topic Re: Budgeting for a home in Personal Finance

Budgeting for a home

iced — Mon, 06 Feb 2017 19:59:05 GMT

For those who have read many of my posts, you may recall we've been somewhat passively looking for a new place to call home. We're starting to get a little more serious with this and have started down the pre-approval route, though to be honest we may end up waiting another year or two because there's just not much on the market that's in our budget.

When we do the numbers (and I have made a post on this some time ago) we came out that we can realistically afford to borrow about $200,000 to $300,000 for a home. This effectively puts our budget at $500,000-$600,000 as we have around $300,000 we're willing to put up as a down payment. This amount doesn't include points and closing costs, which we're more than happy to pay separately at closing. Anything over 1000 sq. ft. in the neighborhoods we're looking at is going to cost at least $800,000 and likely include an HOA fee of $400 to $1100 a month (whereas we pay about $150 a month now for HOA). Needless to say, that means we need to shift our budget upwards.

The part that's a bit troubling is we're aware of several people who make less than we do affording more house than we can. What we don't know (and are a bit too polite to ask) is how people in that situation are making it work. They must be doing something we aren't or aren't doing something we are, and that's what we're trying to figure out.

To help, I get you'll need to see a few numbers, so here goes:

1. Married, no children (yet). Gross income varies from a base of about $180,000/year to around $240,000/year depending on dividends/bonuses/etc.

2. Fixed debt: mortgage payment $1200, car payment $550, student loan payment $350. All except car payment are in excess of the minimum to pay down principal faster.(so can be reduced a bit if necessary).

3. Fixed expenses: HOA $150, electricity $50-100, cable/internet $75, phone $70, gym $70, insurances (car/home) $350

4. Fixed retirement: ESPP $1200, 401(k) $2100, savings/investments/other $1900, HSA $150. Retirement is important and even if it's 30 years away, I don't want to touch this unless it's necessary. I'm already behind on my goals as it is.

5. Remaining funds: about $1800 for food/gas/clothing/etc. We can shrink this down a bit.

The numbers I'm getting so far:

1. Today we pay about $1,500/month for total housing - 900 mortgage P&I, 300 taxes, 150 HOA, and 150 insurance

2. To make a $500,000 mortgage work, we'd need about $4,000/month - 2400 mortgage P&I, 600 taxes, 700 HOA, 300 insurance. Also estimating about $12,000 for closing costs.

The options I see that are possible:

Option 1: Pay off student loan to free up $350 a month. This would cut into the savings that would be used for closing costs, meaning that we may have to shift some of them into the down payment. Gets us nowhere near 4000.

Option 2: Pay off the car and free up $550 a month. Same as above except it's a somewhat larger cut (about $6000 more) so it would cut into both closing costs and down payment. Also gets us nowhere near 4000. If I could do it all over again, I would not have bought the car to begin with and just taken the subway or rented a zipcar for the days I need one.

Option 3: Adjust tax withholdings. Last year (filed single) got about $9000 redund and this year (joint) we're looking at around $14,000 refund. There seems a bit of wiggle room for taxes here, but I will not allow for a situation where we've allocated this to mortgage and something changes where we owe money the next year. This means I won't be comfortable with much more than about $300/month pulled from here. Result: even if we withheld $1000 less, we're still nowhere near 4000.

Option 4: Cut gym and dining out. This would free up about $800 a month, but we'd be on the ramen noodle diet and I feel like we're past that point. However, if that's what everyone else does to afford a home, then I guess we do it. Cable/internet is already trimmed to bare minimum (we get a few channels, no HD, and internet), but we could cut Netflix to save $10. We have no other subscriptions to cut and have already made entertainment (such as going out to the movies) a few times a year thing so no significant savings can be cut from that. I use the gym about 4 times a week, but I will drop it if necessary.

Even combining the 4 options, we don't make it to 4000, and we reduce our closing costs/down payment in the process, which means we also effectively reduce our ability to buy a home by about $50,000. Our approach so far has been to sit tight where we are and wait until we see the right place at the right price, but if prices go up as fast as we can save, we'll never hit that point.

