How do you know how much to spend on a house?

[bicktrav]

My fiance and are just starting to look, and it's tough to know what we can and can't afford. How do you all calculate how much to spend on a house? Anyone got any good methods?

[atomicmassunit]

Make sure the note is around 25% of your monthly income. Most people are approved for more than they can realistically afford, that will keep it in a safe range.

[EricPeterson]

I was told 4 times my annual income when I was looking, I bought for less than that though.

[rhinocaster]

My wife and I went with a 20 year loan that was 20% of our (at the time) monthly income. We also had saved $40K for a down payment.

We figured that we wanted to be able to afford our home even if we ended up in a tough place financially. Turns out, we are now in a tough place financially due to the economy. Still in no danger of losing our home though.

Imagine your worst case scenario and buy a home that you can afford if those bad times come. :)

[bicktrav]

My wife and I went with a 20 year loan that was 20% of our (at the time) monthly income. We also had saved $40K for a down payment.

We figured that we wanted to be able to afford our home even if we ended up in a tough place financially. Turns out, we are now in a tough place financially due to the economy. Still in no danger of losing our home though.

Imagine your worst case scenario and buy a home that you can afford if those bad times come. :)

Was it 20% of your pre-tax monthly income of post-tax?

[loudboy]

About 20% less than you realtor will tell you that you can afford.

[Mikey2201]

[QUOTE=Imagine your worst case scenario and buy a home that you can afford if those bad times come. :)[/QUOTE]

Excellent advise

[rhinocaster]

Was it 20% of your pre-tax monthly income of post-tax?

It was 20% of our gross. :)

[tiktok]

I'd suggest looking for something that you can get a 30yr (or shorter) fixed mortgage where the monthly note is no more than 25% of your take-home pay.

Also don't forget to factor in property taxes and homeowner's insurance.

[Peteyvee]

I was told 4 times my annual income when I was looking, I bought for less than that though.That won't work in most parts of LA... ;) I was always told that the mortgage payment (including insurance and property tax) should be 20-25% of your take home pay...

[ggwwbb]

Imagine your worst case scenario and buy a home that you can afford if those bad times come. :)

Yes, excellent advice.

[Doug's Tubes]

I know this might sound strange, but you should buy a house that you can presently afford.

[cratz2]

Imagine your worst case scenario and buy a home that you can afford if those bad times come. :)

This is the best possible advice. :aok

We built our first house in 1998-1999. The guy at the subdivision we built in actually suggested we build in a completely different city. That's how thin they were wanting us to stretch our dollar. We built at about half of what we were pre-approved for and that concept was SO lost on our guy, he literally couldn't understand it.

I know Indy is a very reasonable city in which to buy a home and that we are very fortunate on the buying end. Unfortunately, come to to sell, our values trickle up. Having had friends buy around San Francisco and just generally browsing prices, I simply can't imagine living in those areas.

[Sidmore]

we saved for 10 years and put 25% down on a 2-fam in a nice neighborhood - it doesn't suck having someone else make 60% of my mortgage payment.

['58Bassman]

My fiance and are just starting to look, and it's tough to know what we can and can't afford. How do you all calculate how much to spend on a house? Anyone got any good methods?

Get pre-qualified and the bank will tell you how much you can afford. Oh, wait- they gave loans to people who had no chance to make the payments over the long-term.

They used to advise that the loan payments didn't exceed 25% of the monthly income. How much you're comfortable with is up to you.

[sahhas]

when my wife and i bought our house 12 yrs ago, we were given the figure of 2.5 x our gross annual income...as a general basis.

it may be more nowadays w/ interest rates much lower now (when we bought we were over 8%! we've refinanced a few times since!).
go talk to a few banks to get a feel for what they will loan you.
generally they will give you a range.

of course start saving!!!

the other figure is how much you will be putting down as downpayment.
the more you have, the less your payment (can range anywhere from 5% to 10% as standard) b/c you are financing the house.

you may also want to talk about the difference of buying a built house vs. building a new house--the loans are a bit different...
good luck

[smcgov]

my mortgage is about 25% of our net monthly income...would be easy if my daughter's school wasn't almost that amount as well....

