Author Topic: How did you determine your budget for a mortgage?  (Read 4243 times)

EconDiva

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How did you determine your budget for a mortgage?
« on: February 03, 2017, 11:51:32 AM »
I'm moving back to Atlanta soon and have done the rent versus buy calculator and it's coming out pretty strongly as "buy".

So if I do indeed decide to buy a home there it'll likely be this time next year after getting the rest of my downpayment together.

How did you decide how much to budget/spend on your home?  The non-mustachian part of me wants a 2 bedroom/2 bath loft I've seen for $250K because it's "all nice and shiny".  The mustachian part of me wants a 1 br/1 ba condo I saw downtown going for $100K because I can see myself paying that off in less than 10 years and then having a ton of extra money to split between retirement funds and travel :D  My mustachian-by-nature best friend who doesn't know anything about this site is strongly encouraging me to buy a $30K 3 br/2 ba house in West End and either put $100K in it to reno, or knock it all down and pay $150K to build which I admit scares me to death.  (Although a 3 br/2 ba home at this price would give me more space for roommates to help pay the mortgage and also if something happened to my mom in South Carolina she could always come stay with me.)

Anyways, I digress.

With so many options I need to figure out where to begin and I thought I should focus on the cost.  At first I was only focusing on location.  But I think I need to set a budget and then figure out where I can live that fits within that budget.  A $100K mortgage is about 1.1x my current gross annual salary FYI. 

How did you decide the max budget for your mortgage?  Did you set it as a certain % of your net monthly income that you did want to go over?  If so, what was your max and for what length mortgage?

Mgmny

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Re: How did you determine your budget for a mortgage?
« Reply #1 on: February 03, 2017, 11:57:38 AM »
I'm moving back to Atlanta soon and have done the rent versus buy calculator and it's coming out pretty strongly as "buy".

So if I do indeed decide to buy a home there it'll likely be this time next year after getting the rest of my downpayment together.

How did you decide how much to budget/spend on your home?  The non-mustachian part of me wants a 2 bedroom/2 bath loft I've seen for $250K because it's "all nice and shiny".  The mustachian part of me wants a 1 br/1 ba condo I saw downtown going for $100K because I can see myself paying that off in less than 10 years and then having a ton of extra money to split between retirement funds and travel :D  My mustachian-by-nature best friend who doesn't know anything about this site is strongly encouraging me to buy a $30K 3 br/2 ba house in West End and either put $100K in it to reno, or knock it all down and pay $150K to build which I admit scares me to death.  (Although a 3 br/2 ba home at this price would give me more space for roommates to help pay the mortgage and also if something happened to my mom in South Carolina she could always come stay with me.)

Anyways, I digress.

With so many options I need to figure out where to begin and I thought I should focus on the cost.  At first I was only focusing on location.  But I think I need to set a budget and then figure out where I can live that fits within that budget.  A $100K mortgage is about 1.1x my current gross annual salary FYI. 

How did you decide the max budget for your mortgage?  Did you set it as a certain % of your net monthly income that you did want to go over?  If so, what was your max and for what length mortgage?

I used the zillow "how much house can i afford" calculator, and put in a 15 year mortgage at 20%  debt to income ratio. This was a pretty low number for me (because i had a very small downpayment at the time), so i bumped it to 30%, with the knowledge that my household income would nearly double 2 months after closing when I got married. 

https://www.zillow.com/mortgage-calculator/house-affordability/

Right now, we're sitting at an 11% debt to income ratio, but just making 3x mortgage payments until we get rid of our PMI (hopefully in a few months).


nereo

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Re: How did you determine your budget for a mortgage?
« Reply #2 on: February 03, 2017, 12:06:46 PM »
Quote
How did you decide the max budget for your mortgage?  Did you set it as a certain % of your net monthly income that you did want to go over?  If so, what was your max and for what length mortgage?

