Home How much to spend on a house?

[Dreamer_D]

So it looks like DH and I will be buying our first home when we relocate this fall! I am very excited but also nervous. The first thing I am trying to figure out is how much mortgage we can realistically afford. What are the rules of thumb for this? How do you even begin?

I regularly budget and keep track of our expenses, and I have a reasonable idea of what our take home income will be in our new jobs. We don''t want to be house poor by taking on too much, but we also have heard that we should get the most expensive house we can afford since our income will be increasing over the coming years and interest rates are so low.

Help!

 

[steph72276]

I wouldn't have my mortgage payment be more than 1/4 of our take home pay, but I am pretty conservative and don't want to be house poor also. Monthly payment is the most important thing. Figure out what you can afford if one of you lost your job for a while just in case~ you never know in this economy.

Also, a good rule of thumb is to not have the total you pay for your house exceed 3 times your annual salary. We went considerably less that that, but I def. wouldn't go more.

 

[icekid]

Date: 6/14/2009 9:26:13 PM
Author: steph72276

Also, a good rule of thumb is to not have the total you pay for your house exceed 3 times your annual salary. We went considerably less that that, but I def. wouldn''t go more.

I have heard this one as a good estimate, as well. Of course, it depends also on what you are able to put down, though.

 

[Dreamer_D]

Interesting. Using both those estimates brings us in around the number we were thinking of spending.

Unfortunately for us, the median house price where we are moving is 25% more than that budget

It is one of the more expensive real estate markets in Canada! Boo hoo!! I believe townhomes are a fair bit less, however, and we could probably get a nice townhome in a nice area for within that budget. We had wanted a detached home, but I think that is totally out of the question in the neighbourhoods we want!

 

[sparklyheart]

You might try calling a mortgage company and asking about this. When I bought my house, my mortgage man said since I was young and it was my first house, he would allow 45% of my monthly income to go towards my mortgage payment with the assumption that as I age my income will increase. I honestly don''t remember the percentage I ended up at though! I knew the amount I was comfortable paying and ended up below that. Just call a reputable company around you and speak with them. I''m sure they would be more than willing to answer your questions!

 

[Blenheim]

That is exciting! I''ve heard 2-3x your annual salary as a rule of thumb. I''d be really hesitant to stretch it more than that - ours was a little under 3 times our combined salaries when we bought the house and a little under 2x our combined salaries for much of the time we''ve lived here, but taxes are high here (another thing to take into account) and we feel very crunched now with DH out of work.

Would buying a fixer-upper in one of the desirable neighborhoods and gradually fixing it up be an option?

 

[Haven]

Date: 6/14/2009 9:26:13 PM
Author: steph72276
I wouldn''t have my mortgage payment be more than 1/4 of our take home pay, but I am pretty conservative and don''t want to be house poor also. Monthly payment is the most important thing. Figure out what you can afford if one of you lost your job for a while just in case~ you never know in this economy.

Also, a good rule of thumb is to not have the total you pay for your house exceed 3 times your annual salary. We went considerably less that that, but I def. wouldn''t go more.

These sound like good guidelines to me.
We found that mortgage brokers were willing to lend us far more than what we were comfortable spending, and those mortgage calculators online returned ridiculously inflated numbers.

When we bought our house last summer we decided to take the lesser of our two salaries, and figure out what we''d be comfortable spending on our monthly mortgage if that salary was our only source of income. We wanted to be able to live very comfortably even if we only had one income. We also didn''t want to put less than 20% down, of course.

There were times we were really tempted to spend a bit more because we would see what *just* another 50 or 100K would buy us, but in the end we stuck to our original budget, and I''m so happy we did. We love our house, and we''re still able to live below our means.

Good luck! What fun--new location, new jobs, new house!

 

[neatfreak]

DD: It depends on not only your pay but also any debt you might have (student loans, car payments, CC''s, etc.) so take that into consideration too.

I think you''ll be able to come up with a realistic number on your own if you sit down and write a budget out-that''s what we did and we are ending up just under what we are very comfortable spending.

We used the 1/3 of take home pay as a guideline-but we only used 1/3 of my DH''s take home pay. We wanted to make sure we''d be ok if one of us lost a job in the future. We also didn''t want to stretch ourselves while I finish up school so we didn''t take my pay into account.