[starfish]

I believe home ownership is a myth in the 30-yr. mortgage scenario. Who owns that home for 30 yrs.? You? Nope.

Buy what you can afford on a 10-15 yr. mortgage. Surprisingly, it is often not that much more money. You will thank me when you actually own your home and then can afford a second and even third property afterwards.

[Tele Wacker]

Monthly payment not more than 25% of your net income! That's what I was told over 30 years ago. Bought a nice house 21 years ago on a 30 year note. Within 2 years the rates dropped and we re-financed. We continued to pay a little each month extra on the principle and refinanced for 15 years. We saved about $145,000 by going 15 years. House is now paid for, it's a nice house that is in a nice neighborhood. I feel good.
I see young people buy way too much house, while they drive 2 new BMW's and it's just too much for them. I didn't try to impress anybody!

[RedRockRoy]

Imagine your worst case scenario and buy a home that you can afford if those bad times come. I dunno about this advice. I can imagine a really, really bad worst case. I don't think people should plan their life assuming the worst. But don't assume the best case either.

Pay no attention to what realtors or mortgage brokers say you can afford. Think about how much of your take home money will be spent on stuff (car, gear, trips, IRA, etc...) and whatever is left is what you can spend on housing.

[DGTCrazy]

My fiance and are just starting to look, and it's tough to know what we can and can't afford. How do you all calculate how much to spend on a house? Anyone got any good methods?

Get a few names from family/friends of lenders they trust. If your timeframe to buy is under 90 days, find out what you can get Pre-Approval for, then work out you budget at home so your not paying more than 20-25% of your Takehome. If your timeframe to buy is over 90 days.....just get a Pre-Quallification and Tire Kick. Getting Pre-approved means you can move quickly ( as long as you get in within the "lock" period). Pre-qualified just means you've been given an estimate of how much you can borrow. Whatever you do......make a list of Needs vs. wants.....because you can get sucked into maxing your budget if you're not careful. You need a Line in the Sand.


Also,don't overlook the opportunity for buying a home where the Owner will carry the note. You could save money. But depending on where you are, first-time homeowners can quallify for great deals, in CA for example, you can still come in with just 3% down. If you've served in the Milatary, you xan get a VA loan. In addition, buying a home sans an agent is a LOT easier than you'd think. That can whack off up to 3% if the purchase price. Lots of good info on-line for that.

Good luck!

[plexirocker 68]

Years ago before the craziness happened in the housing market we were told as a young couple your payment should be 25% of monthly NET not gross!!!!!


Best advise ever

We took a 30 year but have made extra payments every month on the principal as we can afford, it will ACTUALLY take us 18-19 years and we have been able to save almost 20% of our net for years now

Don't be a slave to the house payment and not enjoy the other things in life

plexi

[RedRockRoy]

Don't be a slave to the house payment and not enjoy the other things in life

plexiBest advice ITT.

[shawnshack]

I understand when people recommend 25% of your income, but that doesn't necessarily factor in your circumstances (debt from student loans, medical bills, other financial commitments). Write out a budget - health insurance, gas, car payments, food, any other expenses. Determine what is doable for a house payment (this is a good time to adjust the other expenses if possible). Figure out approx. expenses for utilities. Now plan how you will save. Dont buy a house if you aren't going to save for the future and a sinking fund. You will need to replace a roof, a furnace, etc. You might find that spending 25% of your income on a house wouldn't be sustainable for you.

[Bankston]

I was told 3x annual income but I agree with the posts saying that you don't want to be house poor.

And as someone else mentioned, find out how much property taxes and insurance will be. Property tax information is public info and you should be able to go on the website of your county appraisal district to find out about the particular property you're looking at.

Also, on home insurance, you really only need to get coverage of replacement value, not the full value you borrow.