Basically, regardless of whether you are renting or buying, your housing budget is an expense. 
As such, you spend as little as possible without sacrificing quality of life.  Simple.
If you want to bring roommates into the equation, then calculate what your cost will be after including rent paid to you (but make sure to include vacancies since you will be the landlord)


(If you want to make money buy renovating a home, that's a different strategy entirely, and you'll need to calculate purchase price, loan, anticipate sale price and renovation costs)

EconDiva

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Re: How did you determine your budget for a mortgage?
« Reply #3 on: February 03, 2017, 12:07:03 PM »
I'm moving back to Atlanta soon and have done the rent versus buy calculator and it's coming out pretty strongly as "buy".

So if I do indeed decide to buy a home there it'll likely be this time next year after getting the rest of my downpayment together.

How did you decide how much to budget/spend on your home?  The non-mustachian part of me wants a 2 bedroom/2 bath loft I've seen for $250K because it's "all nice and shiny".  The mustachian part of me wants a 1 br/1 ba condo I saw downtown going for $100K because I can see myself paying that off in less than 10 years and then having a ton of extra money to split between retirement funds and travel :D  My mustachian-by-nature best friend who doesn't know anything about this site is strongly encouraging me to buy a $30K 3 br/2 ba house in West End and either put $100K in it to reno, or knock it all down and pay $150K to build which I admit scares me to death.  (Although a 3 br/2 ba home at this price would give me more space for roommates to help pay the mortgage and also if something happened to my mom in South Carolina she could always come stay with me.)

Anyways, I digress.

With so many options I need to figure out where to begin and I thought I should focus on the cost.  At first I was only focusing on location.  But I think I need to set a budget and then figure out where I can live that fits within that budget.  A $100K mortgage is about 1.1x my current gross annual salary FYI. 

How did you decide the max budget for your mortgage?  Did you set it as a certain % of your net monthly income that you did want to go over?  If so, what was your max and for what length mortgage?

I used the zillow "how much house can i afford" calculator, and put in a 15 year mortgage at 20%  debt to income ratio. This was a pretty low number for me (because i had a very small downpayment at the time), so i bumped it to 30%, with the knowledge that my household income would nearly double 2 months after closing when I got married. 

https://www.zillow.com/mortgage-calculator/house-affordability/

Right now, we're sitting at an 11% debt to income ratio, but just making 3x mortgage payments until we get rid of our PMI (hopefully in a few months).

I feel like the 'affordability' calculators tend to overestimate how much I could actually afford but it could be the ones I've used in the past...

Right now my logic for determining how much to spend has been:

Pick a max % of my net income I'd be comfortable with, then take that amount and use the Bankrate calculator that calculates the mortgage amount for a 15 year note based on that monthly payment.

For instance, if I pick 15% net monthly income as a max (~750 per month), that puts me at a 100Kish mortgage on a 15-year note. 

But then I need to figure out how much taxes would be and potentially lower the potential mortgage amount based on taxes and maintenance cost estimates to make sure my entire "housing budget" still fits within the 15% of my net monthly income figure.  Does this seem like good logic/a good plan?
« Last Edit: February 03, 2017, 12:08:52 PM by EconDiva »

jamesbond007

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Re: How did you determine your budget for a mortgage?
« Reply #4 on: February 03, 2017, 12:07:51 PM »
In my case, I did not want to sacrifice my already low cost lifestyle. So I took my monthly take home income, put aside for my regular expenses that I have then added some amount that I am comfortable with to go into savings (putting 20% down empties the bank accounts. So got to get it back up for emergency expenses in case of job loss etc). Now I am left with $x to play around with.

Say I am already paying $y for rent. Then $x+$y is what I can afford every month for PITI on my mortgage. After that, based on how much down payment I can make ($z) play around with numbers in a mortgage calculator. I arrived at a maximum amount that I am willing to spend.FYI, $z includes closing costs which don't count towards the house.

I also, made some principles that I stuck to. Never pay PMI. Never go more than the allotted budget. Never get tempted by looking at the house. Never say yes without running the numbers.

It took me 2 years to get the house that met all these criteria but I sure did get one. The up side, I am in a positions to buy another house now within a year (Not that I would) and I have never sacrificed a single thing in my lifestyle. That's the beauty of living a mustachian lifestyle.

