Author Topic: Easy Ratio for how much house to buy  (Read 5742 times)

FrugalFisherman10

  • Bristles
  • ***
  • Posts: 318
    • Fly Fishing Photo Project
Easy Ratio for how much house to buy
« on: February 08, 2018, 09:45:26 PM »
Anyone have a good guideline for how expensive of a house one should buy? say based on income (and security of that income)

I think I heard 3 times your income is a good general guideline, so what would the Mustachian version of that be? Tone it down some to 2 times?

Obviously there's tons of factors to consider, like income potential from the property itself etc. I'd likely rent out the first place I buy to a few roommates, but beyond that I'd like to be married and will then likely need to pay for the whole thing myself (unless there were some sort of separate entrance I could continue renting out to someone). So i'm really looking for guidance on how much house to buy for myself.

AnnaGrowsAMustache

  • Handlebar Stache
  • *****
  • Posts: 1713
  • Location: Noo Zilind
Re: Easy Ratio for how much house to buy
« Reply #1 on: February 08, 2018, 11:36:15 PM »
If I spend 3 times my income I wouldn't be able to buy even a third of a house here.

Finances_With_Purpose

  • Pencil Stache
  • ****
  • Posts: 730
    • Finances With Purpose: deploying resources wisely to live vigorously
Re: Easy Ratio for how much house to buy
« Reply #2 on: February 08, 2018, 11:52:42 PM »
PTF, as I am curious what responses you will receive. 

I assume this means you have no debts now.  Otherwise, a simple ratio isn't helpful. 

My answer is something like "it depends," since it's too complicated of a calculation to reduce to one ratio.  And even involves some intangibles.  But I am curious what others think...

joonifloofeefloo

  • Magnum Stache
  • ******
  • Posts: 4880
  • On a forum break :)

2Birds1Stone

  • Walrus Stache
  • *******
  • Posts: 5983
  • Location: Earth
  • K Thnx Bye
Re: Easy Ratio for how much house to buy
« Reply #4 on: February 09, 2018, 12:58:07 AM »
There shouldn't be an "easy ratio" based on income, simply because there are SO many factors and variables to consider.

Personally I would never take on a mortgage that is more than the going market RENT rate for a 2 bedroom apartment in my area.

Zola.

  • Bristles
  • ***
  • Posts: 408
  • Location: UK
  • Let's do this.
Re: Easy Ratio for how much house to buy
« Reply #5 on: February 09, 2018, 02:36:30 AM »
I lusted after big houses until I came here....... now our 3 bed semi detached house seems right for us. Mortgage cost is low, garden is good and its easy to clean!

Sun Hat

  • Pencil Stache
  • ****
  • Posts: 671
  • Location: Canada
Re: Easy Ratio for how much house to buy
« Reply #6 on: February 09, 2018, 06:39:47 AM »
I think that it'll depend a lot on the relative cost of housing in your area. If you earn $70k/yr and live in an area where you can buy a house in decent condition in a relatively safe neighborhood for $100k, then you'd be foolish to buy a McMansion just because your ratio said that you should spend more. On the other hand, if you live in a place where property prices are astronomical, it might make sense to rent in perpetuity (I would ask the formidable @Zikoris  if they have a way of calculating where that line is).

Personally, when I relocated to my current city, I bought my home on the basis that it was the cheapest place that I was comfortable with. I set my ceiling on what I would be comfortable with (FAR below what the bank and realtor thought that I should spend based on income), and looked at places priced between 50% and 100% of that number, choosing a place at about 70%.
Keep in mind that formulas touted by banks and realtors are designed to get you to spend more. They're businesses, not a public service.

birdman2003

  • Bristles
  • ***
  • Posts: 314
  • Location: Iowa
Re: Easy Ratio for how much house to buy
« Reply #7 on: February 09, 2018, 06:49:50 AM »
Average house in my area was $150k but I went low and bought a $90k house that met my needs ($70k mortgage, $20k down payment) and then felt very comfortable making my $600 a month payments with my $70k per year salary.

