How Much House Can I Afford (Revisited)

Having sold my condominium, I am revisiting a calculator to find out how much house I now can afford (previous amount was $281,000).

My new inputs are:



And the results are:



I am now limited by the front end ratio of 28%. The total mortgage amount comes at $242,000 at 5.5%, and the total house value at $322,000.

How Much House Can I Afford?

Fannie Mae provides future home buyers a calculator to help them estimates how much house they can afford to purchase. I took the calculator for a test drive. Here are my entries:



I then click on Calculate and voila!...



…and what the hell? Either this calculator is broken or I just found the reason for the current housing market crisis.

According to this calculator, and assuming a 6% interest rate, I can afford to purchase a $335,000 house which after down payment and closing costs would leave me nearly $4,000 in the red?? Why is this calculator telling me to bring $84,000 to the closing when I told the calculator I only have $80,000? Not to mention that my total debt-to-income ratio would rise to 50% (new monthly payment $2,450 + current debt payment $800 divided by monthly gross income $6,500).

According to this Yahoo How-to guide the standard requirements for conventional mortgages as established by Fannie Mae are the 28% and 36% debt-to-income ratios. Monthly mortgage payments, interests, property taxes and insurance cannot exceed 28% of the buyer’s monthly gross income. This is called the front-end ratio. Total monthly debt payments (housing, credit card payments, car payments, etc) cannot exceed 36% of the buyer’s monthly gross income. This is called the back-end ratio. I was not able to find any confirmation of those debt-to-income ratios on Fannie Mae’s website.

For a second opinion, I turned to the Yahoo calculator How Much Home can I Afford? I plugged in the same information and here are the results:



Now this makes a lot more sense. According to this calculator, the maximum house I can afford is around $281,000 (assuming a 6% interest rate). I am currently capped by the 36% debt-to-income ratio (my total monthly debt payments). I would have to either reduce my debt payment obligations or increase my gross income in order to afford more house.

I am contemplating buying a cosmetic fixer upper, preferably a real estate owned one, in a desirable neighborhood where home prices are typically in the $350k-$400k range. I am staking the market for the right opportunity to show up.

$1.6M Retirement Balance by age 55?

The Personal Finance section of Yahoo!Finance has many useful calculators. A popular one is called “How much will I need to save for retirement?”. You input your assumptions and it gives you a chart and a spreadsheet of what your retirement balance should look like over the years. So let's see how much savings I need if I want to retire at say age 55.





The graph above shows that my retirement balance must be about $1.6M at age 55 to be able to enjoy 30 years of retirement with 75% income replacement.

The spreadsheet below shows my required savings for the next 20 years in order to reach a retirement balance worth $1.6M by age 55.



The bulk of the money comes from the interests. Being able to produce an 8% investment return year after year will be the most challenging part. Is this plan actually feasible?