My neighbor told me the 10%-20%-30% rule is too difficult for their kids to follow. (That’s 10% down on a house, 20% reserve at closing, and no more than 30% of gross income.) I told them, if they follow the rule they can purchase a $366,000 home in less than three years with $33,000 savings after paying $33,000 down payment. Their kids are in the late 20’s – 30’s. I told my neighbor if your son or daughter cannot meet these simple rules they shouldn’t get a loan. Your son or daughter who just got married must practice before purchasing the house. What better method to practice than to pay into their own savings account to build up the down payment? Read about how save $66,716 in less than three years, put $33,358 down on a $366,941 home and still have $33,358 in the saving account after buying the house!
Example:
A couple in their late 20’s makes $40,000 each. Combined they make $80,000.
How much house can they afford?
$80,000 x 30% = $24,000 per year mortgage
$24,000 / 12 month = $2,000 per month
Assume 6% interest rate at 30 years
Use Excel Financial function to calculate the Present Value PV.
Nper is number of payments = 30 x 12 = 360 Nper months
I is interest per month = 6% APR / 12 month = 0.5% per month
Pmt is payment per month = $2,000.00
The present value of the mortgage you can afford is PV = $333,583.23.
Now remember my formula stated you have saved 10% down. Therefore the price of the house that you can afford if equal to the PVmortgage + 10% down payment
House Price Maximum Limit = $333,583.23 x (1+10%) = $366,941.55
The down payment = House Price max – PVmortgage = $33,358.32
And in my rule you have to keep 10% reserve in your account for rainy day = $33,358.32
Total savings required = $66,716.65.
Now your kids have to practice paying for their house like one of them have just lost their job to save for the house.
They pay rent and they pay into their savings, pretending like one of them lost their job. How long would it take for them to save enough money to buy a $366.941.55 house.
Take 20% reserve requirement in savings at closing = $66,716.65 / PVmortage payment
= 33.4 months. In little less than 3 years they can buy their first home.
So if your son and daughter can resist purchasing those sports cars in little less than 3 years; they could have enough to go buy the house.
By doing this exercise they already prepared themselves for purchasing the house and know how it would feel if one of them loses their job and what it takes to keep the house from going into foreclose.
Remember the actual time will be less because your son or daughter, if they are good workers, would increase their earnings over the 3 years. The money they save will also be earning interest. The actual time until they can afford the house could be down to 2-1/2 years if they follow this rule.
They banks love this profile of customer, because these are the kind of very responsible people they want to loan too.
In 33 months your son or daughter would have $66,716.65 in the bank savings.
They are shopping for the first house priced at $366,941.55.
Even after the closing of the Sale/Purchase of the house, your son and daughter still have $33,358.32 in savings.
Their savings and disposable income will grow because they are no longer paying the rent and they can forward that money into savings. Your parent will not worry and the bank will not worry about your finances. Your work will look at your credit score and finances. Notice you are great at budgeting-finances then most likely you will get a promotion.
Don’t buy that sports car; no one gets impressed of someone with a broken down sports cars that has devalued, living in a rented apartment or your home foreclosed upon.