Capt j-rod

  • Bristles
  • ***
  • Posts: 338
Re: Easy Ratio for how much house to buy
« Reply #8 on: February 09, 2018, 07:02:05 AM »
This is a moving target... I always say make sure you can own it outright on a 15 year mortgage. Your personal home is a bad investment. Look at the rule of sevens for investment... Money doubles every 7 years at 10% and every 10 years at 7%. Your 30 year mortgage needs to be worth (price paid)^3 power. $200K needs to be worth $1.6 million in 30 years. Now I get it that you make payments write off your interest blah blah blah, but it is not nearly as powerful as investing elsewhere. All that being said you HAVE to live somewhere. 2 years salary is reasonable.

ooeei

  • Handlebar Stache
  • *****
  • Posts: 1143
Re: Easy Ratio for how much house to buy
« Reply #9 on: February 09, 2018, 07:34:31 AM »
A family of 6 with household income of $50k may need a more expensive house than a single 20 year old who makes $50k.

Generally you want to minimize costs while getting the essential features you need. In LA maybe that house costs $750k, in small town Kansas maybe it's $150k. Income has nothing to do with how much you should spend on a house. Price houses that fit your needs and see how much it will cost compared to an alternative (such as an apartment or renting).

FrugalFisherman10

  • Bristles
  • ***
  • Posts: 318
    • Fly Fishing Photo Project
Re: Easy Ratio for how much house to buy
« Reply #10 on: February 09, 2018, 07:40:29 AM »
PTF, as I am curious what responses you will receive. 

I assume this means you have no debts now.  Otherwise, a simple ratio isn't helpful. 

My answer is something like "it depends," since it's too complicated of a calculation to reduce to one ratio.  And even involves some intangibles.  But I am curious what others think...
I have no debts now, other than the stuff I put on my credit card each month and then pay off at the end of the month. Interesting actually, because a lot of the calculators/guidelines I found when googling say to deduct any debt service payments you have. I wouldn't really consider this debt service, since it's just the amount I'm spending on my daily life, not paying interest against some balance...but at the same time if I were to not pay it in a month, it would become a debt I had to service right?

FrugalFisherman10

  • Bristles
  • ***
  • Posts: 318
    • Fly Fishing Photo Project
Re: Easy Ratio for how much house to buy
« Reply #11 on: February 09, 2018, 07:53:11 AM »
There is no rule and there shouldn’t be a rule.
Like anything else, you have to look at your personal financial situation and figure out what works for your circumstances. That’s like asking what percent of your income you should spend on groceries.
Disagree, I think there absolutely is a rule that applies here. Like "historically, what were some safe recommendations for how much people can reasonably spend on a mortgage each month?"
"what would the people of the 60s/70s/30s say about the ratio of your income to your home price?" If they think it sounds shocking, it probably is. I have no way of knowing/harnessing that kindof intangible gut feeling of 'people who have been there before' without asking.

"was there a good decade or two where people's house to income ratios proved to be sustainable over their lifetimes, given all the surprises that can come with 'life'?"
...I want to know what those people shot for. 2x? 3x?

I'm looking for timeless wisdom on what makes sense in this area.

I think there are also recommendations for groceries and other stuff that should hold true through out time, to some extent.

I initially thought I'd like to spend something like $185k on my first house. Which is already more than my parents sold the house I lived in all my life, in a good school district in the 'burbs. I've since realized over the last few years that there aren't any SFRs around here for that, unless I want to live as an urban pioneer in some really, really, rough neighborhoods (at which point I could by a house for like $30k). So I've slowly migrated my expectations UP, to where now I consider houses around $300k probably doable and better in the long run...but I'm starting to second guess that.
If the guideline is 2 or 2.5 times my income, I should not be looking at $300k homes. more like $200k homes.