Taxes and insurance typically can either be escrowed or you can pay them yourself. If you choose not to escrow, make sure you always pay your premiums and taxes on time. If you don't, the lender will pay them for you and create an escrow. You will have to pay back what's been paid plus the next year's assessment. Lender placed insurance is typically much more expensive. Believe me, I do a lot of wrongful foreclosure work and this is a common reason homeowners default on their mortgages. In this scenario, monthly payments can double or triple.

You have to also find out what the homeowners association dues are. Those are typically not escrowed.

Finally, if you don't put 20% down, you will have to pay PMI, which is usually an extra $100 a month for insurance that benefits the lender. You can get around this requirement with an 80/20 loan, which creates a first and second lien on the property.

Be cautious about adjustable rate mortgages, especially with a pick a payment feature. While there's a chance that you will amortize more quickly when rates go low, there is a chance that you will actually suffer negative amortization when rates go high, because interest is deferred and added to the principal.

Happy hunting!

[bicktrav]

This is all incredibly helpful. Thank you everyone! Advice on everything from guitars to mortgage payments; gotta love TGP!

[epluribus]

One other notion...upkeep. The bigger the house, the bigger the maintenance bills. Not to mention utilities. Ditto fancy materials and such...replacing slate roofing isn't gonna be cheap. Not a reason to run away, just another factor to account for.

Another thing...extra payments. Those extra payments can be pure equity, and will dramatically shorten your payback period as someone said above. A cool way to do this is to make a half-payment every two weeks, even though you're only required to make one full payment a month. IIRC it shortens a 30-yr mortgage to 17 yrs...ask your banker, they should know this one easy.

BTW, about a house being an "investment." If we're talking "investment" like stocks, you'll need to live in a pretty hot market to generate a bona-fide ROI like a good portfolio. True, you don't throw away rent receipts, but sit down with a calculator and crunch some equity/expense numbers side-by-side, renting vs. owning. Scratch your head and dig up all the expenses that come with each choice...there are a lot. Keep in mind that upgrades and remodels rarely pay you back dollar-for-dollar, and can sometimes actually hurt your resale. (Remember too that $300K invested in a $150K location is still only worth $150K.) You may be surprised how much appreciation it takes for you to outrun a renter. In weak markets, chances are you won't.

--Ray

[sausagefingers]

I would try to only buy what you can afford comfortably with one income. What if one of you loses a job or gets pregnant repeatedly?

[Elev8]

In UK the old rule of thumb was up to 3.5 x your top line (pre-deductions) annual salary. Or 2.5 x combined salary in the case of joint mortgages.

You certainly could get approval for way more than that in recent years, although I'm not so sure that's the case any more.

It's generally acknowledged that those are "historically safe" borrowing levels.

[Devostating]

Between 3-4 times your annual gross salary (ideally no more than 3.5 though) at the time of purchase.

If possible a 20 or 25 year mortgage rather than 30 or 35 year one.

Try and get a fixed rate for the first 5 years at least. (unlikely at the moment, thank you ECB) Til yo

Also save for as long as you can beforehand, so to maximise your deposit (downpayment), A 75% mortgage is ideal, especially compared with a 90% one, or the dreaded 100% they offered a few years ago. :facepalm

Factor in stuff like;
House insurance
Life Assurance
Payment Protection
Solicitors Fees
Stamp duty/property taxes

All of which go hand in hand with buying house, some are once offs, but stuff like House and Life cover can (and are, over here) a requirement of your mortgage.

Best of luck with it, started tentatively looking with the girlfriend and this sh!t is terrifying.

[bkd_guitarist]

we saved for 10 years and put 25% down on a 2-fam in a nice neighborhood - it doesn't suck having someone else make 60% of my mortgage payment.

This is great advice. We did the same thing. When I "retired" from full-time music at age 22, I had few marketable skills and Mrs. bkd was pregnant and getting ready to quit her job to be a stay-at-home mom, so we had to figure out how to make it on my crappy income. We bought a duplex for $85K in Ft. Worth, TX (gotta love those Texas property values...amazing). Our payment was something like $800 a month. We lived in one side and rented out the other side for around $550, reducing our housing expense to $250 a month. After a few years we sold the place for $125K and were off and running with some equity in hand. I HIGHLY recommended this approach as a starting point for a young couple.


