Monday, September 4, 2017

Five Ways You Can Afford a Million Dollar Home in Los Angeles


 

West LA Homes - Million Dollars and Up - What You'll Need to Live There

If you live in DTLA or anywhere west of downtown, and you are currently paying rent or own a home in a neighborhood you want to get out of. Or if you need more room. You need to get used to the fact that a quality home or condo in a good neighborhood is going to cost you a million bucks. We have shown here and here why these prices are unlikely to decrease anytime soon, and we’ve shown here why buying is much better than renting (assuming the same quality home and neighborhood.

What will it take to get that $1m dollar home, and how can you start planning now to make that purchase?

What income do you need to qualify for an $800,000 mortgage?

The standard down payment for any home purchase is 20%. Therefore, if you are buying a $1M home, you’ll need $200,000 down. That means you will need to qualify for an $800,000 mortgage. Clearly, you can pay more down, and your payments will be less, therefore making it easier to qualify. You can also put less than 20% down, but then your monthly payments will go up and you will need to pay an additional amount for PMI (premium mortgage insurance) through the FHA or through private insurance providers.

For this illustration, we’ll assume the standard situation. At 4% interest, the total cost including taxes and insurance will be approximately $5700 per month. The recommended income for this type of loan is $240,000. With outstanding credit, you might be able to slide by at $207,000.

If you were to eliminate all other debt, including car debt, you might be able to qualify with an income of $170,000. The range of the ratio acceptable today is an income equal to 28% to 41% of payments on debts + property taxes + home owner’s insurance + PMI.

Step one would include getting enough income and low enough debt to qualify. How can you get the requisite income? Your personal earnings plus your spouse’s earning, and/or the earnings of any individual who will live on the premises and is willing to sign on the mortgage. Keep in mind that their credit score must also qualify.

How do you get rid of debt? You will need to do these things well in advance of making the purchase:

·      Sell the expensive car and get by with a less expensive car or other transportation method.
·      Cut back on expenses to make large payments on credit card or other debt. The lower transportation cost will already help. You can get rid of cable TV, eating out, coffee out, and alcohol, not to mention cigarettes. Then review internet and miscellaneous expenses. Generally, you’ll find at least $500 per month that can be eliminated for a while or forever.
·      Who might “give” you the money to eliminate your debt or part of it. If you are already counting on these donations to help with the down payment, you may not be able to double dip here. On the other hand, the elimination of debt will lower the down payment needed, so would often be the better strategy.
·      Liquidate assets such as pension plans, savings, investments, or collections. Keep in mind that taking funds out of pensions will result in penalties if you are under 65.

What If I can do all the above, but I can’t generate $170,000 in income? For many individuals that are looking to buy a $1M home, they are selling a home in the process. The sale of the home may create more down payment, thus reducing the needed income. Each additional $100,000 in down payment reduces the monthly payment by $550, and therefore reduces the income needed by about $20,000 per year. In the case where you have high credit scores and no debt, the income needed on a $700,000 loan would drop to $150,000.

Alternatively, you might be able to rent out the property you now own. Any profit you can show on that rental would increase your income. However, you will need to show that you are a competent property manager and/or hire one, and you’ll need a lease in place.

I have the income, but not the down payment

You can buy a home with as little as 3% down, but most mortgage companies would like to see at least 5% down. This also allows you to use private mortgage insurance, which generally has many benefits compared to FHA.

Obviously as the mortgage amount goes up, the monthly payment goes up. You will pay about $550 per month more for a $900,000 mortgage compared to an $800,000 mortgage. In addition, you will pay PMI of around $300-$500 per month. If we use $1000 per month additional payment total, then the income necessary to afford the loan becomes closer to $275,000 per year, but could be as low as $200,000 with outstanding credit and no debt.









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