Ultimately my renting situation right now is just so good I won't be buying anytime soon

FrugalFisherman10

  • Bristles
  • ***
  • Posts: 318
    • Fly Fishing Photo Project

nereo

  • Senior Mustachian
  • ********
  • Posts: 12947
  • Location: Just south of Canada
    • Here's how you can support science today:
Re: Easy Ratio for how much house to buy
« Reply #13 on: February 09, 2018, 08:16:00 AM »
Anyone have a good guideline for how expensive of a house one should buy? say based on income (and security of that income)

https://www.nytimes.com/interactive/2014/upshot/buy-rent-calculator.html
Thanks, this calculator is helpful! I see it cited alot.

that calculator might be the closest you will find to answering your question.

I agree with others that there IS no good rule, and there can't ever be one.
For starters, what you ought ought to be asking is "how much house do I need to be happy."  It isn't about the maximum you can afford.  As others have mentioned, this will change radically based on your age, family size and lifestyle - regardless of your income. A large family will likely need to spend more on housing than a single person, period.

Second, linking it to some ratio of your income is fool-hearty. To be sure there's a maximum amount a person can afford on a given budget, but never a minimum they should spend.  Imagine two families otherwise identical in a LCOL area; one earns the median $50k/year, the other $200k. It's ridiculous to assume the latter *should* spend 4x more than the former.  That line of thinking basically goes against the ethos of this entire forum.

Third - housing prices are so variable any ratio you do come up with would have to be hyper-local.  I previously lived in a HCOL area where I spent >50% of our income on housing for a small place. It sucked but that was the best we were able to do and we got the smallest, cheapest place we could find.  Now I live in a LCOL area where we spend ~25% of our income on something much larger, even though our income has gone down slightly.  There's "Can I afford it" questions, but once that is settled how much you should spend depends on your local market, the rental market ("should I rent vs. buy") and your expectations on how much housing you will be content with.  Other factors come into play, too.  The interest rate is certainly one - at 4% fixed you can simply afford a higher ratio than you could at 8% (which happened in the 1980s). Job security and savings is another; our current home is about 5:1 of our present income, but we could have paid cash and our income is guaranteed. We rent out a room which pays for a large chunk of the mortgage.  OTOH, someone with a much higher income but with some debt, no savings and a high chance of losing their job would need a much lower ratio of home-price:income

...in other words, there is no ratio that will work across multiple markets and cover the diversity of borrowers, lending environments etc.

« Last Edit: February 09, 2018, 08:44:25 AM by nereo »

joonifloofeefloo

  • Magnum Stache
  • ******
  • Posts: 4880
  • On a forum break :)
Re: Easy Ratio for how much house to buy
« Reply #14 on: February 09, 2018, 08:43:03 AM »
https://www.nytimes.com/interactive/2014/upshot/buy-rent-calculator.html
Thanks, this calculator is helpful! I see it cited alot.

You're welcome! I find it very helpful indeed. I've used it so many times (and each time it's convinced me not to buy).

I simply aim for housing to be as cheap as possible. For much of my housing life, it's been $0-$500/mo, whether renting or owning, including in extremely HCOLAs (e.g., Vancouver BC). At one point, this was through ownership, but achieved by renting out every square inch I wasn't in. After additional life circumstances changed, that became too stressful. I sold and returned to renting.

So I guess now my rule is "the cheapest option that's low stress." I found a lot about ownership challenging. I've rented at market rates only about three years out of 29 years.

Gilly

  • Stubble
  • **
  • Posts: 102
Re: Easy Ratio for how much house to buy
« Reply #15 on: February 09, 2018, 09:03:56 AM »
I can tell you what I used since I looked for a rule and felt the suggested ones were absurdly high. Of course this is situation specific. I am married in a MCOL area, the average home price is ~235k. I determined that the monthly PITI payment should not be more than 40% of my SO's monthly gross pay. This would have roughly put us at a max house value of 215k to 225k depending on which county we bought in (there were 4 potential ones). FFW that 40% of SO's monthly pay would have been about 25% of my monthly gross and 15% of our monthly gross

My reasoning: I didn't want us trapped if one of lost our job or quit and my SO makes less that I do. Things I considered was my employment is more secure so it is more likely in a worse case scenario it would only be 25% of our monthly income. Also, if both of us lost our jobs at the same time (a highly unlikely situation) unemployment would have covered us for six months with the house payment only being 30% of those benefits. That would have given us a lot of time to find another job or sell. I also have a 457(b) for my retirement which means upon termination of employment I can access my account with zero tax penalty. At the time of purchase that would have given us an additional year to find a solution.