This leads me to the following conclusions:

1. My numbers are wrong, and/or

2. Others aren't saving enough for retirement so they could buy a home, and/or

3. I'm saving too much for retirement to afford a home, and/or

3. They're trimming expenses in ways I haven't thought of.

How are others managing this? Any other opinions on what can be done to make the numbers work for us?

Re: Budgeting for a home

gardini51 — Mon, 06 Feb 2017 23:07:37 GMT

Looking at your numbers there, are you seriously putting $5,200 towards retirement/investments a month? Based on your 180k a year, that would put you saving around 35% towards retirement. I would say that there is about nobody saving that much.

Re: Budgeting for a home

Anonymous — Tue, 07 Feb 2017 00:35:05 GMT

Iced - you state you are looking at a $500-600k mortgage with $300k down payment. Assuming you get a $300k loan, your P&I payment would be $1450-ish - not $2400. This puts at what you are paying now.

I also strongly urge you to lower the amount you are giving Uncle Sam for free every year. $9k back in a year is $750/month you shouldnt be handing over. There is no penalty for having to pay every April. Also, with the higher taxes and perhaps interest you can deduct, you may owe even less. I would adjust your withholdings to shoot for $2000 back. This would put $580 back in your pocket each month..

You are also putting far more into retirement and investing that average. This is likely where others are seeming to make less but get more. I am sure if you looked at their net worth vs yours, it would be radically different.

My 2 cents.

Re: Budgeting for a home

iced — Tue, 07 Feb 2017 01:28:05 GMT

Yes, we put a fair bit into retirement.

I have been pushing to get that even higher by absorbing more of the expenses and allowing the wife to sock away even more into 401(k). She's withholding 22% and I was at 17 but dropped to 14 as I was consistently hitting the 18k cap midway through the summer. She should push up to 25-30% by the end of this year (pay raises get offset by higher contributions by both of us so we keep budget flat while excess and bonus funnels into more retirement). I moved the excess toward additional investments as my ESPP is also capped.

Taxes get complicated. I'm shifting more and more of my contributions toward a Roth 401(k), which will eat into the tax refund. The idea behind the large refunds is that we plan to funnel them into our Roth IRAs. We will try to keep enough contributions going to traditional 401ks to keep our AGI under the limit to contribute to Roth. If we pull back a lot of the taxes, we not only run the risk of paying in April but we also lose that easy funding source for Roth. On a good year, that's another $11000 to add to the retirement pool but it's not a given (was nigh impossible for me until we married). And since we don't know we if we qualify until we see our AGI, it's the best time to contribute without risk of penalty.

I have been working under the Financial Samurai goals of striving for 50% savings. To be honest, I figured most people did about 30%, but if you're both saying that's high then maybe that's where some others are pulling it off where we can't. The question I would then have to sort is how much can we reduce and still make our goals before we die of old age. It's not an easy question to answer as either one of us could lose our job tomorrow and lose out on contributions until re-established, putting us at further risk of retiring (or being retired) without enough to live on.

I'm also pretty sure the wife thinks I worry too much about it.

Re: Budgeting for a home

gardini51 — Tue, 07 Feb 2017 01:54:18 GMT

@iced wrote:

Yes, we put a fair bit into retirement.

I have been pushing to get that even higher by absorbing more of the expenses and allowing the wife to sock away even more into 401(k). She's withholding 22% and I was at 17 but dropped to 14 as I was consistently hitting the 18k cap midway through the summer. She should push up to 25-30% by the end of this year (pay raises get offset by higher contributions by both of us so we keep budget flat while excess and bonus funnels into more retirement). I moved the excess toward additional investments as my ESPP is also capped.

Taxes get complicated. I'm shifting more and more of my contributions toward a Roth 401(k), which will eat into the tax refund. The idea behind the large refunds is that we plan to funnel them into our Roth IRAs. We will try to keep enough contributions going to traditional 401ks to keep our AGI under the limit to contribute to Roth. If we pull back a lot of the taxes, we not only run the risk of paying in April but we also lose that easy funding source for Roth. On a good year, that's another $11000 to add to the retirement pool but it's not a given (was nigh impossible for me until we married). And since we don't know we if we qualify until we see our AGI, it's the best time to contribute without risk of penalty.

