Author Topic: Buying a house  (Read 7308 times)

Jags4186

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Buying a house
« on: February 24, 2015, 12:40:49 PM »
I always see bandied about on random websites numbers such as 28%, 36%, and 42% of gross income towards your monthly housing expenses. Is there a mustachian rule of thumb for cost to carry as well as %of your assets you should put towards a home purchase?

Where I live I can't get anything decent (where you could raise a family in a single family home) in a relatively close area to work for much under $500k...am I destined to rent forever unless we seriously increase our incomes?

waltworks

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Re: Buying a house
« Reply #1 on: February 24, 2015, 12:52:47 PM »
It would be worth just sitting down and seeing how much of your income goes to housing depending on the price of the house (plus of course taxes/insurance/maintenance or some sort of estimates thereof).

The *absolute limit* I'd say, is about 5x gross annual income. And it would be much better to be way, way under that.

If you make $50k, and a house is $500k, you'd be a fool to buy one unless rent is just insane.

-W

I always see bandied about on random websites numbers such as 28%, 36%, and 42% of gross income towards your monthly housing expenses. Is there a mustachian rule of thumb for cost to carry as well as %of your assets you should put towards a home purchase?

Where I live I can't get anything decent (where you could raise a family in a single family home) in a relatively close area to work for much under $500k...am I destined to rent forever unless we seriously increase our incomes?

shotgunwilly

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Re: Buying a house
« Reply #2 on: February 24, 2015, 12:59:44 PM »
5x gross?! I'm thinking more like 3x MAX.

I guess it all matters where you live though.

waltworks

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Re: Buying a house
« Reply #3 on: February 24, 2015, 01:02:38 PM »
Yeah, 5x only works with the crazy low interest rates we have now. With "normal" 7-8 percent, I'd say 3x would be a reasonable max.

Again, though, it depends on where you live and what it costs you to rent. Fire up the NYT calculator and you can get a rough answer in 30 seconds.

-W

5x gross?! I'm thinking more like 3x MAX.

I guess it all matters where you live though.

The Beacon

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Re: Buying a house
« Reply #4 on: February 24, 2015, 01:02:45 PM »
I would keep renting.  The rule of thumb is 4 X your gross annual income.  That is for average Joe. But if you are on this forum, then it is 3 X your GAI.  Mine is 1.5.

Another thing is why it has to be SFH.  Can it be a town home?
« Last Edit: February 24, 2015, 01:04:58 PM by Sharpy »

rpr

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Re: Buying a house
« Reply #5 on: February 24, 2015, 01:07:51 PM »
I always see bandied about on random websites numbers such as 28%, 36%, and 42% of gross income towards your monthly housing expenses. Is there a mustachian rule of thumb for cost to carry as well as %of your assets you should put towards a home purchase?

Where I live I can't get anything decent (where you could raise a family in a single family home) in a relatively close area to work for much under $500k...am I destined to rent forever unless we seriously increase our incomes?

How much is your current rent as a fraction of your gross income? If you intend to buy, try to keep your housing spending fraction close to this number. 

Jags4186

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Re: Buying a house
« Reply #6 on: February 24, 2015, 01:10:00 PM »

I always see bandied about on random websites numbers such as 28%, 36%, and 42% of gross income towards your monthly housing expenses. Is there a mustachian rule of thumb for cost to carry as well as %of your assets you should put towards a home purchase?

Where I live I can't get anything decent (where you could raise a family in a single family home) in a relatively close area to work for much under $500k...am I destined to rent forever unless we seriously increase our incomes?

How much is your current rent as a fraction of your gross income? If you intend to buy, try to keep your housing spending fraction close to this number.

The problem with this question/answer is I wouldn't buy what I'm renting. Right now our rent is 15% of our income. We rent a 650 square foot 1br 1ba walk up apartment.

finitelement

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Re: Buying a house
« Reply #7 on: February 24, 2015, 01:12:08 PM »
Whether or not you have the 20% down comes into play also

rpr

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Re: Buying a house
« Reply #8 on: February 24, 2015, 01:16:02 PM »

I always see bandied about on random websites numbers such as 28%, 36%, and 42% of gross income towards your monthly housing expenses. Is there a mustachian rule of thumb for cost to carry as well as %of your assets you should put towards a home purchase?