For one person 40% would be way beyond my personal comfort level. I'd go with PITI being 25% of my gross. Not that this is a rule of thumb across all markets, but for my situation it makes more sense to me than the 28%-35% of gross for only the P&I that I see on internet searches for a rule of thumb.
I did give some hard numbers as reference because sometimes that helps. FFW we bought a house that was 35% PITI of my SOs pay.
Also in case I forgot or it's confusing, when I am using % its monthly payment to monthly gross income. I like doing that in house situations because purchase price is only part of the payment equation, taxes and insurance can really vary by state, and changes in interest rates really can effect payment too.
« Last Edit: February 09, 2018, 09:13:43 AM by L. WereBear »

ketchup

  • Magnum Stache
  • ******
  • Posts: 4239
  • Age: 29
Re: Easy Ratio for how much house to buy
« Reply #16 on: February 09, 2018, 09:09:06 AM »
I don't like "easy rules of thumb" for this.  The real answer is to first figure out the rent vs. buy calculation, and then optimize downward what you can from there.  If the "rule" says spend no more than x, but you can get what you need for 0.5 * x, why would you pay x?  If the "rule" says spend no more than x, and the only available option is 1.5 * x, that doesn't do you much good either.

For the record, medium cost-of-living area in a medium-high cost-of-living MSA, and we bought three years ago for just under 2x our combined annual income.

Prairie Stash

  • Handlebar Stache
  • *****
  • Posts: 1803
Re: Easy Ratio for how much house to buy
« Reply #17 on: February 09, 2018, 09:46:15 AM »
There is a Maximum rule, but not a Minimum rule. The mortgage company sets the former, a Mustachian determines the latter.

frugaliknowit

  • Handlebar Stache
  • *****
  • Posts: 1687
Re: Easy Ratio for how much house to buy
« Reply #18 on: February 09, 2018, 09:49:35 AM »
I think Dave Ramsey's rule of thumb is PRETTY darn good:

House payment on a 15 year fixed (preferably 20% down or more) should not exceed 25% of take home pay.

Zikoris

  • Magnum Stache
  • ******
  • Posts: 3732
  • Age: 33
  • Location: Vancouver, BC
  • Vancouverstachian
Re: Easy Ratio for how much house to buy
« Reply #19 on: February 09, 2018, 10:02:53 AM »
I think that it'll depend a lot on the relative cost of housing in your area. If you earn $70k/yr and live in an area where you can buy a house in decent condition in a relatively safe neighborhood for $100k, then you'd be foolish to buy a McMansion just because your ratio said that you should spend more. On the other hand, if you live in a place where property prices are astronomical, it might make sense to rent in perpetuity (I would ask the formidable @Zikoris  if they have a way of calculating where that line is).

Formidable, lol! I just use the standard NYT rent/buy calculator, then add in monthly transit passes for any options outside of walking distance to work. Pretty much if you find a rental for under $1,000/month, you'll never do better by buying here. And the extra transit costs tend to completely eliminate any price advantage of living further out.

alanB

  • Stubble
  • **
  • Posts: 223
  • Age: 32
  • Location: PA, US
Re: Easy Ratio for how much house to buy
« Reply #20 on: February 09, 2018, 10:07:21 AM »
The sticker price is not the only thing you should look at.  The cost of a house is dictated by the following:
Interest + Taxes + Insurance + Depreciation/Repairs + Utilities + HOA (boo)

This annual cost should dictate your upper limit.  Depending on these variables two houses could have wildly different "prices" and cost the same amount!!

A house also has value determined by the land and the structure on top of it.  That value can be harnessed through renting, easement, growing things, producing energy, as well as the gradual increase in price following inflation and local market conditions.

If you do not intend to use your house as a way to make more money, at least try to spend as little as possible.