Imagine your worst case scenario and buy a home that you can afford if those bad times come. :)

Based on this, I'd never have bought a house. "Worst case" in my mind is we both lose our jobs and can't find new ones that would support our house payment for a couple of years. I know a number of people in this boat. In that case, you'd have to sell (or lose) the house. "Worst likely case" is a more realistic guideline, IMHO. Again for us, that would be we both lose our jobs and it takes 3-6 months to recover. Whether or not we could maintain the house in that scenario is the guideline that I use.

[arthur rotfeld]

I would try to only buy what you can afford comfortably with one income. What if one of you loses a job or gets pregnant repeatedly?

Good advice.


We could sell our smallish place and get some big mortgage on nice house, but frankly we don't want the stress and lowered quality of life for a basement and extra bedrooms.

[germs]

when i stop and think about it, our note is roughly 20% of our take-home pay...

i don't know how accurate that is, as our cost of living is pretty low compared to other parts of the country.

[tone4days]

i like to think about it in terms of NET pay ... so, what would the monthly payment be (principle, interest, taxes, insurance) as a percentage of monthly take home pay ... try to keep that to less than 25% ... and, when you factor in other debt (student loans, car loans, etc), try to make your housing plus all other debt be no more than about 30% of monthly take home pay ...

this way, you can figure out how much you can afford to put down on the house to arrive at the mortgage value ... then you can figure out the mortage product that works for you (fixed, adjustable, etc) on a monthly basis to account for your longer term needs / risk tolerance ...

and yeah, try to buy well under your comfort level to the greatest doable extent ...

good luck
t4d

[Midnight Lady]

Go to a mortgage broker.

They will tell you EXACTLY what you can afford and what you can't afford. They will also find you the very best mortgage available at that point in time. It's a win/win.

[rhinocaster]

Based on this, I'd never have bought a house. "Worst case" in my mind is we both lose our jobs and can't find new ones that would support our house payment for a couple of years. I know a number of people in this boat. In that case, you'd have to sell (or lose) the house. "Worst likely case" is a more realistic guideline, IMHO. Again for us, that would be we both lose our jobs and it takes 3-6 months to recover. Whether or not we could maintain the house in that scenario is the guideline that I use.

Worst case, worst likely case, whatever floats your boat.

The problem is that people often go into this process with boundless optimism. They'll always make more money so that balloon payment is no big deal. That BIG house that they can afford right now is doable so LET'S DO IT!

The reality is that bad things are likely to happen in your 20, 30, 40 year buying experience and preparing for the BAD times at the time of purchase is they way your house will show itself to be an asset rather than a liability when everything turns bad.

We chose to buy a house that was easily affordable for us when other people we knew (and in our same basic financial position at the time) bought much more. Those people are currently living with their parents and have nothing at all to show for the money they "invested" in their home. We still have our house even though we've been severely affected by the recession and we have more than $100K in real equity.

Can things get worse? Of course. Still, if we're force to sell, we'll realize quite a bit of money based on planning and buying based on a worst case scenario. I'm glad we did. :)

[AnotherAvatar]

Examine your motivations for wanting a home.

[Mr. Pickles]

The way the real estate market is today, with the recession, and many other cultural and political shifts, I don't believe that buying a home is a sound investment as it was for the previous few generations.

I also think that many of us are over-housed. If I were to get a do-over, I would reconsider the amount of space my family needs and buy something affordable and manageable. Most of my time is devoted to maintanance of property and possessions; a fact I'm quite unhappy with at this point in my life. I'd love to downsize and purge most of what I own. I'm a big proponent of the tiny-homes movement and I'm fascinated by shipping container homes in particular. They can be beautiful, sustainable, green and functional. If you can bear to reduce the amount of space you need to be comfortable and the amount of stuff you need in that space, you'll be able to save a ton of money keep mortgage payments manageable. Imagine a home that can be paid off in a few years!

