Author Topic: How much house can we afford?  (Read 6916 times)

mtn

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How much house can we afford?
« on: May 24, 2016, 10:59:51 AM »
Sorry to be cryptic, but I'm not comfortable posting how much we make on a public forum--anonymity is never guaranteed!

Anyways, my wife and I think that we want to buy within the next 6 to 24 months. I'm playing with the NY Times rent vs. Buy calculator, and it is always on the verge, and more and more leaning toward buy once I consider our commutes in places where we can afford rent vs. places where I would buy. But looking through the "How much can I afford" calculators on Zillow and Bankrate, I never quite believe them--it just doesn't quite jive with me to be spending how much they say I can afford.

How much percentage of your take home is a good rule of thumb to spend on housing? Assume housing includes insurance, taxes, and mortgage (and potentially PMI depending on the area).

Here is our current situation (we're 26 and 27 years old)
 
My story:
28% to 401k (21% pre-tax, 7% Roth)
58% of take home to rent
23% of take home to insurance/cellphone/cable/utilities
3% of take home to hockey
The remaining 16% of my take-home goes to savings/entertainment/vacation funds/emergency funds in various capacities depending on what is going on that week or month

My wife’s story (we make about the same amount):
15% to 401k
~20% of take home to student loans
~15% of take home to grocieries
~10% of take home to car expenses including gas
~25% of take home to medical expenses
Remaining 30% or so of the take home goes to entertainment/savings/vacation/emergency funds.

Other:
About 70% of one year combined (gross) salary saved in 401ks/IRA’s
Student loans worth 25% of our combined (gross) salaries
Car is paid for
Emergency/down payment combined fund worth about 16% of our combined (gross) salary
Our finances are "Separate", but that is just because we've been too lazy to combine them.

ditheca

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Re: How much house can we afford?
« Reply #1 on: May 24, 2016, 11:28:11 AM »
How much home can I afford calculators are silly.

Go look at four homes, at 50k, 100k, 200k, and 300k. 

Decide what price range you need to look in to be satisfied.  Decide if you can afford it.  If it will cost less than your rent, that's a good sign.

Those 'how excessive can I be' calculators would have me living in a mansion and contributing 0% to retirement, but we are happy in a (large) hovel.

Spending a percentage of your take home simply is not a good rule of thumb.  When our income increased by $20k in a year, we didn't go house hunting.




KCM5

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Re: How much house can we afford?
« Reply #2 on: May 24, 2016, 11:39:56 AM »
Agree with the above.

This is one of those calculations that isn't necessary.

Find the house that costs the least that you'll be happy with (or is at least adequate). That could mean spending 30% of your income (I hope not!) or spending 7%. And if the house that you'll find adequate doesn't at least break even on the rent vs buy calculation, keep renting. There's nothing wrong with renting. Owning a home has it's own drawbacks, too.

neo von retorch

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Re: How much house can we afford?
« Reply #3 on: May 24, 2016, 11:40:05 AM »
Obviously you're arriving at a pretty specific number using the Buy vs. Rent calculator.

Did you do a home search in the desired area(s) and see if homes that match that number meet your needs?

Guava

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Re: How much house can we afford?
« Reply #4 on: May 24, 2016, 11:41:33 AM »
I think if you want to make sure the house will be affordable in the long run, you need to consider whether you both expect to continue working or if you plan for kids if one of you may want to stay home. Whether to include both incomes into affordability is a big question. I personally chose  to include only one income when I purchased. I decided how much my maximum payment could be then found prices from there with my desired down payment.  Ultimately I came in less than what my budgeted payment could be because I found something that fit at a better price. What are your long term savings goals and what house payment will help you meet those?

MrsPete

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Re: How much house can we afford?
« Reply #5 on: May 24, 2016, 12:00:42 PM »
Never buy as much house as "they" say you can afford. 

When we bought our first house, the standard advice was, You can afford 1/4 of your salary.  We felt that was too much, so we told our realtor and loan officer a figure we were comfortable spending; they saw our salaries, so they knew we were buying "less than we could afford".  The loan officer actually said, "You must have some high debts!"  We had no debt, but we didn't correct him -- didn't matter to us what he thought.  Because we bought "less", we were able to save at a higher level, and when our children were born I was able to take a decent maternity leave.  Buying "less" was one of the cornerstones of financial stability for us.