ETA: also do not forget about the dreaded Opportunity Cost....
« Last Edit: February 09, 2018, 10:10:42 AM by alanB »

matchewed

  • Magnum Stache
  • ******
  • Posts: 4376
  • Location: CT
Re: Easy Ratio for how much house to buy
« Reply #21 on: February 09, 2018, 10:19:12 AM »
Anyone have a good guideline for how expensive of a house one should buy? say based on income (and security of that income)

https://www.nytimes.com/interactive/2014/upshot/buy-rent-calculator.html
Thanks, this calculator is helpful! I see it cited alot.

that calculator might be the closest you will find to answering your question.

I agree with others that there IS no good rule, and there can't ever be one.
For starters, what you ought ought to be asking is "how much house do I need to be happy."  It isn't about the maximum you can afford.  As others have mentioned, this will change radically based on your age, family size and lifestyle - regardless of your income. A large family will likely need to spend more on housing than a single person, period.

Second, linking it to some ratio of your income is fool-hearty. To be sure there's a maximum amount a person can afford on a given budget, but never a minimum they should spend.  Imagine two families otherwise identical in a LCOL area; one earns the median $50k/year, the other $200k. It's ridiculous to assume the latter *should* spend 4x more than the former.  That line of thinking basically goes against the ethos of this entire forum.

Third - housing prices are so variable any ratio you do come up with would have to be hyper-local.  I previously lived in a HCOL area where I spent >50% of our income on housing for a small place. It sucked but that was the best we were able to do and we got the smallest, cheapest place we could find.  Now I live in a LCOL area where we spend ~25% of our income on something much larger, even though our income has gone down slightly.  There's "Can I afford it" questions, but once that is settled how much you should spend depends on your local market, the rental market ("should I rent vs. buy") and your expectations on how much housing you will be content with.  Other factors come into play, too.  The interest rate is certainly one - at 4% fixed you can simply afford a higher ratio than you could at 8% (which happened in the 1980s). Job security and savings is another; our current home is about 5:1 of our present income, but we could have paid cash and our income is guaranteed. We rent out a room which pays for a large chunk of the mortgage.  OTOH, someone with a much higher income but with some debt, no savings and a high chance of losing their job would need a much lower ratio of home-price:income

...in other words, there is no ratio that will work across multiple markets and cover the diversity of borrowers, lending environments etc.

I cannot agree any stronger to this than to gif it.


People think too much about the monetary value of the home and not enough about the quantity (size) or other attributes of the home they need. Furthermore, as happens in several cities in the US, the home values are skewed far beyond the incomes of the general populations. If that is the case then purchasing a home regardless of the size or other attributes is stupid.

I'd start with what type of home do I want to have?

Then does it fit my budget/savings goals?

If the answer to the second is a continuous no then you may have to either look elsewhere, increase your income, or compromise your goals.

charis

  • Handlebar Stache
  • *****
  • Posts: 1920
Re: Easy Ratio for how much house to buy
« Reply #22 on: February 09, 2018, 10:53:09 AM »
There is no rule and there shouldn’t be a rule.
Like anything else, you have to look at your personal financial situation and figure out what works for your circumstances. That’s like asking what percent of your income you should spend on groceries.
Disagree, I think there absolutely is a rule that applies here. Like "historically, what were some safe recommendations for how much people can reasonably spend on a mortgage each month?"

I'm sure you can look at historical data.  But you shouldn't apply someone else's "safe recommendations."   We could have probably "safely" afforded a 200K house, but we were able to find a decent $110K house.   We didn't start by looking at 200K houses, we started looking in the 100-120K range because there were some decent houses available at that price. 

You shouldn't start by looking in a certain price range, you should start by researching how much (or little) decent houses cost in your area.

405programmer

  • 5 O'Clock Shadow
  • *
  • Posts: 87
Re: Easy Ratio for how much house to buy
« Reply #23 on: February 09, 2018, 11:11:09 AM »
Just wanted to add that your rotating credit card bill isn't a debt that you "service". I made that mistake in several mortgage estimators and it consistently gave very low approval amounts and very high rates.