Check out my favorites from a Canadian company called Meka (no afffiliation with any of these):
http://www.mekaworld.com/new/category/models/

Browse around at the Tiny Homes blog for more links and ideas:
http://tinyhouseblog.com/

Check out Jay Shaffer's Tumbleweeds:
http://www.tumbleweedhouses.com/

Enjoy. Hopefully this will strike a nerve with someone.

[ewheel]

Take a very close look at what you and your fiance are making and spending presently each month and ask yourselves - what are you willing to give up or cut back on?

Don't allow yourselves to be time pressured - it might be better to rent for a while and save money for a down payment.

Make sure you both can fully fund your 401k's and save everything you can on top of that.

Remember - kids are VERY expensive!

Good Luck - Life's a gamble - Proceed with caution.

Please disregard the above advice if you've recently won the lotto or have signed an 8 figure deal with a major record label! :D

[RSRD]

Depends on how badly you want the house


Alot of advice on this thread does not take into account location. That is a HUGE factor. If you live in NYC, DC, Boston,etc... buying a house in a desirable location is always a good investment.

[joemilitello]

This is great advice. We did the same thing. When I "retired" from full-time music at age 22, I had few marketable skills and Mrs. bkd was pregnant and getting ready to quit her job to be a stay-at-home mom, so we had to figure out how to make it on my crappy income. We bought a duplex for $85K in Ft. Worth, TX (gotta love those Texas property values...amazing). Our payment was something like $800 a month. We lived in one side and rented out the other side for around $550, reducing our housing expense to $250 a month. After a few years we sold the place for $125K and were off and running with some equity in hand. I HIGHLY recommended this approach as a starting point for a young couple.



Based on this, I'd never have bought a house. "Worst case" in my mind is we both lose our jobs and can't find new ones that would support our house payment for a couple of years. I know a number of people in this boat. In that case, you'd have to sell (or lose) the house. "Worst likely case" is a more realistic guideline, IMHO. Again for us, that would be we both lose our jobs and it takes 3-6 months to recover. Whether or not we could maintain the house in that scenario is the guideline that I use.

Buying a duplex is really good advice. Great way to help build equity in the property.

Also- google "mortgage calculator," and you will find a pretty good tool to figure out what monthly payments will be for various size mortages and different interest rates.

[stevieboy]

The general rules of thumb given here are valuable, but one thing I also considered was how much I was paying and/or could be realistically paying in rent in the city where I live. You gotta have a place to live, and it's either rent or mortgage--or Mom's basement! If there's a big difference between your rent and your mortgage payment, you might be over reaching. Remember you have taxes and upkeep too.

But if you aren't having any trouble paying your rent, you can probably figure out if you can swing whatever extra your mortgage will cost you. The rent is gone forever. What you want to avoid of course is getting into a situation where the mortgage, and down payment, is gone forever too.

[Hwoltage]

Worst case, worst likely case, whatever floats your boat.

The problem is that people often go into this process with boundless optimism. They'll always make more money so that balloon payment is no big deal. That BIG house that they can afford right now is doable so LET'S DO IT!

The reality is that bad things are likely to happen in your 20, 30, 40 year buying experience and preparing for the BAD times at the time of purchase is they way your house will show itself to be an asset rather than a liability when everything turns bad.

We chose to buy a house that was easily affordable for us when other people we knew (and in our same basic financial position at the time) bought much more. Those people are currently living with their parents and have nothing at all to show for the money they "invested" in their home. We still have our house even though we've been severely affected by the recession and we have more than $100K in real equity.

Can things get worse? Of course. Still, if we're force to sell, we'll realize quite a bit of money based on planning and buying based on a worst case scenario. I'm glad we did. :)

In my case, I bought a home that was right at my limits (not smart). The economy started to tank while I simultaneously lost all hope in my employers, and decided to shed all needless burden and dept. Quit my job and spent what was previously my "9-5" furiously renovating and then selling my home before the market tanked even more. I did, and even though I ended up virtually homeless (with my parents) I did so debt free when previously I was 40k+ in debt not counting the double mortgage.

By the hair of my chinny chin chin. :eek:

Looking at the current situation of this country from many different angles, not just economically, I assume that will be my last home buying experience for quite a while. ;)

[Jerrod]

Doesn't anyone build a budget any more? A spreadsheet with some solid numbers goes a long way.