Find the house that costs the least that you'll be happy with (or is at least adequate).
With one qualifier:  Don't choose the house that'll meet your requirements just for today.  Think ahead to the next 10 years or so.  Selling and moving are expensive, so plan for children, the dog you want to buy, a business you might want to house in your garage ... or whatever you might need in the near future. 

Personally, we're in the process of building a house for our retirement years.  We're quite healthy now, but we're putting in a no-barrier walk-in shower, wider doorways, a ramp in the garage -- small things that'll allow us to stay in this house when we're elderly.  No, we don't need them today, but at the point we do need them, we'll need them RIGHT AWAY.  We're in a good place now to "build them in" while it'll cost pennies instead of dollars. 

MrDelane

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Re: How much house can we afford?
« Reply #6 on: May 24, 2016, 07:51:38 PM »
But looking through the "How much can I afford" calculators on Zillow and Bankrate, I never quite believe them--it just doesn't quite jive with me to be spending how much they say I can afford.

To give you an idea of just how ridiculous those calculators are, I just ran my own numbers.
These are the values I got:

ZILLOW:  $818,698
BANKRATE:  $705,912

(THE REALITY:  $350,000)

Our current savings rate is roughly 65% of our gross.
Yes, we could buy a house that is twice the value of ours and then some... but it would knock our savings rate down significantly.

Forget the calculators (as others have suggested).
Look at your finances, make reasonable projections of future income, decide on what sort of savings rate you want to hit and then use all of that data to decide the price range in which you should be looking.


tobitonic

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Re: How much house can we afford?
« Reply #7 on: May 24, 2016, 08:21:30 PM »
I recommend <1x of annual income if possible, and <2x as a cap.

nottoolatetostart

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Re: How much house can we afford?
« Reply #8 on: May 25, 2016, 04:52:38 AM »
I recommend <1x of annual income if possible, and <2x as a cap.

This and try to do it from ONE person's income, not both incomes, in case one person wants to stay at home. The sales price was 1.76 of my husband's income and then put down more than 20%, bringing us to borrowing 1.36 (mortgage to income).

little_brown_dog

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Re: How much house can we afford?
« Reply #9 on: May 25, 2016, 06:33:29 AM »
I recommend <1x of annual income if possible, and <2x as a cap.

This and try to do it from ONE person's income, not both incomes, in case one person wants to stay at home. The sales price was 1.76 of my husband's income and then put down more than 20%, bringing us to borrowing 1.36 (mortgage to income).

+1 - especially if you want kids. Most women do not want to work full time when they have babies. Many prefer part time work or to stay home for a few years. Don't trap yourselves in a mandatory 2 income arrangement because your house is too expensive.

I once read somewhere that you should not spend more than 30% of your take home pay on shelter (rent/mortgage/property tax). Anything over that and you risk being house poor.

When looking at what you can afford, do not make the mistake of looking at the mortgage only. Always look at how much mortgage+property tax looks like when compared to rent. Many mortgages are lower than rents, but when you factor in property tax, they often go over and above rental rates.

Do not forget that owning also increases other costs. Chances are your utilities will be much higher than in a rental. You will also be on the hook for doing all of the repairs, and trust me, no matter how great your home inspection is, you will ALWAYS be fixing and repairing things. Stuff is always breaking, even in the most well maintained homes. Hell, last year we had a colony of bats that cost us $500 to extract and exclude!

So when deciding if you can afford a house, you should factor in: mortgage cost + property tax cost + increased utility costs + repair slush fund for a monthly budget that doesn't derail your savings.

andy85

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Re: How much house can we afford?
« Reply #10 on: May 25, 2016, 06:37:49 AM »
my current house cost me 1.84*gross annual  income

ender

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Re: How much house can we afford?
« Reply #11 on: May 25, 2016, 06:56:23 AM »
Quote
How much house can we afford?