 

[Gemma12]

Date: 6/14/2009 11:12:13 PM
Author: neatfreak
DD: It depends on not only your pay but also any debt you might have (student loans, car payments, CC''s, etc.) so take that into consideration too.

I think you''ll be able to come up with a realistic number on your own if you sit down and write a budget out-that''s what we did and we are ending up just under what we are very comfortable spending.

We used the 1/3 of take home pay as a guideline-but we only used 1/3 of my DH''s take home pay. We wanted to make sure we''d be ok if one of us lost a job in the future. We also didn''t want to stretch ourselves while I finish up school so we didn''t take my pay into account.

How exciting DD!!

I second NF. We used DH''s salary only also as we wanted the flexibility for me to stay home with kids for as long as I want. It meant a serious lifestyle change but I''m really glad we did!

 

[Hera]

My husband and I are house poor and we're a little over the 1/3 benchmark because we live in beautiful San Diego. It's based on just my husband's salary in case I ever need to work I can do so. He's in the military so we don't have to worry about job stability or anything.

 

[partgypsy]

As you keep a budget I think it is best to look at your own real (after-tax) numbers. How much do you currently spend on housing? With your after-tax income, how much is left after paying for everything else? I wouldn''t go above those 2 numbers combined. Yes you can scrimp and save in areas, but there are also repairs and expenses with having a house as well. When I run those housing calculators it gives us a number (even the conservative end) that is significantly higher (about 1.3x) than the amount we felt we could afford.

 

[Hudson_Hawk]

Biggest thing to remember are the small things that need to be factored into the monthly payment. Property taxes, sewer/water bill, maintenance, insurance. Those things combined with your mortgage payment should not come to more than 30% of your take home pay. Obviously the less the better.

And remember, just because you're approved for a certain amount doesn't mean you should take the full amount. It doesn't always mean you can afford it either.

 

[robbie3982]

Dreamer, our monthly payment (which includes taxes, insurance, etc) is 27% of our take home pay. The mortgage alone is only 20%, however we based it off of both of our incomes. DH and I make about the same money, so basing on one income would have cut our budget in half. There was definitely nothing in that price range worth looking at in the area we wanted to buy so we had to decide what was more important to us. We know that I may never be able to stay home with the kids, but being close to our families in a town with good schools won out.

 

[littlelysser]

DD - Congrats on house shopping! DH and I bought our house 5 years ago - before we were even engaged (yikes!!!). Being a home owner is pretty great, in my opinion!

Regarding budget - I agree with the folks that said to try and base it off of one income. We were able to do that and it has given us a ton of flexibility and allowed me to quit being a lawyer, make jewelry, and take as much time off as I want after el kiddo arrives. Sit down and really figure out how much you are comfortable spending each month, especially given how much you are currently spending on rent. And life NF said, keep in mind other bills you have to pay. We live in a city where housing is CRAZY cheap and we spend around 20% of our (well, DH''s, since I''m currently making nada) on our mortgage and taxes, etc.

And I''m not sure how it works in Canada, but there are other costs associated with home ownership that must be paid each month, insurance, taxes, etc. Our mortgage company escrows our taxes and pays our insurance for us...so although our mortgage, for example is 1000, we pay our mortgage company 1400 each month. If that makes sense.

One last bit of advice - don''t believe the mortgage company! When we bought our place, DH and I qualified for a mortgage that was hundreds of thousands dollars more that we would have EVER contemplated spending! I think about how awful things would be for us if we had a mortgage anywhere near that size and I just shudder! If you can avoid being house poor - buying a town home, for example, I''d totally do that.

 

[somethingshiny]

We stayed conservative with our house (which we bought in Oct). We didn't go over 2x annual salary. At first we kept thinking we should have spent more and gotten a bigger house, but when DH got laid off in early 09, we were thankful that we didn't. Our house payment is still easily manageable on unemployment.


eta~ I am a SAHM (and plan to continue) so it's actually based off of one salary which we also felt was important.

 

[SapphireLover]

Good thread questions-

We bought based on 3x our combined salaries, although at the time we were offered 5x our combined salaries, which we didn''t take as that is just plain madness (and part of the reason the whole economy is screwed). It never even occured to us to borrow that much money are we were horrified. This is from what was and still is considered a good lender that has managed to weather the storm very well.

