I've studied housing... A lot. Probably too much. Several things:
1) Housing should be treated as consumption (maintenance, improvements, etc.) and insurance (against rising rents), not as an investment. This is because it doesn't produce a cash flow and because you cannot sell it and still have a place to sleep. In the long run, you want your money in real estate to be less than 25% of your net worth. Don't underestimate things like maintenance (est. 1% of value per year). Owning a home has pains in the butt that should not be underestimated. When you sell you have to spend a bunch of money on that, and the bigger the property, the bigger the pain.
2) Put together a long term, 50 year plan for your life. It doesn't have to happen, it just has to be something both of you think sounds good. Price it out. See where you need to be net-worth wise every decade and see if you're likely to have the income numbers to hit that. How much will you need to retire? Do you want a beach house? Etc. Back it up to a 10 year plan. Back that up to a 2 year plan. That will help you put the purchase in a wiser financial context. Almost for sure, it will be much easier to hit your 50 year goal if you sacrifice in the beginning, and housing is a big area where people can avoid the lost of tons of time value.
3) People talk about hedging mortgage interest rate vs. market returns, but this calculation usually, naively, ignores risk. Also, looking at housing volatility, this kind of hedge only works over long periods of time, and only if people have excellent discipline. Most do not. People use the hedge to justify buying a larger home on a 30 year... Basically to justify their consumption. After studying wealthy people and running many calculations myself, I've found that the mortgage hedge is not that great of a deal, even if you do it perfectly.
4) The impact of psychology on wealth building cannot be overstated. Purchasing a more expensive home will lead to the purchase of more expensive accessories, and those will not be accounted for in the initial calculation. They will be purchased with money with a big time value. The nicer area you move to, the more you will be reminded of any deprivation. If you buy a cheaper property, not only will the numbers come out better, but also the psychology will, and that will in turn influence your savings rate and general satisfaction.
5). Re agents and loan officers will tell you how wonderful the interest deduction is. They're full of crap. Getting a discount paying money to the bank is still paying money to the bank.
6). Retirement accounts don't count as savings because they have huge opportunity costs for withdrawing the money. It would be like a 40% interest credit card to use that money for anything. The $260k of index funds is cool, but remember you want to maintain diversity and wise investors typically hold for 4+ years.
My overall point is this: be conservative. Like others have said, if your income is $90k, don't buy anything where the payment is over 25% of take home pay. You say, "but I live in a high cost of living area!" -- then it's possible the best move to hit your biggest 50 year goals is not to buy right now, even if his income is so high at the moment. If you do choose to use a bigger chunk of the $260k, just make sure you feel the pain of the lack of diversity in your net worth, and don't get yourself into a property that's going to absorb so much of that $90k that he won't be able to build up the investments again in a timely way. It may be that once you talk about your dreams and run the numbers, he feels inspired to work a few more years at the higher rate.
None of the real estate people care about you or your net worth. They will use standards of affordability that relate to the bank's risk tolerance - the bank's net worth, not yours. They will play on your materialism. Come up with your long term goals, college costs, etc, and keep critically thinking and seeking out different opinions. You'll start to see patterns in how people approach it.