We made a spreadsheet showing the breakdown of after tax/tithe income based on just my income (in case SAHP happens). Then plugged in everything we spend and anticipate spending, made it about as worst case as possible, and played with the spreadsheet a bunch. What happens if X happens, where X is dramatic income reduction, housing crash, recession, etc.

After looking at our situation we decided we wanted to spend around 20% of that amount (after tax/tithe) on mortgage/property taxes/insurance. We will be about 23% if our current accepted offer goes through.

Your situation will be different since you are a different family with different priorities in a different real estate market with different price ranges.

Figure out what you need and what you want. Then determine what of your wants you are willing to pay for. Part of the reason we bought a bit higher than planned is that we can see ourself in this house for 10+ years and so we're ok paying slightly more now with the expectation that this location will not require us to move for job/family reasons indefinitely.

When thinking about our situation, I thought a fair bit about the 10-10-10 concept - how would I feel after 10 minutes? 10 months? 10 years? This can help sort out your needs from wants and determine what you actually will be willing to pay for. Most wants are probably wants rather than needs and thinking along 10 years will make it easier to sort them out. All those fancypants bathrooms - do you really care? It might be great after 10 minutes, but after 10 years are you really going to care that your bathroom has super-fancy-feature-you-never-use-X? Probably not.

Also, something to keep in mind, figure out what is potentially a future fix vs impossible. If you decide you hate <random interior feature> you can probably pay $ and change it, if you decide after living in a place you really can't stand it. But you can't just change your lot. Windows are a good example, if your place is great except not enough or poor too small windows you can always pay to add more or upgrade them.

If you are going to be working with a realtor, make sure you pick a good realtor. You have a huge incentive to not have a mediocre realtor. Find someone who you believe will actually help you and guide you through the process.

zephyr911

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Re: How much house can we afford?
« Reply #12 on: May 25, 2016, 07:11:31 AM »
It's not really about whether you "believe them" - calculators are just there to help you establish an upper limit. Since we here are all about living well below our means for the sake of greater happiness both now and in the future, we rarely go near any such limit, but it's still an interesting reference point.

When DW and I rented out our last place and did our Mustachian downsize, we put 10% (or about a month's combined gross pay) down on a place worth a little over 80% of our combined annual gross. The monthly payment is about one week of her take-home, or 3 days of mine. We're so happy with the house that we'll never leave unless/until we move out of state. We're lucky to live in a high-quality, low-COL area though. In another place, we wouldn't blink at paying 2-3x this much, especially if our wages went up. Unless other costs dramatically increased too, we wouldn't need much of a raise to absorb the higher payment, because it's such a low percentage of our income. I agree with the above in general - set a baseline and figure out what that costs, including not just today's needs but any future needs that you can anticipate with reasonable confidence. Then figure out if the numbers work.

oldmannickels

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Re: How much house can we afford?
« Reply #13 on: May 25, 2016, 07:19:18 AM »
If she has crappy credit I would see how much you would get pre-approved for by yourself and just go with that.

VaCPA

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Re: How much house can we afford?
« Reply #14 on: May 25, 2016, 07:35:25 AM »
It's not really about whether you "believe them" - calculators are just there to help you establish an upper limit. Since we here are all about living well below our means for the sake of greater happiness both now and in the future, we rarely go near any such limit, but it's still an interesting reference point.

I was going to post a similar thought. I don't think the calculators are that far off. They're just telling you what you could potentially afford based a few data points like your income. It's not telling you what you should spend, because it doesn't really have all the info. The same thing happens with a lender pre approval. Often times it's a lot more than a person really can/should spend. In my case the lender is unaware that we pay $2k in daycare costs per month, so obviously what their pre approval calculation says I can afford is much different than my own budget.

meg_shannon

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Re: How much house can we afford?
« Reply #15 on: May 25, 2016, 08:16:15 AM »
All this is great advice if you live in a LCOL area or even an average COL area. I grew up in the upper midwest, and my parents never spent more than 1.5X their income on a house.