[JamesT]

we paid 850 per month renting. someone said you get 30% (actually 25%) tax break so we increased it a third to 1250- told realter we wanted to spend 1250 per month... how much would that buy?

he said 160K but approved for 220K we stuck with 1/3 increase. actually i miss calculated going from 850 to 1250 is 50% increase. lol...

[tamader74]

It is hard to find a mortgage co. that will let you go past the 80% rule ( 80% mort. against your 20% equity, a decade ago, it was hard to find one that would let you get away without borrowing less than 90%-125%!!!....Reality...whata' bitch.
I've owned all my life, and dabbled a bit in Real Estate ( always trying to make a buck...LOL)....alot depends on taxes, insurance, etc. I have always looked at the HOME, not the decor., I added in what I can do as far as " Fix-ups" and used that as a tool in the price.
Next, Make SURE that the appraisal is on your side...Don't force it, If the home comes in appraised below the offer/ asking price, Make sure YOUR Realtor writes the offer based on the current market analyisist (CMA) and at or below the Bank appraisal, as a buyer know this, in MOST states the trust is with the seller ( Fidisuary trust)...In other words, Yes, you sought out your agent, yes, they may not be in the same brokerage/office as the listing agents....But, still they are working for the seller, and their own commission.
Knowing this, You can now take all their "arts & charts" they show you as what YOU can afford....and throw them out the window, the next 5-30 years is YOUR reality, not theirs.
A good rule of thumb is always, and really has always been a "Fixed rate mortgage", yes there are times that the trend/ market fluxuates....But, really, how many of us here are dealing with multi-million dollar properties, that values the refi. cost? and the 30yr. is best, Now, the most thrifty, most stick to your guns "run the families finances as a business" spouse/partner (which I'm sure applies in MOST cases) has to be the one in charge of this end...AND STAY THE COURSE!!!, you must make 13 payments a year (minimun) this will give you all the Income tax advantages, and IT is MORE than pure equity, you are also, buying down your total interest.
A 30 yr. mortgage will also give you a lower Initial payment, but, will help you give you more flexability...i.e., you based your payment on 22-25% of your net income, you have read and followed what I've wrote, Bought the house below value,kept yourself at least a 20% equity holder, kept your down payment low enough to put a MINIMUM of 3-6 months JOINT income liquid ( different topic, later on that, I use Insured accounts, But,they Damn sure ain't simple bank acct.s) away. this and using a little common sense, will make the pride and back breaking work it takes for wonderful homeownership.
Remember ALWAYS remember, shop and search...Because, starting out...your just looking at "Houses"....It's when you move in, and that "Feeling" thats there...That's Home, Tom...

[Jason UP]

don't use rules of thumb or any of that malarky, just work backwards using a decent amortization software like T-value or one of the free ones you can find on the interwebz. The variables are interest rate, monthly payment, loan and term (# of years). You can solve for any of them individually. so you'll know the interest rate (reasonably 4.25-4.5% if fixed for your math purposes, anything better is gravy), the term is 30 years (or 15 or 25 or whatever), and then plug in a monthly payment you can afford. T-value can even do interest-only type calcs if you shoot for a one-month LIBOR mortgage, if you qualify. If you're a first time homebuyer, don't gamble on a LIBOR gig. Keep in mind that this is BEFORE allocation of monthly RE taxes and insurance escrow. Solve for X which is the mortgage. This assumes 100% mortgage at purchase, so now tack on 20% of that to get to the home value. So you'd need to afford the 20% (reasonable to get out of PMI) and then the monthly nut. Take your estimated annual RE tax (from internet, use comps or specific houses) and annual insurance (estimated) and divide by 12 and tack that onto your monthly payment from mortgage calc. can you afford it? Start over with lower monthly # in calc until it forces a lower home value. Baddabing.

