[quote=patientrenter]chrisp, I know there are others on this board who have that info (about historical affordability measures). Just in case they don’t cough it up quick, here are some very rough traditional ratios:
1. Home price should be no more 2-3 times income
2. Downpayment (actually from the buyer, not a second lender) should be at least 20% for an owner-occupied home, and 30% for other homes.
3. Regular home debt payments (or was it all home payments, including home insurance?) should not exceed the smaller of (a) 28% of income, or (b) 33% of all debt service obligations (including car payments and credit card payments etc.)
Relying only on 2 and 3 is risky in a low interest rate environment, because low payments can coexist with prices in the stratosphere in such an environment. So if 2 and 3 look good, but 1 doesn’t, exercise more caution.
I hope someone can give you a better source.[/quote]
PR pretty much nailed it, and I would add that a person should have 6 months (more, in today’s economy) of living expenses saved up **IN ADDITION TO** whatever they’re using for the down payment and closing costs.
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You mentioned that a person with 10% down might not default, and that taxpayers/lenders are at the same risk if the borrower had put 20% down. Not true. If a borrower puts down 20-30%, they are much less likely to default because they have more skin in the game, AND because they are much less likely to be underwater on their loan — the house can usually be sold for an amount equal to or greater than the amount owed, so there will usually be no foreclosure on a high-downpayment loan.
Prices would have to drop an extra 10-20% in order to put a 20-30% d/p underwater, whereas a 3.5% d/p is gone from day one because selling costs alone can easily cost 6%+ of a home’s value. That’s why the FHA is setting up tomorrow’s foreclosures because these borrowers are technically underwater from day one. They cannot get out of their house without foreclosure if they lose a job, get divorced, or any of the many other reasons people have to move. The entire “housing crisis” could have been avoided entirely if everyone had to put 20-30% down.