Once you actually sit down with a loan officer they can explain this very well but that's typically pretty late in the process of buying a house. I agree with the other posters that there isn't a hard and fast rule for income to housing expense because of all the other factors involved. The advice definitely can't be timeless because traditional mortgages didn't exist 150 years ago.

I think the best rule is just find the cheapest housing that meets your needs and makes you happy to come home. Spending beyond this level is silly and spending below it is negatively impacting your life.

ETA: This sent me down an interesting rabbit hole on the history of mortgages in America.
http://www.randomhistory.com/1-50/037mortgage.html
« Last Edit: February 09, 2018, 11:20:45 AM by 405programmer »

affordablehousing

  • Bristles
  • ***
  • Posts: 470
Re: Easy Ratio for how much house to buy
« Reply #24 on: February 09, 2018, 12:46:58 PM »
Frugal Fisherman, I asked this question a month ago and got more responses by baiting people saying the broker said 4x is a rule of thumb. Obviously, brokers are idiots and useless but I did get a range of responses from people that were just numbers. Many said keep it under 1.5 times. I really believe it depends and it is personal based on where you want to live, how much you enjoy being at home and using your home for things like entertaining, or having kids, or gardening. The house I have now we bought at 1.5x income and that makes it a minimal expense. The next house we get will be a big expense at likely 3.5x income, but we want a house we like in an expensive area and we won't want to move, perhaps ever.

And for reference, I enjoyed a very cheap existence with a benevolent landlord where the rent was about 35% of market. While I saved a lot, I missed out on a ton of amazing deals to buy. So don't let yourself languish just to preserve cheap rent. You only get one life.

Cassie

  • Walrus Stache
  • *******
  • Posts: 6477
Re: Easy Ratio for how much house to buy
« Reply #25 on: February 09, 2018, 12:59:23 PM »
40 years ago they would tell you no more then 25 % of your income or 2 times what you made a year. For our first house we needed to use this formula. As we aged and made more $ we spent less of our income on housing.  The realtor will try to convince you to spend more but they just want a higher commission.

YoungInvestor

  • Bristles
  • ***
  • Posts: 411
Re: Easy Ratio for how much house to buy
« Reply #26 on: February 10, 2018, 05:44:07 AM »
With the rise of dual income households and historically low interest rates, I think most of these ratios would have climbed significantly.

APBioSpartan

  • 5 O'Clock Shadow
  • *
  • Posts: 33
Re: Easy Ratio for how much house to buy
« Reply #27 on: February 10, 2018, 07:51:52 AM »
If it helps, my wife and I are looking for our first home in the 2.0-2.5x income range.  As others have mentioned, it really just depends on your unique situation!  The housing to income ratio where we live is messsssssed up. 

FrugalFisherman10

  • Bristles
  • ***
  • Posts: 318
    • Fly Fishing Photo Project
Re: Easy Ratio for how much house to buy
« Reply #28 on: February 10, 2018, 08:32:13 AM »
Just wanted to add that your rotating credit card bill isn't a debt that you "service". I made that mistake in several mortgage estimators and it consistently gave very low approval amounts and very high rates.

Once you actually sit down with a loan officer they can explain this very well but that's typically pretty late in the process of buying a house. I agree with the other posters that there isn't a hard and fast rule for income to housing expense because of all the other factors involved. The advice definitely can't be timeless because traditional mortgages didn't exist 150 years ago.

I think the best rule is just find the cheapest housing that meets your needs and makes you happy to come home. Spending beyond this level is silly and spending below it is negatively impacting your life.

ETA: This sent me down an interesting rabbit hole on the history of mortgages in America.
http://www.randomhistory.com/1-50/037mortgage.html

Thanks!
Yeah i am very happy to come home now to this awesome house that I rent with friends. and I'm not just staying here for the cheap rent, it really is a great living situation.

to the other comments that said something along the lines of:
"don't ask how much you can spend at the top...
oh but some situations are unique so those people are allowed to spend like 3x - 4x of their income"

Doesn't there seem to be a hole in the logic there...
I hope we're not all looking at those people a few decades from now saying "you spent HOW much on your housing in 2018? 4x your income? Because "you lived in San Francisco"? ..great reasoning"

ShoulderThingThatGoesUp

  • Magnum Stache
  • ******
  • Posts: 3056
  • Location: Emmaus, PA
Re: Easy Ratio for how much house to buy
« Reply #29 on: February 10, 2018, 08:50:01 AM »
You’re going to spend more on a older house, or a house that you’re not happy with, but sometimes the lower price makes it worth it.