I have been working under the Financial Samurai goals of striving for 50% savings. To be honest, I figured most people did about 30%, but if you're both saying that's high then maybe that's where some others are pulling it off where we can't. The question I would then have to sort is how much can we reduce and still make our goals before we die of old age. It's not an easy question to answer as either one of us could lose our job tomorrow and lose out on contributions until re-established, putting us at further risk of retiring (or being retired) without enough to live on.

I'm also pretty sure the wife thinks I worry too much about it.

I would almost agree slightly with the other posters who said adjust your deductions slightly, so you can get a little more a month but don't overdo it so you wildly swing your taxes for april. According to my fidelity account I should be on track for a decent retirement Balance at my current giving level and I only put in 6% with my company matching 10%.

Anyways, also based on your housing numbers there I would assume you live in either new York, California, or Chicago. I would say that if you really want a house that would carry that large of a payment, I would probably cut back a little on the retirement contributions and maybe use some of your tax refund to pay off your loans.

Re: Budgeting for a home

iced — Tue, 07 Feb 2017 02:28:33 GMT

@gardini51 wrote:
I would almost agree slightly with the other posters who said adjust your deductions slightly, so you can get a little more a month but don't overdo it so you wildly swing your taxes for april. According to my fidelity account I should be on track for a decent retirement Balance at my current giving level and I only put in 6% with my company matching 10%.
Anyways, also based on your housing numbers there I would assume you live in either new York, California, or Chicago. I would say that if you really want a house that would carry that large of a payment, I would probably cut back a little on the retirement contributions and maybe use some of your tax refund to pay off your loans.

I can't trust that the S&P500 (or stocks in general) will perform much better than 3% year after year, that protections like Medicare will still exist, or that Social Security will even be solvent by the time I retire, so my numbers have to take into account $0 for SS, paying 100% out of pocket for health care (minue my accrued HSA savings), and a market that grows 3% YOY (plus dividends). My company is also cheap and only matches 3%.

One thought I had in response to the last reply was that I'm not factoring in mortgage interest, but it adds up. If I'm paying another $1000 a month in interest, that's another $12,000 deduction on top of my current mortgage interest, which will offset the payment a bit (but not enough to make this comfortable on its own).

I live in Boston, actually. The housing market here is pretty crazy too.

Re: Budgeting for a home

Anonymous — Tue, 07 Feb 2017 03:28:30 GMT

It's great that you're trying to prepare for the future. $5200/month preparation...may be a bit much, especially when $1200 of that is going to ESPP (which makes me cringe as ENRON always comes to mind). You may be too young to remember that debacle. Not only do most people NOT invest 30% - most do waaaay less - you're lucky if you find someone investing 10% on a regular basis.

I agree with other posters, consider cutting back some on your tax refund and on your retirement investment (just a little ). Doing that as well as trimming in those areas you've already examined should get you there. Personally, I would rather owe Uncle Sam and send the check when I file my taxes than give the gov't a $9,000 interest free loan. You could just as easily sock that money away in some interest bearing account and use it to pay the tax bill if you owe. If you don't owe- you'll have it to throw into your 401k or whatever. But as it stands, you're essentially giving Uncle Sam a 9K interest-free loan or more every single year.

My eyes bugged out when I saw that you could be paying $700/month in HOA fees- which is $100/month more than your property taxes. Is this considered average or on the high end of HOA fees? Guess I won't be living in Boston anytime soon. LOL!

You'll have to loosen your grip on your perfect plan just a little bit if you intend to reach all of your goals. I wish you the best of luck in having everything work out.

Re: Budgeting for a home

Anonymous — Tue, 07 Feb 2017 11:43:25 GMT

Good thread iced. Keep it coming!

Re: Budgeting for a home

iced — Tue, 07 Feb 2017 13:26:59 GMT

@Anonymous wrote:
It's great that you're trying to prepare for the future. $5200/month preparation...may be a bit much, especially when $1200 of that is going to ESPP (which makes me cringe as ENRON always comes to mind). You may be too young to remember that debacle. Not only do most people NOT invest 30% - most do waaaay less - you're lucky if you find someone investing 10% on a regular basis.