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Re: How did you determine your budget for a mortgage?
« Reply #5 on: February 03, 2017, 12:09:33 PM »
We just came up with a number we spent comfortable spending.  We didn't base it on our salaries, savings, or the market (if nothing was available, we wouldn't have purchased), and certainly not what we could qualify for.  Just a "I don't want to spend more than X on our house."

We did that both times we have purchased houses. 

RWD

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Re: How did you determine your budget for a mortgage?
« Reply #6 on: February 03, 2017, 12:09:41 PM »
As little as possible to get a relatively recent house with a garage within biking distance of work. We ended up buying a house at about 1.5x our gross income.

EconDiva

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Re: How did you determine your budget for a mortgage?
« Reply #7 on: February 03, 2017, 12:12:29 PM »
In my case, I did not want to sacrifice my already low cost lifestyle. So I took my monthly take home income, put aside for my regular expenses that I have then added some amount that I am comfortable with to go into savings (putting 20% down empties the bank accounts. So got to get it back up for emergency expenses in case of job loss etc). Now I am left with $x to play around with.

Say I am already paying $y for rent. Then $x+$y is what I can afford every month for PITI on my mortgage. After that, based on how much down payment I can make ($z) play around with numbers in a mortgage calculator. I arrived at a maximum amount that I am willing to spend.FYI, $z includes closing costs which don't count towards the house.

I also, made some principles that I stuck to. Never pay PMI. Never go more than the allotted budget. Never get tempted by looking at the house. Never say yes without running the numbers.

It took me 2 years to get the house that met all these criteria but I sure did get one. The up side, I am in a positions to buy another house now within a year (Not that I would) and I have never sacrificed a single thing in my lifestyle. That's the beauty of living a mustachian lifestyle.

What do you mean by "never get tempted by looking at the house"?

Also, how did you decide "how much house" to buy?  You'll note in the example of my original post I was comparing the benefits of having a 3/2 (rooommates/potential room for mother down the line) versus a 1/1 (would get paid off super fast).

I'm a red panda

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Re: How did you determine your budget for a mortgage?
« Reply #8 on: February 03, 2017, 12:16:23 PM »
What do you mean by "never get tempted by looking at the house"?


It's easy to feel a price is reasonable if you fall in love with a specific house.

EconDiva

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Re: How did you determine your budget for a mortgage?
« Reply #9 on: February 03, 2017, 12:17:39 PM »
As little as possible to get a relatively recent house with a garage within biking distance of work. We ended up buying a house at about 1.5x our gross income.

So one of your most important factors outside of garage/location was age of the home (you mention 'recent house')?  What age range of homes were you looking at?

1.5 times gross sounds excellent although I know MMMers would caution me not to get too caught up in arbitrary rules like purchasing a certain amount of your income, etc.  I think at 1.5 x gross in a 2 income household (I'm assuming that since you said 'our') means a lot less pressure if something happens to one of your incomes.

I'm single so I was thinking ideally, I should probably go with 1 times my income (much easier to continue to contribute to a super hefty emergency fund).  However, it is tempting to consider more expensive homes at closer to say, 2 times my income as those homes would be larger and come with extra bedrooms I could rent out which gives the potential for me being able to have a second source of income....
« Last Edit: February 03, 2017, 12:20:48 PM by EconDiva »

EconDiva

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Re: How did you determine your budget for a mortgage?
« Reply #10 on: February 03, 2017, 12:19:32 PM »
What do you mean by "never get tempted by looking at the house"?


It's easy to feel a price is reasonable if you fall in love with a specific house.


Ah, I see...so basically don't look at any houses outside of the set budget.