At the time our mortgage payments were £150 a month more expensive than what we had been renting and it was just over 1/4 of our monthly take home. Our salaries have gone up (as has the mortgage as well because our tie in deal ended at a time when interest rates were rocketing) and come September our repayments will be roughly 1/5th of our take home pay.

We would NEVER have been able to buy ANYTHING at all if we had gone purely on DFs teachers salary at the time. I mean, nothing. Not even a flat in the drug gang heartlands of wear we live.

 

[Dreamer_D]

Date: 6/14/2009 10:42:40 PM
Author: sparklyheart
You might try calling a mortgage company and asking about this. When I bought my house, my mortgage man said since I was young and it was my first house, he would allow 45% of my monthly income to go towards my mortgage payment with the assumption that as I age my income will increase. I honestly don''t remember the percentage I ended up at though! I knew the amount I was comfortable paying and ended up below that. Just call a reputable company around you and speak with them. I''m sure they would be more than willing to answer your questions!

In thenext few weeks we will be working with a mortgage broker to find the best lending rate. I think you are correct that we will be approved for much more than 25% of our income. The question is whether we want to spend that! I think the answer is "no".

 

[Dreamer_D]

Great help from everyone... some of you mentioned similar issues so I thought I''d respond to the issues more generally rather than answering each post

RE buying based on one person''s salary or 2x combined

This is a great idea but unfortunately completely unfeasable. The only things available that is 2x our salary where we are moving are 2 bedroom condos, which we are not interested in, and on only my salary -- which is the higher -- we would be in about the same range. Just to put it in perspective, the median house price where we are moving is $500 000. In the nicer areas where we want to move, there are only about a dozen houses under this price!

Honestly, I feel comfortable with 3x combined. I will not be staying home with out kids for more than my maternity leave, which is 10 months at 95% of my salary! I also trust I will not be losing my job, which is tenure track at a good university. If I don''t get tenure for some reason then out house will be the least of our worries

In a pinch, we could manage payments based on juts my salary, since we wouldn''t need to pay for daycareif DH was at home and other expenses would be cut as well.

RE Lenders offering more than we feel comfortable with

Yes, in the area we are moving to, this is very common! I am very certain they will offer us much more than we want to spend. That''s why I am trying to figure out what we actuall *want* to spend! But figuring this out is hard because in our new jobs our combined household after-tax income is increasing by about 50%! At the same time, we have a new child and other expenses when we move that we haven''t had before, so crunching the numbers is a little difficult. It''s hard to make sure I am including ALL of the new expenses we will have!

 

[D&T]

dd I hope this attach ok, and you can read this, I like to play around with spreadsheet so that I know how much I can expect to pay or how much I am willing to pay out, so I did this that gives a rough estitimate, although there are other extra fees that you will h ave to consider but its very basic and maybe you can do one mock up for yourself. I hope this somewhat helps, this is just my basic model, I play around with the dollar amount and interest rate, the 360 is the number of payments totalling 30 years mortgage.

 

[Dreamer_D]

Date: 6/14/2009 11:12:13 PM
Author: neatfreak
DD: It depends on not only your pay but also any debt you might have (student loans, car payments, CC's, etc.) so take that into consideration too.

Luckily we only have a small line of credit left in debt from over the years (student loans and wedding etc). It is low interest so it shouldn't affect us too much! We also have a monthly car payment.

 

[Dreamer_D]

Date: 6/14/2009 10:59:10 PM
Author: Blenheim

Would buying a fixer-upper in one of the desirable neighborhoods and gradually fixing it up be an option?

We definitely want to buy a place we can add value to! But perhaps not a true "fixer", I don''t want to do major strutural work or plumbing etc. Still, even those houses are very pricey.

 

[Dreamer_D]

Date: 6/15/2009 1:30:21 PM
Author: D&T
dd I hope this attach ok, and you can read this, I like to play around with spreadsheet so that I know how much I can expect to pay or how much I am willing to pay out, so I did this that gives a rough estitimate, although there are other extra fees that you will h ave to consider but its very basic and maybe you can do one mock up for yourself. I hope this somewhat helps, this is just my basic model, I play around with the dollar amount and interest rate, the 360 is the number of payments totalling 30 years mortgage.

I can read that, thanks! I will make one myself!