I agree with other posters, consider cutting back some on your tax refund and on your retirement investment (just a little ). Doing that as well as trimming in those areas you've already examined should get you there. Personally, I would rather owe Uncle Sam and send the check when I file my taxes than give the gov't a $9,000 interest free loan. You could just as easily sock that money away in some interest bearing account and use it to pay the tax bill if you owe. If you don't owe- you'll have it to throw into your 401k or whatever. But as it stands, you're essentially giving Uncle Sam a 9K interest-free loan or more every single year.

My eyes bugged out when I saw that you could be paying $700/month in HOA fees- which is $100/month more than your property taxes. Is this considered average or on the high end of HOA fees? Guess I won't be living in Boston anytime soon. LOL!

You'll have to loosen your grip on your perfect plan just a little bit if you intend to reach all of your goals. I wish you the best of luck in having everything work out.

I do remember Enron, and rest assured I don't keep the entirety of my ESPP parked in my company's stock. I diversify it, but I do not withdraw it. Since I get to buy at anywhere from 40% to 85% of the stock's value, it makes sense to me to max ESPP then sell some of the stock and roll the proceeds into another company's stock.

I get the whole free loan thing, I really do. I'm just a bit OCD about ever, ever owing again (as I did many years ago) so now I'm erroring on the conservative side. And I'm alone on this one - even my wife thinks my tax withholdings are a tad excessive. This year may be the straw that breaks that camel's back since the loan to the IRS just went up another couple of thousand dollars. Perhaps I'm the example of what happens when someone got financially bit in the past and swings to the other extreme.

I would guess the average HOA we've seen is around $700 for 1000 sq. ft., though I've seen some as low as $100 (not counting single family homes which of course are $0) and as high as $1500 (but included on-site gym, pool, doorman, snow removal, landscaping, etc). A lot of neighborhoods are doing between .50 and $1 per square foot per month. About half of the properties we've looked at also don't include parking, so depending on neighborhood, you may also be forced to purchase off-street parking.

Re: Budgeting for a home

Anonymous — Tue, 07 Feb 2017 15:47:07 GMT

I am in the same boat as the OP in two key respects:

(1) I contribute a huge portion of my monthly paycheck toward retirement

(2) I want to buy a house in 6-7 months.

#1 makes a lot of sense for me, since I got started much later than I should have preparing for retirement. Still, we are talking about me putting away a LOT. Basically 30k a year into a Roth, which means I also pay taxes on it up front too.

The way I plan to get a pre-approval for a big loan is to cut way back on my monthly contributions to retirement in the three months before I apply. Remember that they don't look at your paychecks for the last two years. They base their projections for how much available cash you will have each month (and therefore how big of a loan you can afford) to a big extent on this 2-3 months of paychecks -- basically what was your take home pay.

If I do that, I will appear to have a lot more "take home" money each month and therefore I'll get approved for a much bigger loan.

Now of course there's still the issue of making sure one does not buy a house that is too expensive for one's means, given that AFTER he owns the house he'd like to resume saving for retirement at close to his previous level.

But what seems to me is an unnecessary obstacle is "the bank won't approve me for a big enough loan." Our OP should be able to control that by sharply reducing his retirement contributions for maybe 4-5 months.

I admit to not being an expert in this area -- happy to hear if others think that this strategy would be useless.

Re: Budgeting for a home

Anonymous — Tue, 07 Feb 2017 18:28:32 GMT

@iced wrote:
@Anonymous wrote:
It's great that you're trying to prepare for the future. $5200/month preparation...may be a bit much, especially when $1200 of that is going to ESPP (which makes me cringe as ENRON always comes to mind). You may be too young to remember that debacle. Not only do most people NOT invest 30% - most do waaaay less - you're lucky if you find someone investing 10% on a regular basis.