I watch a lot of HGTV and am always thinking to myself, "How are these people okay with seeing these houses that are like 15% outside of their max budget?"  If it were me I would refuse to look lol.  Actually I would be fairly upset if I made it clear to any realtor the amount I didn't want to go over and they tried to showed me anything higher than that.

jamesbond007

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Re: How did you determine your budget for a mortgage?
« Reply #11 on: February 03, 2017, 12:25:21 PM »
In my case, I did not want to sacrifice my already low cost lifestyle. So I took my monthly take home income, put aside for my regular expenses that I have then added some amount that I am comfortable with to go into savings (putting 20% down empties the bank accounts. So got to get it back up for emergency expenses in case of job loss etc). Now I am left with $x to play around with.

Say I am already paying $y for rent. Then $x+$y is what I can afford every month for PITI on my mortgage. After that, based on how much down payment I can make ($z) play around with numbers in a mortgage calculator. I arrived at a maximum amount that I am willing to spend.FYI, $z includes closing costs which don't count towards the house.

I also, made some principles that I stuck to. Never pay PMI. Never go more than the allotted budget. Never get tempted by looking at the house. Never say yes without running the numbers.

It took me 2 years to get the house that met all these criteria but I sure did get one. The up side, I am in a positions to buy another house now within a year (Not that I would) and I have never sacrificed a single thing in my lifestyle. That's the beauty of living a mustachian lifestyle.

What do you mean by "never get tempted by looking at the house"?

Also, how did you decide "how much house" to buy?  You'll note in the example of my original post I was comparing the benefits of having a 3/2 (rooommates/potential room for mother down the line) versus a 1/1 (would get paid off super fast).

Budget should be the limiting factor, not how nice the house looks.

As far as how much or how big of a house I needed, I asked myself this "If I were to rent, would I rent this big of a house?" If the answer was yes then that's the right size.

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Re: How did you determine your budget for a mortgage?
« Reply #12 on: February 03, 2017, 12:35:53 PM »
What do you mean by "never get tempted by looking at the house"?


It's easy to feel a price is reasonable if you fall in love with a specific house.


Ah, I see...so basically don't look at any houses outside of the set budget.

I watch a lot of HGTV and am always thinking to myself, "How are these people okay with seeing these houses that are like 15% outside of their max budget?"  If it were me I would refuse to look lol.  Actually I would be fairly upset if I made it clear to any realtor the amount I didn't want to go over and they tried to showed me anything higher than that.

Mostly because the people on HGTV have already bought their house... the houses they look at are just for TV.

When we bought our first house our budget was $135,000. The seller countered our offer with $137,000, and my husband was going to walk away for the $2,000. (At the time- it made a difference to us- I didn't yet have a job, DH was a grad student, and when we set the line in the sand, we meant it.)  So the next time we went house shopping, with a $300,000 budget, our realtor actually wasn't going to show us a new construction (thus, no negotiating price) - the floor plan we liked elsewhere but rejected due to location in a much better location that was $305,000 - because he remembered when we budgeted, we meant it; he asked before taking us, if we were sure we were okay with it.  We did actually end up with that house, not quite 2% over budget...

In this case though, we went over budget because we had already 'fallen' for the floor plan.  We could have easily spent double on the house though, so the 2% wasn't a huge deal for us; but budget is budget, so it did hurt just a little!

RWD

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Re: How did you determine your budget for a mortgage?
« Reply #13 on: February 03, 2017, 12:39:22 PM »
As little as possible to get a relatively recent house with a garage within biking distance of work. We ended up buying a house at about 1.5x our gross income.

So one of your most important factors outside of garage/location was age of the home (you mention 'recent house')?  What age range of homes were you looking at?

1.5 times gross sounds excellent although I know MMMers would caution me not to get too caught up in arbitrary rules like purchasing a certain amount of your income, etc.  I think at 1.5 x gross in a 2 income household (I'm assuming that since you said 'our') means a lot less pressure if something happens to one of your incomes.

I'm single so I was thinking ideally, I should probably go with 1 times my income (much easier to continue to contribute to a super hefty emergency fund).  However, it is tempting to consider more expensive homes at closer to say, 2 times my income as those homes would be larger and come with extra bedrooms I could rent out which gives the potential for me being able to have a second source of income....

We were typically trying to look at houses less than about 15 years old (built in the 2000s or later). We were seeking energy efficiency as well as more modern floor plans and amenities. We ended up with a house built in 2012.