We live in central NJ. Housing is expensive enough that with his next promotion, my husband's employer offers an in-house mortgage to help with housing costs (2% rate, min. 10% down, no PMI). Most houses listed under 500K are being sold as tear-downs. Fortunately, I guess, if we look a town or two over the prices get a bit lower (300K-400K). However, there's no way to get to sub-200K even we bought a major fixer upper, and neither of us have the skills to do major home renovations. And let's not forget property taxes, which are about 2%/year of assessed value - though no houses are assessed at their sale value.

Dmy0013

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Re: How much house can we afford?
« Reply #16 on: May 25, 2016, 08:19:22 AM »
I also had a very similar problem as you...

I went to traditional style banks and they approved me for X amount of dollars

I then went to a mortgage broker and she was able to approve me for well over double what the traditional banks would... I'm pretty sure I provided them with the same information and everything...  Long story short I spent about 1/3rd what I was pre approved for, and I am happy I did that

mtn

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Re: How much house can we afford?
« Reply #17 on: May 25, 2016, 08:45:04 AM »
I guess that part of my problem is that where we want to live is HCOL. We're looking to stay under 3.5x our combined income, the best we can hope for is 2.5x our combined income; and even if we go away from there and into a less desirable town we're spending 2x our combined income to get a place that is liveable. We could go further than that, but then we're either into seriously dangerous areas or else places that I think the taxes are going to go up so significantly it will negate the savings. Not to mention, we're trying to optimize my wife's commute (mine is all on the train, so it doesn't matter). And its not like we have ridiculous demands either--the only one that is "ridiculous" is a 2 car garage.

Apartments are an option, but there just aren't a lot of them and they don't meet any of our wants; not to mentioned we're sick of living in apartments.

little_brown_dog

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Re: How much house can we afford?
« Reply #18 on: May 25, 2016, 09:08:08 AM »
I guess that part of my problem is that where we want to live is HCOL. We're looking to stay under 3.5x our combined income, the best we can hope for is 2.5x our combined income; and even if we go away from there and into a less desirable town we're spending 2x our combined income to get a place that is liveable. We could go further than that, but then we're either into seriously dangerous areas or else places that I think the taxes are going to go up so significantly it will negate the savings. Not to mention, we're trying to optimize my wife's commute (mine is all on the train, so it doesn't matter). And its not like we have ridiculous demands either--the only one that is "ridiculous" is a 2 car garage.

Apartments are an option, but there just aren't a lot of them and they don't meet any of our wants; not to mentioned we're sick of living in apartments.

I understand, we also live in a hCOL area. A 2-3 bed home here will easily set you back 300k+, and the ones selling for 300k tend to be crap, or they get snatched up by pure cash investors who flip homes. You really need to decide if it's worth it to you to essentially sink massive amounts of income into your home because of your area. We did because our lifestyle (gardening, livestock, big dogs) is really not conducive to apartment living at all. But if we were the type of people who didn't really feel a need to have our own land and didn't require a yard/property, then it would have been much smarter to rent for a while longer.

mtn

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Re: How much house can we afford?
« Reply #19 on: May 25, 2016, 09:11:56 AM »
I guess that part of my problem is that where we want to live is HCOL. We're looking to stay under 3.5x our combined income, the best we can hope for is 2.5x our combined income; and even if we go away from there and into a less desirable town we're spending 2x our combined income to get a place that is liveable. We could go further than that, but then we're either into seriously dangerous areas or else places that I think the taxes are going to go up so significantly it will negate the savings. Not to mention, we're trying to optimize my wife's commute (mine is all on the train, so it doesn't matter). And its not like we have ridiculous demands either--the only one that is "ridiculous" is a 2 car garage.

Apartments are an option, but there just aren't a lot of them and they don't meet any of our wants; not to mentioned we're sick of living in apartments.

I understand, we also live in a hCOL area. A 2-3 bed home here will easily set you back 300k+, and the ones selling for 300k tend to be crap, or they get snatched up by pure cash investors who flip homes. You really need to decide if it's worth it to you to essentially sink massive amounts of income into your home because of your area. We did because our lifestyle (gardening, livestock, big dogs) is really not conducive to apartment living at all. But if we were the type of people who didn't really feel a need to have our own land and didn't require a yard/property, then it would have been much smarter to rent for a while longer.