I agree with other posters, consider cutting back some on your tax refund and on your retirement investment (just a little ). Doing that as well as trimming in those areas you've already examined should get you there. Personally, I would rather owe Uncle Sam and send the check when I file my taxes than give the gov't a $9,000 interest free loan. You could just as easily sock that money away in some interest bearing account and use it to pay the tax bill if you owe. If you don't owe- you'll have it to throw into your 401k or whatever. But as it stands, you're essentially giving Uncle Sam a 9K interest-free loan or more every single year.

My eyes bugged out when I saw that you could be paying $700/month in HOA fees- which is $100/month more than your property taxes. Is this considered average or on the high end of HOA fees? Guess I won't be living in Boston anytime soon. LOL!

You'll have to loosen your grip on your perfect plan just a little bit if you intend to reach all of your goals. I wish you the best of luck in having everything work out.
I do remember Enron, and rest assured I don't keep the entirety of my ESPP parked in my company's stock. I diversify it, but I do not withdraw it. Since I get to buy at anywhere from 40% to 85% of the stock's value, it makes sense to me to max ESPP then sell some of the stock and roll the proceeds into another company's stock.

I get the whole free loan thing, I really do. I'm just a bit OCD about ever, ever owing again (as I did many years ago) so now I'm erroring on the conservative side. And I'm alone on this one - even my wife thinks my tax withholdings are a tad excessive. This year may be the straw that breaks that camel's back since the loan to the IRS just went up another couple of thousand dollars. Perhaps I'm the example of what happens when someone got financially bit in the past and swings to the other extreme.

I would guess the average HOA we've seen is around $700 for 1000 sq. ft., though I've seen some as low as $100 (not counting single family homes which of course are $0) and as high as $1500 (but included on-site gym, pool, doorman, snow removal, landscaping, etc). A lot of neighborhoods are doing between .50 and $1 per square foot per month. About half of the properties we've looked at also don't include parking, so depending on neighborhood, you may also be forced to purchase off-street parking.

Just remember, it's not an all or nothing thing...you don't have to pull all the way back on the tax withholdings, just a little to help meet the goal. I completely understand going all the way to other side once bitten - been there, done that. That's ok for the short term, but eventually you always want to strike a balance so you're not operating out of fear of this, that or the other happening. Personally, I find drawing close to the middle helps balances things out a bit and keeps me from spazzing out too much..

Wow - as high as $1500 - plush and then some - snow removal in Boston....definitely a plus

Again, I wish you all the best. Please let us know what you end up deciding and what you trimmed so others can benefit from your knowledge.

Re: Budgeting for a home

Anonymous — Tue, 07 Feb 2017 17:06:23 GMT

@Anonymous wrote:
I am in the same boat as the OP in two key respects:
(1) I contribute a huge portion of my monthly paycheck toward retirement
(2) I want to buy a house in 6-7 months.

#1 makes a lot of sense for me, since I got started much later than I should have preparing for retirement. Still, we are talking about me putting away a LOT. Basically 30k a year into a Roth, which means I also pay taxes on it up front too.

The way I plan to get a pre-approval for a big loan is to cut way back on my monthly contributions to retirement in the three months before I apply. Remember that they don't look at your paychecks for the last two years. They base their projections for how much available cash you will have each month (and therefore how big of a loan you can afford) to a big extent on this 2-3 months of paychecks -- basically what was your take home pay.

If I do that, I will appear to have a lot more "take home" money each month and therefore I'll get approved for a much bigger loan.

Now of course there's still the issue of making sure one does not buy a house that is too expensive for one's means, given that AFTER he owns the house he'd like to resume saving for retirement at close to his previous level.

But what seems to me is an unnecessary obstacle is "the bank won't approve me for a big enough loan." Our OP should be able to control that by sharply reducing his retirement contributions for maybe 4-5 months.

I admit to not being an expert in this area -- happy to hear if others think that this strategy would be useless.

I recently maxed out my Roth 401K contribution as well and I will be dialing that back a few months before applying to just ensure I get pre-approved. I also recently asked this question on the mortgage board on how retirement contributions affect pre-approvals and I swear one of the mortgage persons indicated it was not factored in at all. But now I can't find their response to save my life. lol.

