Questions about qualifying

[Anonymous]

My husband and I are hoping to purchase our first home perhaps this year or next. We are currently renters. Here is some info:

1. Credit.  My score is 797. I need to find out my husband's score. I'm not sure what to expect because he has little/no credit history because he is a greencard holder. His credit cards are because he is an authorized user on my cards. He has checking/savings/debit cards but no credit cards. We will open a credit card in his name, but I need to first check his actual score. 
2. Income.  I make ~$140k (includes annual bonus). My husband personally makes ~$30k, because he owns a restaurant, and most of the earnings go into the restaurant. It is an s corp. 
3. Source of income.  Mine is salaried and does include an annual bonus (~18% of the total). His is from his restaurant. 
4. Monthly debt payments.  We pay our credit cards in full every month have no balance. I have student loan debt of ~$14k remaining at 3.75% that I pay $150/month towards.
5. Employment. I have been working for my company for 5 years. My husband's restaurant is an s corp that has existed for 9 years. 
6. Assets/Reserves.  I have ~$40k in 401k. We have savings over $100k which we have been saving for a down payment. 
7. Location.  New York City
8. Property.  We are looking at single family, condo, townhomes. 
9. Value.  $600-900k? We are still determining what we can afford. 
10. Occupancy.  Primary residence
11. Transaction Type.  Purchase

My major question is roughly what we would be preapproved for.... Also whether we can include the S Corp as an Asset or even as a cosigner in some way. Whether that is a good/bay idea.  I am just starting the first home purchase research and a lot of this is new to me. I'm wondering if our dream home is a pipedream.

[Anonymous]

Quite simply, you can get an idea of whether you can afford a home by using the debt-to-income ratio that is fairly standard for conventional loans.  28 front end/36 back end.

For just your income at $140K, that would be a home payment (mortgage+interest+insurance+taxes) of no more than $3266 (28% of income) and a total debt burden (cars,other loans, alimony etc) of no more than $4200 (36% of income). 

So, what could you buy for $3200 a month?  With your score (by the way, is that FICO score?  those are the only ones to be trusted), you credit is apparently excellent and you'd get the top rate which is about 4.5% right now.

So, at that rate, yeah it looks like you could do a house in that range, maybe on the lower end.  There are lots of online caclulators that you can use to plug in your information (loan rate, term, other costs like insurance and taxes).  I would look online at the current property tax estimates in the area you want to buy.  NYC will be expensive.  (I bet it would shock me what the taxes are there).   Also, you'll need to factor in homeowner's insurance.

One thing, though.  Based on those caculators, I could theoretically afford a house much more expensive than the one I'm buying.  Frankly, it struck me as a bit ridiculous what they said I could buy.  So, be sure to create a very, very thorough budget accounting for future potential expenses (children, tuition, health care/emergencies, vacations, etc) that may be a one-time or recurring item. In my case, I want to put more towards retirement to catch up from the pauper years in grad school.

It would take a while for your husband to establish a credit score, and then it would take a bit longer to get one up to 797.  If you don't need his income to qualify for the loan you want, then it might make more sense to have only your name on the loan (you could both be on the title).

Your best bet is to go visit a lender and give them this information.  They can plug in the data and give you a solid answer.  It's also a good way to try out different loan officers that you might want to work with when you're ready to buy.

[Anonymous]

Thanks so much! This is so helpful. $3,266 is very affordable. Some of my colleagues pay that in rent each month for only a 1 bedroom! NYC is very expensive but we have always lived here so we're used to it. We don't have a car. The 797 was my quote from Equifax through this website. We are going to go get preapproved in the next few months but I wanted to have an idea. 

Does the S Corp's income factor in at all to the calculation since my husband is the owner?

[Anonymous]

No.  As I said, since you indicated that you didn't know your husband's scores, i just used your income in that simple math.  ($140K/12) x 0.28

[Anonymous]

Thanks. I realized that your calculation didn't include the S Corp. I should have phrased my question better. Do people ever include their business as one of the mortgage applicants as well? 

[Anonymous]

i don't know.  Shane's the expert around here who can answer that question.

[ShanetheMortgageMan]

For conventional loans a total debt ratio up to 45% usually has very little issue qualifying if credit is excellent, housing ratios can also go up to the low 40's... so with just your income, a rough ballpark on your limit may be about $700k sales price with $100k down, with a payment of about $5k/mo for everything.  Property taxes vary quite a bit depending on where in NYC you are buying, you'll need a good real estate agent to advise you how one areas taxes differ from the next, as well as with a condo you'll have varying degrees of homeowners association fees.  You have co-ops to consider too.

You said the S-Corp your husband now works for, and owns, has been around for 9 years, but how long has he personally owned it for?  He'll need to have at least 25% ownership in it for 2 years before it'll be able to easily qualify.  If he does, then his W-2 earnings can qualify + his K-1 earnings/losses from the S-Corp are passed through to him (for better or worse) for qualification purposes as well.  Since you are a U.S. Citizen and he's a Permanent Resident Alien, as long as he has qualifying scores I don't think his credit will have much of an issue.  If he was trying on his own it could be a different story.

[Anonymous]

Thanks very much, Shane. He has been the majority owner for more than 2 years so that is not an issue. Thanks for the additional details. Very helpful!

[ShanetheMortgageMan]

You are welcome.