utilities the family you are talking about is at 50% of income. I assume you are talking gross income, but if you are talking net that would make a difference.

Another wildcard is the 18 year old. Is this person about to take on a full-time job and contribute to household expenses? Or will he/she be starting college and creating additional expenses? Or just leaving the household, meaning they could get by with a smaller house?

The other question here (which you didn’t ask) is the advisability of making these type of family financial arrangements. There are definitely pitfalls!! For a research-based discussion on what the author calls Economic Outpatient Care, and a specific look at the consequences of helping people live in a house they can’t afford, see The Millionaire Next Door.

3

This is very good info, Harriet the Spry. I’m going to see if I can find this from their site and show them. Thanks!

I really don’t think they can “tighten their belt” enough, no matter how easy it is for them to say that now.

Unfortunately, I was talking about their gross income. Both parents have non-skilled service jobs. So, basically, if the parents get four paychecks a month, 2 paychecks will be used solely for the mortgage. This does not include the maintenance fee, association fees, or utilities; all of which are high in Hawaii.

The 18-year-old is more of a wildcard now. She just went off to bootcamp for the Army National Guard. So, she would have had tuition taken care of and a modest income. BUT she’s coming home in two weeks after a medical discharge for asthma. So now that is gone and she made no other plans after high school besides the Army. I’m thinking she’ll be working now, though.

As for the smaller house, we’ve repeatedly suggested they rent a 2BR apt for a year-long lease (around $900/mo in Hawaii) and see if they can afford the extra expenses a house would entail. But they are quite adamant on buying. Ironically, one of the reasons is the taxes, but those will be likely going to my parents-in-law since the house would be in their name.

Actually, this is the crux of the matter, but I guess I didn’t make it clear enough. We’ve all but given up trying to convince the Australians to rent rather than buy. We figured the market and bank would convince them if we could not. After all, they’d find out soon enough they could not get a loan.

The parents-in-law doing this for them caught us totally by surprise. So now we’re going to have a big family meeting (minus the Australians) to demonstrate to the parents that this is a rather risky proposition. That it looks like it’s not in their best interest to do this, no matter how much we care about our relatives.

And, heck, it looks like its not in the Australians’ best interest either to be given this house.

Sigh

4

I was just in Hawaii on vacation and was struck by the cost of living - gas and milk, man. Are they aware of how expensive things are there? (Er, things besides beach towels and those pens where the lady takes her clothes off when you turn the pen over?) I know you’ve said you tried to talk them into renting for a while and it failed, but maybe stressing renting for a while for sheer “how much do we really need to live on” reasons?

I read that the milk prices were because of protectionism over the Hawaiian dairy industry, but I saw it for almost 8 bucks a gallon somewhere and nearly fell over dead in shock. I think if I lived there I’d just have to resign myself to osteoporosis. Um, didn’t stop me from expanding my job search from “30 miles around Columbia” to “30 miles around Columbia, and Hawaii”. Nice place you got there.

5

Three kids, and 1500 bucks remaining to live on?

In Hawaii?

Are they suffering from massive head trauma caused by a kangaroo pummeling them?!?!?!?!?

6

They ignore all our financial projections and ideas by telling us “We’ll have to sacrifice”, “We’ll have to do without a few things for a while.” It’s so vague, they may as well be putting their fingers in their ears LA LA LA!

Like I said above, we figured they’d find out the hard way when the banks said no. Now, its gotten tougher, and my wife’s parents may pay that price.

{hijack}
Wal-Mart may be considered the spawn of hell on the mainland, but, boy, we love it out here. While I’m sure it’s destroying the community, undermining the Mom & Pops, it still is the only place you can get a $3 gallon of milk. Costco is also good, as you can get gas for around $2 a gallon. Long live the big box retailers!
{/hijack}

7

Like you said, you really don’t have to worry about talking them out of it because no bank (even those not in their right minds) would ever give them a mortgage. This is two parents and three children on $1500 a month right. After fees, utilities, and we have to stop right there right now because this is getting crazy there is less than $5 a day allocated to each person. I think that even a bank in the Sudan would kick them out if they tried to move there let alone Hawaii :slight_smile:

8

The banks did not. My parents-in-law are planning on putting the house under their name and paying the down payment. We need to convince them not to do this, for their sake and (even if they don’t realize this), the cousins’ sake.

9

Well… it might not be a wise idea to butt in as you will probably be blamed no matter what happens.

Here is what really needs to happen if the PIL are determined to do this.

This really needs to be set up as a [lease-purchase](Lease Purchases
). In these scenarios (in these parts) the landlord generally makes the tenants entirely responsible for maintenance of the house. applicances, AC, etc. - the while nine yards. The only exceptions prior to purchase are for roof and structural issues, which the owner/landlord maintains responsibility for. In many (not all) lease-purchase deals tenants are also responsible for all utilities and property taxes.

Typically an investor doing this sets the sales price at a predetermined level, or at appraised value at sale (which can also be the average of more than one appraisal if necessary). The rent is typically set to cover the investor’s expenses and yield a reasonable profit. In this case if the PIL are not profit motivated the rent will generally approximate the real owrld mortgage costs (with some adjustments). The good part about this is that the tenants (purchasers to be) are able to get a handle on the what real costs are. Depending on where the rent is set the owner can also (if they choose) build in a credit that will be rebated against the purchase price fo the house at sale.

At the end of one or two years, when the tenants have accumulated a sufficient down payment, and (assumedly) been making regular payments, the owner then sells them the house at the agreed on price. The owner will have a reasonable track record at the end of 12-24 months in terms of the tenant’s ability to met the mortgage nut. The owner can also assist them with obtaining financing if they choose.