Re: Budgeting for a home

Anonymous — Tue, 07 Feb 2017 17:55:31 GMT

@Anonymous wrote:
@Anonymous wrote:
I am in the same boat as the OP in two key respects:
(1) I contribute a huge portion of my monthly paycheck toward retirement
(2) I want to buy a house in 6-7 months.

#1 makes a lot of sense for me, since I got started much later than I should have preparing for retirement. Still, we are talking about me putting away a LOT. Basically 30k a year into a Roth, which means I also pay taxes on it up front too.

The way I plan to get a pre-approval for a big loan is to cut way back on my monthly contributions to retirement in the three months before I apply. Remember that they don't look at your paychecks for the last two years. They base their projections for how much available cash you will have each month (and therefore how big of a loan you can afford) to a big extent on this 2-3 months of paychecks -- basically what was your take home pay.

If I do that, I will appear to have a lot more "take home" money each month and therefore I'll get approved for a much bigger loan.

Now of course there's still the issue of making sure one does not buy a house that is too expensive for one's means, given that AFTER he owns the house he'd like to resume saving for retirement at close to his previous level.

But what seems to me is an unnecessary obstacle is "the bank won't approve me for a big enough loan." Our OP should be able to control that by sharply reducing his retirement contributions for maybe 4-5 months.

I admit to not being an expert in this area -- happy to hear if others think that this strategy would be useless.
I recently maxed out my Roth 401K contribution as well and I will be dialing that back a few months before applying to just ensure I get pre-approved. I also recently asked this question on the mortgage board on how retirement contributions affect pre-approvals and I swear one of the mortgage persons indicated it was not factored in at all. But now I can't find their response to save my life. lol.

That seems strange to me. If Bob and Rick have exactly the same gross pay (let's say 72k or 6k per month) but Bob is putting 30k of that into retirement and Rick is putting only 6k, Bob is going to have a far smaller monthly take-home paycheck with which to afford a mortgage payment. A fact that will be quite visible when they look at his paychecks, which they do indeed specifically request.

That they would complely ignore the difference in their take-home pay seems nuts -- so implausible that it's hard for me to imagine it being true.

Re: Budgeting for a home

iced — Tue, 07 Feb 2017 18:06:57 GMT

That seems strange to me. If Bob and Rick have exactly the same gross pay (let's say 72k or 6k per month) but Bob is putting 30k of that into retirement and Rick is putting only 6k, Bob is going to have a far smaller monthly take-home paycheck with which to afford a mortgage payment. A fact that will be quite visible when they look at his paychecks, which they do indeed specifically request.

That they would complely ignore the difference in their take-home pay seems nuts -- so implausible that it's hard for me to imagine it being true.

This doesn't sound so strange to me since reitrement withholdings are (unfortunately) voluntary for most people. I do think they should ask if it's optional rather than assume, but if Bob and Rick are making the same and Bob's putting away a lot more for retirement, it's not obliged debt and Bob can just as easily stop putting that much away tomorrow if it means the bank can siphon it away for a bigger mortgage (interest) payment. It's available as far as they're concerned.

Re: Budgeting for a home

Anonymous — Tue, 07 Feb 2017 18:25:40 GMT

@Anonymous wrote:
@Anonymous wrote:
@Anonymous wrote:
I am in the same boat as the OP in two key respects:
(1) I contribute a huge portion of my monthly paycheck toward retirement
(2) I want to buy a house in 6-7 months.

#1 makes a lot of sense for me, since I got started much later than I should have preparing for retirement. Still, we are talking about me putting away a LOT. Basically 30k a year into a Roth, which means I also pay taxes on it up front too.

The way I plan to get a pre-approval for a big loan is to cut way back on my monthly contributions to retirement in the three months before I apply. Remember that they don't look at your paychecks for the last two years. They base their projections for how much available cash you will have each month (and therefore how big of a loan you can afford) to a big extent on this 2-3 months of paychecks -- basically what was your take home pay.

If I do that, I will appear to have a lot more "take home" money each month and therefore I'll get approved for a much bigger loan.

Now of course there's still the issue of making sure one does not buy a house that is too expensive for one's means, given that AFTER he owns the house he'd like to resume saving for retirement at close to his previous level.

