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Author Topic: Acceptable Salary to Debt Ratio  (Read 4128 times)

Luziana

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Re: Acceptable Salary to Debt Ratio
« Reply #10 on: July 21, 2008, 09:29:42 AM »
I'm going to be a little bit of a contrarian.

If I were you, I'd work on paying off the student loans ASAP.  If you're married or otherwise partnered and your significant other has a job, then maybe you might be able to afford a house.  Maybe.

But be very careful.  Remember that $80,000 will be your gross income -- you'll lose about thirty percent (give or take, depending on your tax bracket and your locality) to taxes and the like.  Let's assume thirty percent.  That would make your net income $56,000 yearly -- $4,667 monthly.  Not too bad. 

But the repayments on your student loans will be at least $1100 per month (a good rule of thumb is $100 per month for each $10,000 you borrow), probably a bit higher because of interest rates.  The payments on a 30 year fixed rate $250,000 mortgage, assuming that you put 20 percent down which you probably won't, would be about $1400 per month.

So, you'd be looking at debt payments of at least $2500 per month, minimum, probably higher because you don't seem to have the cash to make a 20 percent downpayment.

That's more than half of your monthly salary right there.  I'd advise you to add up your other projected expenses -- food, clothing, transportation, insurance, healthcare, childcare (if applicable), pets (if applicable), entertainment, etc.  Figure out how much you spend in each category, and then add that figure to the debt payments figure. 

If the final number you reach is very close to what your takehome pay will be, be very, very careful about buying a house.  Lately too many people have made stupid financial decisions because they believed the realtors' propaganda that everyone must own a home to be happy.  Being a homeowner is nice, but it isn't for everyone.  I'm not saying you can't or shouldn't buy a house, just be careful and do all the math ahead of time.  (And don't trust mortgage brokers' math -- they are biased b/c they want you to take out a mortgage...)

Also, as a sidenote, the lending standards for most mortgages have been significantly tightened.  You might not be able to get one if you're single and carry that much debt already.


If you are married or otherwise partnered, and you have a second income in the household, much of this advice above could change.

brianwithani

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Re: Acceptable Salary to Debt Ratio
« Reply #11 on: July 21, 2008, 09:47:58 AM »
You can buy a house in that range with two salaries and that debt load provided you have a good credit score.  The mortgage industry is getting tighter.  I just bought a house last month with A+ credit and they still had me and my wife jumping through hoops.  Three years ago they would have offered us half a million dollars and wouldn't have even asked for a paycheck stub. 

Student loan debt is often low interest debt.  Definitely lower than credit card or auto loan debt.  I suggest if you really want to buy a house, I would focus on paying down the mortgage.  Two reasons:  1.  As you pay down the mortgage, you gain equity that can be cashed when you sell the house or if you need a home equity line of credit.  2.  If the student loan interest rate is lower and you aren't building any equity, why would you want to focus on getting it paid down other than just not wanting it hanging over you?  Student loan companies are a lot more lenient if you get in a jam and have to miss a payment and besides, what are they going to repossess? 

A good rule is to focus on paying down whatever debt has the highest interest rate first.  My financial advisor told me that debt in general sucks but there are two kinds of debt that are less of a problem, a home mortgage and student loan.  Both have interest that is tax deductible and the interest rates are generally reasonable.  I'd pay off all other debt first and then work on the mortgage and then the student loans.  just my opinion...

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nike6075

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Re: Acceptable Salary to Debt Ratio
« Reply #12 on: July 21, 2008, 09:54:50 AM »
Disclaimer:  I don't pretend to really know much about how much debt you'll be able to manage or whatever.

I'm just coming up with a scenario in which you could possibly pay back your debt quickly.

If you take home 80K, you'll roughly be left with 50K after taxes (right?). So, that's about 4K a month.

Assuming, you're in LA, and you have a roommate, etc.  You could be looking at spending in the ballpark of 1K for rent, utilities, parking.  And then, about another 500 - 1K for miscellaneous expenses (insurance, hobbies, ??).  If you can somehow manage to save 2K - 2.5K a month, you'll be able to save from 24K - 30K per year.

Figure out how much of that you'll want to use to payback debt and how much to put into savings. 