Where I live I can't get anything decent (where you could raise a family in a single family home) in a relatively close area to work for much under $500k...am I destined to rent forever unless we seriously increase our incomes?

How much is your current rent as a fraction of your gross income? If you intend to buy, try to keep your housing spending fraction close to this number.

The problem with this question/answer is I wouldn't buy what I'm renting. Right now our rent is 15% of our income. We rent a 650 square foot 1br 1ba walk up apartment.

When I was renting I was paying about 12% gross income. When I bought this is around 17% gross (includes PITI+ maintenance). 

CW says housing debt repayments around 28% of gross and total debt repayment around 36% of gross. Both of these numbers seem very high to me. You have to decide for yourself.

2Birds1Stone

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Re: Buying a house
« Reply #9 on: February 24, 2015, 01:20:50 PM »
My Rent/Utilities is 15% of NET pay.

I would never purchase a home that was over 2 X gross salary.

Remember the costs associated with a home go far beyond the monthly mortgage payment.

Nepoxx

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Re: Buying a house
« Reply #10 on: February 24, 2015, 01:36:21 PM »
5x gross?! I'm thinking more like 3x MAX.

I guess it all matters where you live though.

I don't know where you live, but I can't see that as being realistic. If you make 50k$ a year, that means a 150k$ home. Over here, you don't even get a shack for that price, even though 50k is a decent income (higher than average!). Even at 100k a year, that's only a 300k$ home, which is, again, a very small house away from work. For the record, I live in Quebec city, which is a medium-size city (700 000 populationn or so), so this might not reflect your situation.


SantaFeSteve

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Re: Buying a house
« Reply #11 on: February 24, 2015, 01:45:03 PM »
Quote
CW says housing debt repayments around 28% of gross and total debt repayment around 36% of gross. Both of these numbers seem very high to me. You have to decide for yourself.

This is a general rule for mortgage lenders.  They want your housing expense (PITI) to be less than 28% of your GROSS income and total debt repayments ate less than 36% of gross.  You can get a mortgage if your debt ratios are higher, but it will usually cost you more and require excellent (not good) credit. 

I think if you are on this forum you should shoot for a PITI of no more than 20% of gross and you should probably not have any other debt that has an interest rate higher than about 3 - 3.5%.  If you have low interest student loan debt then your total monthly debt obligations, including the estimated PITI payment on the home you are considering, should be less than 30% of your gross.  Just my thoughts, but you should be very cautious about getting tempted by the lure of homeownership.  houses are expensive.  If you want to purchase a home and you can't afford one where you live now....move somewhere you can afford one. 

MLKnits

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Re: Buying a house
« Reply #12 on: February 24, 2015, 01:57:30 PM »
My area's similar to the OP in terms of housing costs, but has perfectly reasonable rents ($800-1200 for a 1br). There's no way I'd buy around here--and OP, take a look around at what they GET for the $500K. Around here, it's a ticky-tacky semi-detached with a couple of tiny windows and no sunlight on the postage-stamp lawn--but a two-car garage, because they know what matters!

Even low-range apartments around here have big, lovely windows, and midrange+ has balconies. Give me those any day, especially with the cost differential.

The Beacon

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Re: Buying a house
« Reply #13 on: February 24, 2015, 02:00:03 PM »
I don't know where you live, but I can't see that as being realistic. If you make 50k$ a year, that means a 150k$ home. Over here, you don't even get a shack for that price, even though 50k is a decent income (higher than average!). Even at 100k a year, that's only a 300k$ home, which is, again, a very small house away from work. For the record, I live in Quebec city, which is a medium-size city (700 000 populationn or so), so this might not reflect your situation.

I am not sure about Canada.  But you can find a decent home for around 200k in most parts of the US.  To FIRE, the first thing we do is to reduce our expenses instead of increasing our incomes, so moving to a lower cost part of your country is an optimal solution. Big cities come with a lot of benefits such as ease of finding a job, a lot of conveniences and fun activities.  They do have a lot of downsides too.  So it is your choice to FIRE or not to FIRE. For me and a lot of people here, FIRE takes precedence over anything else since we live only once and have to make the most out of it while we can.
 