But what seems to me is an unnecessary obstacle is "the bank won't approve me for a big enough loan." Our OP should be able to control that by sharply reducing his retirement contributions for maybe 4-5 months.

I admit to not being an expert in this area -- happy to hear if others think that this strategy would be useless.
I recently maxed out my Roth 401K contribution as well and I will be dialing that back a few months before applying to just ensure I get pre-approved. I also recently asked this question on the mortgage board on how retirement contributions affect pre-approvals and I swear one of the mortgage persons indicated it was not factored in at all. But now I can't find their response to save my life. lol.
That seems strange to me. If Bob and Rick have exactly the same gross pay (let's say 72k or 6k per month) but Bob is putting 30k of that into retirement and Rick is putting only 6k, Bob is going to have a far smaller monthly take-home paycheck with which to afford a mortgage payment. A fact that will be quite visible when they look at his paychecks, which they do indeed specifically request.

That they would complely ignore the difference in their take-home pay seems nuts -- so implausible that it's hard for me to imagine it being true.

Oh, I hear ya and feel ya...as I felt the same way when I read it. I've since found the original email that I got from the Community Mailer - DallasTheLoanGuy did reply to my question that I posted and I quote his answer "401k contributions does not reduce income or affect debt ratios in any way".

I was very surprise to learn this as it seems counter-intuitive. But since all posts related to that correspondence seems to have been deleted for some reason, I had to go through the emails to locate his reply. Turns out I'm not crazy...it was there at one time atleast. Ok...I am crazy..but that's a topic for another time on a another board. LOL.

I went ahead and maxed out my 401k as I figured I could always dial it back before applying for a mortgage if I found out it did come into play for DTI. The reason I asked - on one hand it is an expense as it reduces my available funds, but on the other hand it is an asset as my overall net worth is increasing due to my investments. Nor does it reduce your gross pay - it remains the same regardless - AGI is another thing. But from what I understand, mortgages are based off gross income, debt and expenses. So, retirement is techically an expense, but one I could forego, as the OP pointed out. I kept going round and round in my head about it, which prompted me to ask. Guess I'll find out when I apply. It's always a possibility, I suspose, that financial institutions could add their own more stringent rules and calculate it in - maybe.

Re: Budgeting for a home

Anonymous — Tue, 07 Feb 2017 18:37:31 GMT

I wonder what they want your paychecks (for the last two months) then? Just a confirmation that you are indeed making a certain gross income?

I had figured that they were interested partly in your take home pay -- thus the value in seeing the actual paycheck with the amount at the bottom.

But as I said it's all I thing I know very little about, so happy to be corrected.

Re: Budgeting for a home

Anonymous — Tue, 07 Feb 2017 19:08:58 GMT

@Anonymous wrote:
I wonder what they want your paychecks (for the last two months) then? Just a confirmation that you are indeed making a certain gross income?

I had figured that they were interested partly in your take home pay -- thus the value in seeing the actual paycheck with the amount at the bottom.

But as I said it's all I thing I know very little about, so happy to be corrected.

I'm in the same boat as you, lol... what I shared is all I know...and I learned that just recently.

But what YOU know -...please continue to share...as it has helped me as well as many others.

Re: Budgeting for a home

iv — Sun, 12 Feb 2017 06:14:41 GMT

@iced wrote:

Yes, we put a fair bit into retirement.

I have been pushing to get that even higher by absorbing more of the expenses and allowing the wife to sock away even more into 401(k). She's withholding 22% and I was at 17 but dropped to 14 as I was consistently hitting the 18k cap midway through the summer. She should push up to 25-30% by the end of this year (pay raises get offset by higher contributions by both of us so we keep budget flat while excess and bonus funnels into more retirement). I moved the excess toward additional investments as my ESPP is also capped.