Also, but, when you're thinking about purchasing a home, you may also be married and have a double income (this is really why people get married, haha).

no way you lose 40% in taxes.  I'd say 20 - 25% tops. 

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nealric

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Re: Acceptable Salary to Debt Ratio
« Reply #13 on: July 21, 2008, 05:44:49 PM »
As long as it is better than 1:1, I am O.K.
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Ninja1

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Re: Acceptable Salary to Debt Ratio
« Reply #14 on: July 23, 2008, 04:58:08 PM »
You can buy a house in that range with two salaries and that debt load provided you have a good credit score.  The mortgage industry is getting tighter.  I just bought a house last month with A+ credit and they still had me and my wife jumping through hoops.  Three years ago they would have offered us half a million dollars and wouldn't have even asked for a paycheck stub. 

Student loan debt is often low interest debt.  Definitely lower than credit card or auto loan debt.  I suggest if you really want to buy a house, I would focus on paying down the mortgage.  Two reasons:  1.  As you pay down the mortgage, you gain equity that can be cashed when you sell the house or if you need a home equity line of credit.  2.  If the student loan interest rate is lower and you aren't building any equity, why would you want to focus on getting it paid down other than just not wanting it hanging over you?  Student loan companies are a lot more lenient if you get in a jam and have to miss a payment and besides, what are they going to repossess? 

A good rule is to focus on paying down whatever debt has the highest interest rate first.  My financial advisor told me that debt in general sucks but there are two kinds of debt that are less of a problem, a home mortgage and student loan.  Both have interest that is tax deductible and the interest rates are generally reasonable.  I'd pay off all other debt first and then work on the mortgage and then the student loans.  just my opinion...



TITCR.

$80k/yr gross with $360k good debt (house and student loan) is totally doable, especially if the wifey works for 5-10 years. Also, considering that the OP is looking to the Midwest, his general CoL will be a lot lower.

If the wife doesn't work, no big, you just have to live kind of frugally for 5-10 years while you pay down debt and (hopefully) gain increases in salary. You'll have a cool house, a decent car, and some stuff. Plus, since the wife isn't working, you'll basically have a 24/7 maid that has nothing better to do than clean, cook, and stay in shape. Avoid children until your debt is at least half of what it currently is, and ideally, until it's paid off.

If the wife does work, awesome! With two incomes, you will be living the balla lifestyle in no time. Even if she has some sort of modest job like a grade school teacher, her income should be sufficient to pay all of your debt each month with a little bit of money left over. Her income can be used exclusively to service debt while you can split your income between paying extra on the debt and living like the hustla you always knew you were. I recommend a 10-90 split, as you'll still be rapidly repaying the debt but will have most of your income free to finance a Lambo. YOU MAY let the wife work for 5-10 years (half debt left v. debt paid off) and then quit if she wants to. You gain the maid services previously discussed, you'll be in good shape to finish off whatever is left of the debt, and the wife should be grateful that you let her retire young. You will lead the good life and even have money left over to finance children if desired. OR YOU MAY let the wife keep working if she wants to after the debt is paid. You will continue to reap the benefits of the double income, but now with no debt. Avoid children forever, as they will interfere with your plans to buy a helicopter.

Obviously, the wife working is the way to go, and I'm normally not an advocate for marriage.
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yykm

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Re: Acceptable Salary to Debt Ratio
« Reply #15 on: July 24, 2008, 12:10:57 PM »
Buying a home isn't always a great financial move.  The market was just recently at the highest its ever been for housing.  Additionally, depending on the market, you may want to wait at least a few years for a better price.

Here's a general guide of the rent vs. buy delimma: http://www.ginniemae.gov/rent_vs_buy/rent_vs_buy.asp?subtitle=ypth

You may also consider that any savings reaped may very well need to be used for maintenance of the home.  You certainly will build equity, but if you have to push an average of $500+ into your home every year you may not gain as much equity as you may think.  You can play around with the calculations some too.  Consider a modest 5% interest on the extra money you have from renting vs. the equity you gain from owning a home that very well won't increase in value.  If the latter comes out ahead for the time period you set, then buy.  I'm just trying to paint a broader picture.  I think our culture has recently pushed home ownership as the only real way to live when it's not always the smartest move for everyone or even the right time.