 

[cara]

Dreamer, I just wanted to say that while it is certainly nice that some areas allow people to buy liveable homes on one person's salary, that is just not the case everywhere. Don't feel bad.

Among many other things, you have to weigh the likelihood of losing a job/both jobs and the need for additional budget flexibility with the advantages of buying the right home first rather than a starter home. If you buy in a bad school district, will you move before the school years or pay for private school? If you buy farther from your job (or your DH's job) then one of you will throw time down the commute black hole. If you buy a small townhome, which *might* be a good option now, there will be tranaction costs later if you outgrow it or choose to move. Certainly people are being smart to advise you not to overstretch with housebuying, but there are advantages to stretching a *smart* amount using particular estimates of your job security and your husband's job security and the likelihood of both raises and periods of unemployment. Its a calculated risk, at some point, and you'll need to consider both your particular preferences for risk and home and school and commute and community as well as your particular employment odds.

ETA: The other thing is that, to compensate for using both incomes in your budget, you should have a generous emergency fund saved in case of unemployment of either wage-earner. That will take some of the urgency off the situation if there were ever a period of unemployment. It is always tempting to use most/all savings for the downpayment, but you want to hold some back and also grow it bigger after the housebuying. But it is great that you are finally able to get a place of your own!

 

[D&T]

Date: 6/15/2009 1:48:14 PM
Author: dreamer_dachsie

Date: 6/15/2009 1:30:21 PM
Author: D&T
dd I hope this attach ok, and you can read this, I like to play around with spreadsheet so that I know how much I can expect to pay or how much I am willing to pay out, so I did this that gives a rough estitimate, although there are other extra fees that you will h ave to consider but its very basic and maybe you can do one mock up for yourself. I hope this somewhat helps, this is just my basic model, I play around with the dollar amount and interest rate, the 360 is the number of payments totalling 30 years mortgage.

I can read that, thanks! I will make one myself!

Have fun with it, your welcome, I did this for myself and my sister and was off about $75 under for myself, as well as my sister about $50 off the actual mortgage payments (including PMI, and Taxes, and Insurance (but I guestimated on those monthly charges) I'm excited for you, What an eciting time in your life!

 

[Dreamer_D]

Date: 6/15/2009 1:53:02 PM
Author: cara
Dreamer, I just wanted to say that while it is certainly nice that some areas allow people to buy liveable homes on one person''s salary, that is just not the case everywhere. Don''t feel bad.

Among many other things, you have to weigh the likelihood of losing a job/both jobs and the need for additional budget flexibility with the advantages of buying the right home first rather than a starter home. If you buy in a bad school district, will you move before the school years or pay for private school? If you buy farther from your job (or your DH''s job) then one of you will throw time down the commute black hole. If you buy a small townhome, which *might* be a good option now, there will be tranaction costs later if you outgrow it or choose to move. Certainly people are being smart to advise you not to overstretch with housebuying, but there are advantages to stretching a *smart* amount using particular estimates of your job security and your husband''s job security and the likelihood of both raises and periods of unemployment. Its a calculated risk, at some point, and you''ll need to consider both your particular preferences for risk and home and school and commute and community as well as your particular employment odds.

ETA: The other thing is that, to compensate for using both incomes in your budget, you should have a generous emergency fund saved in case of unemployment of either wage-earner. That will take some of the urgency off the situation if there were ever a period of unemployment. It is always tempting to use most/all savings for the downpayment, but you want to hold some back and also grow it bigger after the housebuying. But it is great that you are finally able to get a place of your own!

All good suggestions and things I have heard in favour of taking on a larger mortgaes. I think that my job is secure. It is a tenure track faculty position, and in Canada at this type of school and given what I know about myself, it is basically a given that I will get tenure. They freeze hiring at universities, but layoffs of faculty are unheard of, even pre-tenure. My husband''s job is also fairly secure I think. It is a large insurance company that acutally tends to do better in harder economic times. They have a hiring freeze but no layoffs yet, and since he is mid-level I don''t think he would be hit. But, your point about a contingency fund hits home and is something we will work on.

I think that we are comfortble taking on a mortgage in the upper end of the conservative range

We still want to have money to Do things, and being house poor would be so lame. I''ve had enough of being plain old poor in my life, I''d like it to end now thanks! LOL!