Taxes get complicated. I'm shifting more and more of my contributions toward a Roth 401(k), which will eat into the tax refund. The idea behind the large refunds is that we plan to funnel them into our Roth IRAs. We will try to keep enough contributions going to traditional 401ks to keep our AGI under the limit to contribute to Roth. If we pull back a lot of the taxes, we not only run the risk of paying in April but we also lose that easy funding source for Roth. On a good year, that's another $11000 to add to the retirement pool but it's not a given (was nigh impossible for me until we married). And since we don't know we if we qualify until we see our AGI, it's the best time to contribute without risk of penalty.

I have been working under the Financial Samurai goals of striving for 50% savings. To be honest, I figured most people did about 30%, but if you're both saying that's high then maybe that's where some others are pulling it off where we can't. The question I would then have to sort is how much can we reduce and still make our goals before we die of old age. It's not an easy question to answer as either one of us could lose our job tomorrow and lose out on contributions until re-established, putting us at further risk of retiring (or being retired) without enough to live on.

I'm also pretty sure the wife thinks I worry too much about it.

You are far, far, better prepared for retirement than 99% of people in the US. Really.

Based on every set of stats I've read recently... you're saving more PER YEAR than a majority of people have saved in a LIFETIME.

Even including those in their 50s/60s close to "retirement".

Yeah.

Sad, huh?

But yeah, that's how you're seeing people get "more house" for the same or lower gross income.

Most of them aren't saving much.

Some aren't saving AT ALL.

But if you're committed to staying in Boston, you could probably afford to pull back slightly on the saving plan to make your DTI work.

(Or you could move somewhere where the market is a bit less insane... I thought NJ was bad, but SoCal, NYC, and apparently Boston are CRAZY.)

Re: Budgeting for a home

iv — Sun, 12 Feb 2017 06:26:31 GMT

@Anonymous wrote:
I wonder what they want your paychecks (for the last two months) then? Just a confirmation that you are indeed making a certain gross income?

I had figured that they were interested partly in your take home pay -- thus the value in seeing the actual paycheck with the amount at the bottom.

But as I said it's all I thing I know very little about, so happy to be corrected.

Confirmation that you are STILL making a certain gross income!

W2s could be a year old - paystubs are current.

(Frequently they will also do VOE by calling HR/Payroll, or using a service like TheWorkNumber.)

Paystubs also show things like garnishments (for judgements, child support, etc) and pension/employer loans.

Just in case someone "forgot" to disclose them...

Re: Budgeting for a home

tacpoly — Sun, 12 Feb 2017 07:41:26 GMT

@Anonymous wrote:

Still, we are talking about me putting away a LOT. Basically 30k a year into a Roth, which means I also pay taxes on it up front too.

How do you put $30K per year into a Roth? I believe Roth IRA has a $5500 contribution limit and Roth 401K has $18,000. I guess if you're over 50 you're participating in catch-up contributions? That'll get you to $30K.

But it then one has to ask the question: if you are contributing this much because you "started late" with retirement saving (if I understand your post correctly) is the Roth the right vehicle to be putting your money into? I say this because:

1. The fact that you can afford to sock away $30K suggests your income is fairly high. And the fact that you're socking away money now suggests that you're probably earning more now than at any other point in your life. So...this means you're also at the highest tax bracket you've seen.

2. The fact that you started saving for retirement late suggests you might have difficulty saving enough so that your retirement income would equal what you're currently making -- or close to what you're currently making. (Please correct me if I'm wrong. I know I'm making a lot of assumptions that may not apply to you and I hope you don't take offense. It's just I want people to think about these things.)

3. If you are 50 or over, you'll likely be retired within 20 years. I doubt the tax rates will be increased significantly.

So your Roth strategy therefore would not take advantage of the tax benefits: the tax you are paying NOW on your Roth contributions is more that the tax you would save when you take this money out.

The Roth is a vehicle best used by those starting off: in the lower tax bracket with lots of time for their savings to become very big. So they pay a 12% income tax rate on the contributions initially, but are tax exempt when they are receiving their substantial retirement distributions that put them in a tax bracket much higher than 12%. You might, instead, defer paying income tax now on a regular IRA and 401K, and pay them later when you are retired and making less.

Now, like I said, I am making assumptions about your financial situation. You could have substantial assets and investments that would generate way more income in retirement than you are currently making. But then why worry so much about retirement savings, if that's the case.