Don’t put too much down on house

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Dear Dr. Don,
Here’s a very sore subject that, when broached, always gets me into a heated argument with my wife. She thinks I’m holding us back on home affordability.

We have $330,000 in the bank and $400,000 of equity in our condo — and we have a buyer for it. We live in Westchester County, N.Y. Houses here that look right for us are in the $1.2 million to $1.3 million range, with annual property taxes of $18,000 to $20,000.

Our annual gross income is $200,000. We have a $400 car payment, about $200 in other debt, and that’s it.

What’s our home affordability? Am I way off for wanting to put 50 percent to 60 percent down?

Nick Knell

Dear Nick,
In my simplistic model of the world, the government gets one-third of what we earn, housing takes one-third of what we earn, and we have one-third of our income to handle current and future consumption.

Lenders gauge home affordability based on a prospective borrower’s front and back lending ratios, which relate to my simple model.

The front ratio considers principal, interest, taxes and insurance, or PITI, on the home. Historically, lenders wanted borrowers to have a front ratio of no more than 28 percent of gross income.

The back ratio adds in other contractual expenses to arrive at a total debt figure. Historically, lenders wanted borrowers to have a back ratio of no more than 36 percent.

I say “historically” because in some markets, housing got so expensive that lenders couldn’t hold to these standards and have any customers. There needed to be some measure of flexibility in loan underwriting standards.

Why the history lesson? Well, for one reason, lenders are becoming more conservative again in the wake of the subprime mortgage lending debacle.

The other reason was to explain roughly how Bankrate’s ”
How much home can you afford?” calculator works. To get to the $1.2 million to $1.3 million dollar range in home affordability, according to the calculator, you’d need to put down between $620,000 and $720,000. That moves you off the 20 percent down mark and puts you closer to your 50 percent to 60 percent down bogey.

Don’t put all your money into the house. Hold on to a little financial flexibility in the form of an emergency fund. Keep some additional powder dry for the inevitable decorating decisions. Buy wisely in an attempt to keep the architects at bay.

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