The upside is that if the tenants get a financial reality check, and cannot meet the lease payment, the owner can move them out and lease to someone else without being on the hook for a failed mortgage, or losing their deposit. The owner can also flip the property if they choose. Much less financial risk and relationship damage in the long run.

Make sure you usea local atty who specializes in real estate and has experience with Hawaii lease-purchases. IIRC your real estate ownership laws are often different than the stateside ones, because of the way property is owned in the Islands (something about a giant trust)

10

Maintenance fees can be significant. Also, when they talk about “mortgage” - is that just the loan, or are they including the tax and insurance escrow? That $1500 that they’re going to use to live off of by the skin of their teeth might be more like <$1000 whe all is said and done.

11

$1500? For a family of five in Hawaii? Forget it. They’re done like dinner.

They’ll roll up credit card debt and lose the condo and have nothing. It’s as certain as the sun rising in the East.

12

Since they’re coming from Australia, they may not be as intimidated by the prices as you think. I’m in an area where any home that costs less than $400,000 is considered a starter property. My husband and I have suffered severe sticker shock at the cost of living here, especially moving here from a relatively small town in South Carolina. I honestly don’t know how people manage to own their own home here, but they do.

Anyway, I agree with you that it’s a really, really bad idea for your relatives to try to buy their own home at this point; however, I don’t really see how, beyond concern for your in-laws, this is something you should be trying to control. I think the best you can do is voice your opinions to your in-laws, then just leave it alone. Secret family meetings can only backfire in the long run. YMMV.

13

Stay out of it. It’s not your house, and it’s not your money, so I’m afraid it’s quite simply none of your business. Your inlaws are competent adults who are capable of making their own financial decisions, and they’re not likely to appreciate the family meeting designed to convince them they’re being foolish. The cousins won’t appreciate your trying to talk the inlaws out of helping them, either, for obvious reasons. You’ve stated your concerns already, and the relevant parties have duly noted them. Now it’s time to bite your tongue and let them work matters out between them.

14

I work in real estate, and there is no way in hell they could do this. No bank is going to give them a mortgage based on 50%, because they would probably end up in foreclosure and no bank likes to do that. Even with excellent credit.

The 18 year old is no help. You have to be employed for two years and have good credit to be considered for the mortgage.

If the in-laws do anything to help them, please tell them to consult an attorney and get it in writing. Everything should be legal and above board. Illegal contracts are not enforceable, and illegal activities will look really really bad for future attemps to get credit.

15

I know your in-laws want to help, but there’s a difference between helping out and enabling them.

The Australians are not in a financial position to own a house right now. They need to understand that.

Is there any reason to think your in-laws are being taken advantage of? Are they elderly? Or are they competent enough to know what they’re doing? (Not that the elderly can’t be competent. You know what I mean.)

They will not be able to make payments to your in-laws. There’s a reason the bank turned them down. They need to be more realistic.

16

It’s theoretically possible, since I’m sure many families live on $1500 a month after rent or mortgage. But it’ll be damned hard. In fact, the watchword here would be “grinding penury”.

Does a car payment and/or repairs, to support that 90-minute daily commute, have to come out of that 1500?

17

This is a disaster waiting to happen. If the cousins know they “need to sacrifice” and know they “need to cut back for a while” then why haven’t they done so already?

You really can’t do anything about it if your in-laws want to screw themselves over. If they are rich and in a very comfortable position to buy a house for someone else, that’s fine; but if they are counting on receiving the cousins’ payment each month, they are making a huge mistake. There’s a reason the bank won’t give your cousins a loan. If they can’t qualify, it’s because they can’t afford it or have taken no steps to establish credit or have made poor choices and now have bad credit, and no bank is going to be stupid enough to give them money.

18

I strongly think people should purchase a house on their own, with no help from family members. Owning a house is a huge responsibility, and your biggest investment. What happens if the air conditioner goes out, or you have to call in a plumber? It’s not just affording the mortgage payment. It’s also about affording the maintenance.

If you can’t handle such a financial burden on your own, you have no business buying a home. Your Australian relatives need to sit down with a credit counselor. It’s a big step to be granted a home loan. It means you have the willpower and the credit to be able to handle a five to six-figure loan. If you can’t do it without help, then you’re not ready.

19

I’m extremely concerned about the in-laws in this situation.

When my husband was 18, his parents somehow (I never found out how) put his name on the mortgage. Everything was in his name because their credit was so, so, very bad.

Guess what happened? I’m sure you’ll be shocked to find out they defaulted on the mortgage. Big time. On my husband’s credit report, it shows that for about six months they made late payments. 30 days, 60 days, 90 days…and then nothing. That really fucks up a person’s credit. A lot.

And of course he trusted his parents. They wouldn’t do anything to fuck him over, right? I’m sure your inlaws trust your cousins. They wouldn’t do anything to fuck them over, right?

I think they’re just asking for lots of pain and financial ruin.

20

Shagnasty has the right approach here: You should talk–to your family and to the Australians-- in specific dollar amounts,not in vague issues of “Getting in over your head”, “cutting corners” etc.

Before any meetings, prepare a formal presentation of the family’s buget.Dont be embarrassed–they will accuse you of being patronizing, of treating them like children, or whatever—but stick to your script.It only takes one small sheet of paper…Start at the top , and write " $1500" and subtract expenses on each line below.

If they disagree with you, or say “the numbers arent important–we have an obligation to help our family members”–don’t give in. Hand them the pencil and demand that they cross out your numbers on each line and physically write in their own numbers.

Keep the conversation on the math, and only on the math. Let them get mad at you–but better now than after it’s too late.

And save the sheet of paper when they angrily storm out of the meeting. You can show it to them 2 years from now, when you refuse their begging for more handouts.