[mwc2112]

Make a budget. Write down all your monthly expenses (minus housing) and savings goals and what you have left over is the top of your housing-allotment range. Then it's time to start researching interest rates, escrow requirements (property taxes, insurance, PMI if applicable, etc), extra for incidentals all homes require, etc and eventually you will get to a number you will be comfortable with and within your budget.

[psychodave]

My wife and I based our decisions on ONE income...

[mwc2112]

My wife and I based our decisions on ONE income... so we are easily able to afford our house. Good thing we did that because 2 years later she was laid off.

That's a good point too. When I was laid off in late 2009 for a few months we were still able to make do on my wife's salary without robbing our savings. And because we didn't overspend for our new house we got last summer, she was able to leave her job late last year (was a bad situation for her) and is now staying at home with our 2-year old son while she works on her CPA. At no time were we strapped to the point where one of us was forced to take just any old job to make ends meet nor did we have to take our daughter out of her pre-K program (which isn't subsidized or state-run).

[tone4days]

Go to a mortgage broker.

They will tell you EXACTLY what you can afford and what you can't afford. They will also find you the very best mortgage available at that point in time. It's a win/win.
this is startlingly terrible advice

the broker will tell you about things that maximise their revenue and should not be trusted to care about what you can truly afford

[Travst]

When I was hunting 20 years ago, I got the advice listed above about 4x annual earnings, 25% of gross pay, etc. I ended up buying a home at less than 2x annual earnings and the note was about 15% of my gross. I've never regretted my decisions and have never had a problem making the note, even after being laid off. Nor have I lacked for space in the house. Granted, home prices here can't compare to LA or other cities, but they're pretty average for most of the country.

[Buckeyedog]

Yeah man, 4 times annual salary is way too much in my opinion. We went with closer to 2x just like travst above. Much better as we don't really have to worry about bills and such too much. Always have extra coin for gear and trips and home improvements or whatever, plus can put away for college fund. Stuff always comes up as unexpected expenses. Vehicles are a bad one.....appliances going bad, etc. So it's better not to be living on the edge. Good luck.

[ultrevex]

More food for thought: Many here are declaring that anything less than 20% down = automatic PMI. This isn't completely accurate.

I closed a house purchase last month where I qualified for a 4% conventional 30 year note. I had the option of only putting 5% down and giving up .5 points in interest in exchange for the lender 'wiping' PMI, which I gladly took. I also could have opted to kill PMI with a lump payment up front(basically the lender pays this with the option I took) and locked 4%. I wanted to use my cash for other things.

I locked 4.5% fixed for 30 years, only put 5% of my cash down and my monthly is made up of PITI only. Point being there are MANY options out there, talk to an excellent lender and find out which fit you.

[tamader74]

..^^^, sorta' what point Iwas trying to make ( early in the moanin', or was it late at night?...LOL)...There are alot of options to buy down "points" if you will, and keep a safe amount of cash on hand for emergencies,....Watch out for mortgage brokers outside of your bank,...Yes, there are some good ones, But, there is also alot of them that are broker than you!!!....and again study your options, and use common sense....

[stevieboy]

this is startlingly terrible advice

the broker will tell you about things that maximise their revenue and should not be trusted to care about what you can truly afford

There are decent people in the world, believe it or not. And ways to check on the reputations of people in business. There are unscrupulous people too of course, but automatically assuming everyone is like that is no more useful than automatically trusting everyone. If you can benefit from a service from a qualified professional, it's worth doing a little research and asking around with friends etc to find one that is considered trustworthy.

It's good business to look after the interest of your clients, in the long run.

We had pre qualified for a loan through my credit union, our real estate lady was actually a mortgage broker with a RE license, and she got us a much better deal than the credit union.

[jazzalbart]

In most cases, you should consider buying a home only when you plan to stay somewhere for several years. The cost of your home -- including taxes, maintenance and other costs -- should not exceed 28% of your monthly income.

[buddyrama]

Use an attorney to buy a house, not a realtor. I just bought a property and am in the process of selling my former home and I have never seen anything that is the bullshit of the realtor/ home inspection/ I know a contractor who can do this job at a reasonable cost(Oh, Iforgot to mention that he is a HACK) industry. Get an attorney you like and go buy a house.