We are dying to get a dog, or more, and both love big dogs. On top of that, I want a garage so I can play with (cheap) cars again. Not to mention, we just need more space! Our apartment right now, which remember is 58% of MY take home, is a one bedroom with about 700sqft, and we don't have an in-unit washer and dryer. For us to upgrade, we'd have to be paying about what a mortgage is on a house where we want to buy.

The rentals where we want to buy are of course always an option, they're just few and far between.

Retire-Canada

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Re: How much house can we afford?
« Reply #20 on: May 25, 2016, 09:39:01 AM »
When I moved to our current city I wanted to rent, but for a number of reasons couldn't find anything that made sense so I looked at buying. I just made sure that the costs were:

1.equal to or less what a comparable rental would cost

2. could be carried on my own income [not including my GF who rents from me]

That way if one of us lost their income there was no crisis to deal with as far as the mortgage was concerned.

I bought something that was at least one probably two "levels" of status below what I would get if I was trying to "compete" with our friends/co-workers. That was important to make home ownership stress free and I'd rather have stress free plus $$ in the bank than a bling house I get to show off to people.

zephyr911

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Re: How much house can we afford?
« Reply #21 on: May 25, 2016, 09:42:03 AM »
All this is great advice if you live in a LCOL area or even an average COL area. I grew up in the upper midwest, and my parents never spent more than 1.5X their income on a house.

We live in central NJ. Housing is expensive enough that with his next promotion, my husband's employer offers an in-house mortgage to help with housing costs (2% rate, min. 10% down, no PMI). Most houses listed under 500K are being sold as tear-downs. Fortunately, I guess, if we look a town or two over the prices get a bit lower (300K-400K). However, there's no way to get to sub-200K even we bought a major fixer upper, and neither of us have the skills to do major home renovations. And let's not forget property taxes, which are about 2%/year of assessed value - though no houses are assessed at their sale value.
Have you looked into 203k loans? It's an FHA program that lets you buy a home and also finance up to $35K (if I call correctly) in pre-arranged repairs with licensed contractors, which is escrowed at sale and paid directly to them via progress payments as they do the work. They start working when you close, and it just goes on top of your mortgage balance.
This eliminates the need to pay cash up front for all the repairs, as well as eliminating refi costs, which was the old way of using newly created equity to pay for the repairs/improvements.
Can be pretty helpful with anything but a complete rebuild.

ender

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Re: How much house can we afford?
« Reply #22 on: May 25, 2016, 10:13:27 AM »
I guess that part of my problem is that where we want to live is HCOL. We're looking to stay under 3.5x our combined income, the best we can hope for is 2.5x our combined income; and even if we go away from there and into a less desirable town we're spending 2x our combined income to get a place that is liveable. We could go further than that, but then we're either into seriously dangerous areas or else places that I think the taxes are going to go up so significantly it will negate the savings. Not to mention, we're trying to optimize my wife's commute (mine is all on the train, so it doesn't matter). And its not like we have ridiculous demands either--the only one that is "ridiculous" is a 2 car garage.

Apartments are an option, but there just aren't a lot of them and they don't meet any of our wants; not to mentioned we're sick of living in apartments.

We are dying to get a dog, or more, and both love big dogs. On top of that, I want a garage so I can play with (cheap) cars again. Not to mention, we just need more space! Our apartment right now, which remember is 58% of MY take home, is a one bedroom with about 700sqft, and we don't have an in-unit washer and dryer. For us to upgrade, we'd have to be paying about what a mortgage is on a house where we want to buy.

The rentals where we want to buy are of course always an option, they're just few and far between.

There's nothing wrong with looking at your situation and logically determining you want to buy a house for $X or Y% of your income.

But make sure you understand what you are paying for. You are wanting a big dog or multiples. How much per year is that worth? What about a big garage?

Try to quantify each of these, or at least understand what you are paying for those amenities. Look at places (realtor.com is decent initially) and you will get a feel for how much "extra" those things are. Maybe you see that it's consistently $100k more for a 2 car vs 1 car garage. Or $150k for a lawn big enough for "big dogs."

Either way, make an educated decision. It's a lot of money and that's ok, but just don't blindly buy a place and not realize what you are actually paying for (when considering other options).