How The Sub-Prime Debacle is Affecting Me, a Cautionary Tale With Math

So, you would think if we got an offer on our home we'd be jumping up and down, right?  Well not quite yet.  We purchased this house 1.5 years ago for $449,000.  This was exactly the same amount of money that the sellers had paid for it in 1994, so this house wasn't a victim...beneficiary (?) of the housing bubble.  Undoubtedly, we overpaid, but we were tired of looking and it had just come on the market, so the seller wasn't much into negotiating.  I won't include the amount of money we have spent on it already in these calculations.

We made a substantial amount of money on the home we just left, as we had bought it as a foreclosure and put our hearts and souls into the remodel.  As a result of the money we made, we were able to put $100K down on this house.

So the math so far is:
$449,000
-100,000
$349,000 Amount financed.

Since we have been here such a short time, we still owe $343,000 on the loan.

The offer we received was $375,000.  If we sell for this amount of money, after we pay closing costs, we will net about $348,000.  

New math:
$348,000
-343,000
$  5,000  This is the amount of money we will have to put into a new home.

Now, here's where the sub-prime debacle comes in.  Right at the moment, Howdy and I are making $47,000/year gross.  (273% of the 2007 Poverty Guidelines for three persons, BTW)  Ordinarily, with our good credit, we could qualify for a 100% loan, so the amount for a down payment would be a moot point.  Now, since the lending restrictions are tightened, even our good credit won't help, as there are no more 100% loans.  We are forced to put a down payment, preferably 20%.

We have counter offered $430,000.  This will put our net at about $400,000.  Sounds great, right?

$400,000
-343,000
$ 57,000

So then you can assume that if I use this as a 20% down payment, I can afford to finance $285,000. (57000/.2)

Not so fast.  The rules have changed that way, too.  You have to spend less than 41% of your total income on debt.  This includes car payments, charge cards, student loans, whatever. 

amount of new payment + $975 (current car payments) / $3,916 (monthly gross income) = 41%

If you solve this, our monthly payment can be no more than $630.56.  This includes escrowing insurance and taxes.  Not much to be allowed to spend.

Conversely, if I plug my numbers into this calculator, with 6.25% interest over 30 years, I can afford a house of $106,232.46 with my down payment of $50,000!  Doesn't sound very appealing to me.

We thought maybe we'd just rent a home for a few months and after Howdy gets started in his new business and there's some money coming in, we can buy a home then.  The rules have changed there, too.  Used to be, they'd do something called a "no doc" loan for someone who couldn't substantiate their income.  Obviously, this was a place where fraud was bound to occur, so they no longer do those loans.  Now, if you are self-employed, or even draw income from a place that you own more than 25% of, you have to show your income with 2 years of tax returns.  So, if Howdy starts work at this new job as he is slated to this year, we do not have enough documentation to qualify for a loan until our 2009 taxes are filed, in April of 2010.

This puts is in an interesting position.  Ordinarily, we'd be happy about any offer on the house, but unless we can come up with 20% down, we are basically screwed.  Even if we get a greater offer later, once Howdy is self-employed, we are ineligible to purchase a home until 2010.  

So, as I drive around neighborhoods in my area and marvel at the number of for sale signs, I can't help but wonder who is going to buy all of these homes once we have finally hit bottom.  We have excellent credit and possibly the ability to put 20% down and still might get turned down.  My realtor has told me there are 2,000 new foreclosures in Houston every month, and we are one of the least affected areas of the country.  I can't imagine how it is other places.  How did this happen?  Surely it isn't all fraud. 

In a related story, an acquaintance of mine is fairly wealthy.  He lives in a tiny gated community.  We happened to be travelling in his car (brand new Mercedes) and the radio (CNBC on Sirius satellite, of course) was talking about the sub-prime crisis.  He had the gall to tell me he thought the whole thing was an invention of the media and ask my opinion.  Since I knew he would continue living in his little bubble no matter what I said, I asked him about his car.

We have not received any word on our counter offer.  Ever optimistic,  the residents Chez Sockbug will be going out to look at homes to buy tomorrow.  If you have read this far, send mojo with dollar signs, please.  Oh yeah, and forgot to mention, they want to close in THREE WEEKS.  Oh, the fun we're having here!