Always have $10k extra at closing to take care of the oh-shit surprise in the first month!

EconDiva

  • Handlebar Stache
  • *****
  • Posts: 1140
Re: Easy Ratio for how much house to buy
« Reply #30 on: February 11, 2018, 09:04:45 AM »
I posted a somewhat similar thread quite a while back:

https://forum.mrmoneymustache.com/ask-a-mustachian/you-shouldn%27t-buy-a-home-more-than-xxx/

If I recall correctly, I think the consenus was something along the lines of "buy absolutely as little as possible for a place that will meet your needs".

Although like the OP, I am generally also very curious about what a good "rule of thumb" is for buying, I haven't found that many frugal people agree with adhering to any rule of thumb since everyone's situation will vary so much (for example, home prices can vary dramatically based on region, your goals to FI/RE and timeframe for that can significantly impact the price you should stay under, etc. etc. etc.). 

I think someone earlier in this thread mentioned a rule Dave Ramsey had (monthly housing costs no more than a max of 25% of net monthly salary [?])...I like this rule but would push it even lower to 20% max....

nereo

  • Senior Mustachian
  • ********
  • Posts: 12947
  • Location: Just south of Canada
    • Here's how you can support science today:
Re: Easy Ratio for how much house to buy
« Reply #31 on: February 11, 2018, 09:22:29 AM »
Just wanted to add that your rotating credit card bill isn't a debt that you "service". I made that mistake in several mortgage estimators and it consistently gave very low approval amounts and very high rates.

Once you actually sit down with a loan officer they can explain this very well but that's typically pretty late in the process of buying a house. I agree with the other posters that there isn't a hard and fast rule for income to housing expense because of all the other factors involved. The advice definitely can't be timeless because traditional mortgages didn't exist 150 years ago.

I think the best rule is just find the cheapest housing that meets your needs and makes you happy to come home. Spending beyond this level is silly and spending below it is negatively impacting your life.

ETA: This sent me down an interesting rabbit hole on the history of mortgages in America.
http://www.randomhistory.com/1-50/037mortgage.html

Thanks!
Yeah i am very happy to come home now to this awesome house that I rent with friends. and I'm not just staying here for the cheap rent, it really is a great living situation.

to the other comments that said something along the lines of:
"don't ask how much you can spend at the top...
oh but some situations are unique so those people are allowed to spend like 3x - 4x of their income"

Doesn't there seem to be a hole in the logic there...

I hope we're not all looking at those people a few decades from now saying "you spent HOW much on your housing in 2018? 4x your income? Because "you lived in San Francisco"? ..great reasoning"

If this is what you are reading out of the above posters’ advice - particularly mine - you are misunderstanding what we are trying to say.

We are not encouraging anyone to overspend on housing just because they live in a HCOL area (or for any other reason).  Your application of the word ‘unique’ suggests that these are rare instances; exceptions to the rule.

To reiterate - there is no rule of thumb because too many factors influence the maximum amount a person can spend on housing.  It’s clear here that’s what you are looking for - the maximum permissible amount.  The factors include but are not limited to the real-estate market in your area, your income, your job security, mortgage rate, rent-vs-buy ratios, the size of your family, distance from work, your net worth, debt, taxes (and tax laws in your country & municipality) homeowner taxes + maintenance + fees, # of years you will spend at that location, additional rental income, resale value... and others I’m completely forgetting.

No two people are going to have the same answers, so a community-wide, multinational rule of thumb is going to be entirely worthless.

affordablehousing

  • Bristles
  • ***
  • Posts: 470
Re: Easy Ratio for how much house to buy
« Reply #32 on: February 12, 2018, 10:57:31 AM »
easy ratio - spend 1.5x your annual income.