Yes, we are a two income household and could afford to continue making the mortgage payments even if one of us lost our job. One thing we did not do is try to find a bigger house because we could afford it. We specifically tried to look at the smallest houses (and hopefully lowest priced) that otherwise met our criteria. Other criteria included: single story, three bedroom, two+ bath, no HOA.

neo von retorch

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Re: How did you determine your budget for a mortgage?
« Reply #14 on: February 03, 2017, 12:39:47 PM »
Something like the NY Times Buy vs Rent calculator should be helpful. You could start by figuring out how expensive a house is comparable to your current rent.

Stachetastic

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Re: How did you determine your budget for a mortgage?
« Reply #15 on: February 03, 2017, 01:26:50 PM »
We live in a small town, so that narrows our options and keeps us from getting to overwhelmed. We always go looking for the crappiest house in the nicest neighborhood we can afford. The house we are currently in was just over 1.5X my income alone (husband was laid off and working seasonally until he found something else). The purchase price would now be less than 1X our combined annual income. The house two doors down sold for over 5 times what we paid for ours, though it is significantly larger and a few decades newer (and comes with an HOA--which we don't have).

omachi

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Re: How did you determine your budget for a mortgage?
« Reply #16 on: February 03, 2017, 01:47:49 PM »
I think it depends on where you are in life and how much house you honestly need. If I had to move today, the most I would be willing to spend as a percentage of income would be much lower than when I bought my home.

When we bought our house we were only a couple years out of school. We decided that roughly 2.5x our annual gross would be reasonable. The lenders of course insisted we could afford more, but we ended up in a house very close to what we had decided was fine, in a place with mortgage, interest, and insurance costs of about 30% of our net income at the time. That percentage came down pretty quickly as we advanced our careers, but I think that's the most I'd ever really feel comfortable with.

dorothyc

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Re: How did you determine your budget for a mortgage?
« Reply #17 on: February 03, 2017, 02:01:04 PM »
I rent a house that would sell for approximately 4.7 times my gross annual income, so there is no way I could afford to buy it.

On the plus side, monthly rent is less than one half of one percent of the home value, (.0047) and it is situated about a mile from my workplace and it is a decent square footage (1300) with a two car garage and gardener included.

This is thanks to the peculiarities of renting in Los Angeles - no one could possibly get tenants if they charged the often recommended one percent of the purchase price. My landlord bought 19 years ago, which is why they can afford to rent out at the price they do.

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Re: How did you determine your budget for a mortgage?
« Reply #18 on: February 03, 2017, 02:56:39 PM »
i attack this from the other side in that how does this house purchase affect my FI date.  we upgraded houses ... it added 1-2 years ... we thought lake front quality of life would be worth a couple extra years of work.  we were correct.

economista

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Re: How did you determine your budget for a mortgage?
« Reply #19 on: February 03, 2017, 03:41:46 PM »
I looked at how much of my budget I would be willing to put toward PITI and then calculated out the maximum mortgage amount I could get with that parameter and 10% down.  Then, since I didn't have the full 10% down yet, I saved for another year.  When I went house-hunting that was the max I would look at, but I also looked at everything under that amount that came close to my lifestyle requirements.  Interestingly, the arbitrary amount I set for myself was half of what the mortgage companies calculator said I could qualify for based on debt/income ratios. 

I also looked at listings myself, instead of just relying on the realtor to find them for me.  The first realtor I worked with would only show me houses that were at the top of my budget.  The second realtor simply took me to see the houses I had already chosen.   

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Re: How did you determine your budget for a mortgage?
« Reply #20 on: February 03, 2017, 06:17:15 PM »
I feel like a lot of this depends on your local market. Rent vs. buy calculator comes out in favor of "buy" for me too, but 3X my annual gross doesn't even buy a lot or a tear-down property in a good area. It can get a house in need of a lot of renovations in a semi-decent area. I'm looking at a 7.5X range for decent houses in semi-decent neighborhoods.