Ricky

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Re: Buying a house
« Reply #14 on: February 24, 2015, 09:33:59 PM »
This also of course all changes if you plan to rent out rooms in your house to cover the mortgage...

Frugal_Red

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Re: Buying a house
« Reply #15 on: February 24, 2015, 10:18:59 PM »
From 'The Millionaire Next Door' -  "If you're not yet wealthy, but want to be some day, never purchase a home that requires a mortgage more than twice your annual income."

I've used the Rent V. Buy calculator (http://www.nytimes.com/interactive/2014/upshot/buy-rent-calculator.html?_r=0&abt=0002&abg=0) which can be helpfull with some of those nicky picky details.

Disclaimer: I rent.

cshaw

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Re: Buying a house
« Reply #16 on: February 24, 2015, 10:46:33 PM »
If you really want to buy a home but can't afford to live close to where you work perhaps finding another place to work should be considered.  There are a lot of factors that go into a decision like that so that may or may not even be an option for you.  Thought I'd mention it though.

sol

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Re: Buying a house
« Reply #17 on: February 24, 2015, 11:00:32 PM »
We bought a house last year for 1.75x our combined income, annual PITI totals 15% of our gross income on a 15 year mortgage after we put 20% down.

This was a 25% increase in monthly payments compared to our previous house, so it felt ridiculously expensive.

lizzigee

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Re: Buying a house
« Reply #18 on: February 24, 2015, 11:20:01 PM »
Out of curiosity I just ran my husbands and my joint gross income through a NZ bank calculator, and found they'd loan us $770,000 on a combined gross income of $120,000. Crazy!

Runningtuff

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Re: Buying a house
« Reply #19 on: February 24, 2015, 11:47:33 PM »
Our rent is 36% of gross combined income *sigh*. And 5 x gross would get a just-adequate house in a mildly dubious area.

Guesl982374

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Re: Buying a house
« Reply #20 on: February 25, 2015, 08:50:53 AM »
My wife and I just purchased a condo that met our NEEDS (not wants) that is ~1.5X our gross salaries. All expenses (mort, tax, condo fees, maint. etc) works out to be about <15% of our combined take home. We mainly did it for three reasons 1) in case we have a baby, 2) gives her the option of SAHM, and 3) saving for FI.

If she were to stay home the numbers change to 2.4X my gross.

frugaliknowit

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Re: Buying a house
« Reply #21 on: February 25, 2015, 09:13:16 AM »
No more than 3X gross income in price and no more than about 20% of gross pay for PITI.

MLKnits

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Re: Buying a house
« Reply #22 on: February 25, 2015, 01:26:06 PM »
From 'The Millionaire Next Door' -  "If you're not yet wealthy, but want to be some day, never purchase a home that requires a mortgage more than twice your annual income."

I've used the Rent V. Buy calculator (http://www.nytimes.com/interactive/2014/upshot/buy-rent-calculator.html?_r=0&abt=0002&abg=0) which can be helpfull with some of those nicky picky details.

Disclaimer: I rent.

That's a fabulous tool! Apparently I'd have to almost double my rent for it to be worth it to buy, which I more or less knew, but it's interesting to see it set out so starkly.

Rein1987

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Re: Buying a house
« Reply #23 on: February 25, 2015, 03:23:56 PM »
I think this depends on the property tax rate and your tax bracket. For example, with 40%+ federal+fica+state tax rate, it's insane to put 36%  on housing (this tax rate hits AMT, so only interest deduction). Also, 1.2% property tax and 3% property tax makes a lot of difference.

Strawberrykiwi75

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Re: Buying a house
« Reply #24 on: February 26, 2015, 03:58:44 AM »
Out of curiosity I just ran my husbands and my joint gross income through a NZ bank calculator, and found they'd loan us $770,000 on a combined gross income of $120,000. Crazy!

LOL was it ANZ? I've seen some pretty dodging lending going on there... they don't take into account potential interest rate hikes for example...