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There was a story on NPR this morning about a family in St. Paul who'd had their house foreclosed upon, and a couple of years later, after credit repair, etc. they've bought a house and financed $146K on a family income of $50K. They have 3 kids.

The story was presented as a good thing, but in listening to it, it seemed to me that it wasn't such a good thing. The story said their house payment is $1000 a month.

Now.... with a before-tax income of $50K, and 3 kids, this seems to be really stretching it. After taxes and benefits, I'm thinking they have take-home pay of about $35K maybe? That's about $3K a month, which is about $2K after the house payment. With utilities, gas, food, house repairs, clothes for parents and kids...

Seems to me they're getting right back into the mess that they were in before.
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I'm surprised that they were able to get a mortgage a few short years after being foreclosed upon. I thought lending criteria was much more stringent these days?
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<i<>There was a story on NPR this morning about a family in St. Paul who'd had their house foreclosed upon, and a couple of years later, after credit repair, etc. they've bought a house and financed $146K on a family income of $50K. They have 3 kids.

The story was presented as a good thing, but in listening to it, it seemed to me that it wasn't such a good thing. The story said their house payment is $1000 a month.

If the house payment is PITI, then that's about a 24% debt-to-equity ratio, and that is reasonable. Banks typically use 28% as the ratio for PITI to income, and then 33% including all other debt. So if they make $50k per year and their PITI is $1000, that works out to about 24%. Even if that is only PI, that still leaves a little room for the taxes and insurance.

Banks have used those ratios for years, and it was only in the mortgage debacle that they started using much higher ratios where people got into serious trouble. I actually think this payment on this income is going back to something more conservative, and that's a good thing in my book.
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Now.... with a before-tax income of $50K, and 3 kids, this seems to be really stretching it. After taxes and benefits, I'm thinking they have take-home pay of about $35K maybe?

With an income that low, with three children and a mortgage, it's possible that they have no federal or state income tax liability. Possibly even a negative tax liability once any refundable credits are added to the equation.
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The story said their house payment is $1000 a month. Now.... with a before-tax income of $50K, and 3 kids, this seems to be really stretching it.

The question that I would ask in that case is, how much would they be paying in rent if they continued renting? Unless they have family to take them in, they'd have to be paying to live somewhere. With 3 kids they probably don't have the option of renting a room in someone's house to save money. The $1000 per month mortgage payment doesn't take into account other costs like maintenance, insurance, taxes, etc., but if the rent is high in their area and they'd be paying almost as much to rent, it might make sense to buy even if it was a bit of a stretch financially.

I do find it surprising that someone who has been foreclosed on can buy another house so easily. I had problems renting an apartment after just a couple of late credit card payments back in my youth that damaged my credit, and yet you can still get a mortgage just a couple of years after a foreclosure.

Karen
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Now.... with a before-tax income of $50K, and 3 kids, this seems to be really stretching it. After taxes and benefits, I'm thinking they have take-home pay of about $35K maybe?

With 3 kids, they probably don't have much income tax liability. Benefits are probably already discounted from the before-tax income. Major taxes would be FICA and Medicare.

Stretching to buy $149,000 house, but rent for a 3 bedroom house could easily be the same or higher.
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...it might make sense to buy even if it was a bit of a stretch financially.

Sure, but I don't see this as a rent versus buy discussion. They could have bought a 3br/2ba, 1400sqft condo for around $80K.

xtn
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Sure, but I don't see this as a rent versus buy discussion. They could have bought a 3br/2ba, 1400sqft condo for around $80K.

Condos come with condo fees (so the $80K price can be misleadning to true cost), there can always be a special assessment where all of a sudden you need to fork over cash, and sometimes there are even rules about upkeep in your unit - for instance my mom downsized to a condo last summer and she has to buy a new water heater simply because the one in the unit is 10 years old and the condo rules state owners water heaters that are over 10 years old are not allowed.

It might seem like a stretch for this family, but if they're more economical with other areas, and maybe their incomes now are more stable than before, than they might be just fine. Until you've got enough savings where you would never need an income, there's always risk involved to paying off a debt.
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Sure, but I don't see this as a rent versus buy discussion. They could have bought a 3br/2ba, 1400sqft condo for around $80K.

Condos come with condo fees (so the $80K price can be misleadning to true cost), there can always be a special assessment where all of a sudden you need to fork over cash, and sometimes there are even rules about upkeep in your unit - for instance my mom downsized to a condo last summer and she has to buy a new water heater simply because the one in the unit is 10 years old and the condo rules state owners water heaters that are over 10 years old are not allowed.

It might seem like a stretch for this family, but if they're more economical with other areas, and maybe their incomes now are more stable than before, than they might be just fine. Until you've got enough savings where you would never need an income, there's always risk involved to paying off a debt.


Sure. And lots of houses come with HOA fees and maintenance requirements as well.

I totally agree with your point, but indebting one's self less both reduces that risk and results in reaching that savings goal sooner. Well, assuming the hundreds of other factors in life stay the same.

xtn
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