[pedalcr8z]

2.5 times of your total family income has been the standard for many years and what we have done now for 3 houses.

[RupertB]

I know this might sound strange, but you should buy a house that you can presently afford.

Good advice.

It is worth noting how many people over the past decade were convinced to not only buy as much house as they could afford but also to think in terms of higher future earnings (your paycheck can only go up right?). How else do you get a buyer into a 7-year balloon mortgage?

Unfortunately, many thought they were talking to a mortgage advisor when they were in fact, speaking to a mortgage salesman.

[Wolfgangsta]

When my wife and I bought our first house about 12 years ago, we worked up a budget then figured out how much house payment we could afford. THEN, we went to the bank and got pre-approved. We were shocked when they pre-approved us for almost double what we figured that we could afford. The banker said that many people see that pre-approval figure and start looking at bigger houses. We stuck with the amount we had previously decided on and were much better off in the long run.
Also, my advice, FWIW, is do a 15 or 30 yr fixed mortgage loan. A friend of mine got talked into a adjustable rate mortgage a number of years ago, and at one point he said his payment went from around $800 to almost $1200 in a month. And he couldn't afford a $1200 payment. He ended up losing the house. That may be an extreme situation, but it's food for thought.

[Ogrekingdad]

Don't let the BANKS or the REALTOR tell you what you can afford. They will always try to upsell you to something larger. Look at what your expenses are.... as a rule of thumb the posters above are right, 25% is "safe". But only you know what your debt situation is.

[Jahn]

I was told 4 times my annual income when I was looking, I bought for less than that though.

it shouldn't be that high, no way. if you did that, you wouldn't be able to keep up with your mortgage payments, unless you put a buttload down in a cash downpayment at closing.

make it so your mortgage payments don't exceed one fourth of the monthly take home income of your family. maximum. and that's for a fixed mortgage payment, none of that 5 year ARM stuff that will blow up in your face in a few years.

[lhallam]

Years ago before the craziness happened in the housing market we were told as a young couple your payment should be 25% of monthly NET not gross!!!!!


Best advise ever

We took a 30 year but have made extra payments every month on the principal as we can afford, it will ACTUALLY take us 18-19 years and we have been able to save almost 20% of our net for years now

Don't be a slave to the house payment and not enjoy the other things in life

plexi

Exactly my scenario.

We have been able to have yearly vacations and make ad-hoc purchases without having to worry about mortgage payments. This includes new washer, re-roofing and other maintenance things required by a house.

Not a giant house but it's practical and sufficient for all our needs.

I have friends who will never be able to retire given their mortgages, HOA charges, taxes, air&heating and maintenance costs. Screw that.

[supergenius365]

How much can you afford on one of your incomes?

I was so pissed at my wife when we bought our first house because she was adamant that we spend waaaaaaayyyyyyy less than we were approved for or could realistically afford. A few years later, when only one of us was working, I was thanking her for being so stingy because we were in no danger of losing our house.

[brlfq]

My fiance and are just starting to look, and it's tough to know what we can and can't afford. How do you all calculate how much to spend on a house? Anyone got any good methods?

Add up the cost of your current housing + 1/2 of the amount you have left at the end of the month and that equals your approximate monthly payment. (Start buying your house now. Put the money you figure out that you can afford to pay for a house in a special account. It will allow you to see if your calculations are reasonable, and will build up a fund to help out with the expenses.)

Find a house that is near the places you like to be. (family, work, play, friends, especially work. You go there 5 days a week!)

Consider renting a house in the area where you want to live. If you've never lived in a house together, you'll find out that cool and practical are different animals. If the rent is near what you can afford as a house payment, you'll get a free trial of "house payments".

Finally, your house is not an investment. It's your home. It's a thing that you pay for and live in.

Don't you dare listen to me! I have an id-10 t issue when it comes to money!

[tiktok]

Make sure the note is around 25% of your monthly income. Most people are approved for more than they can realistically afford, that will keep it in a safe range.

And make sure you're getting a fixed rate mortgage, not an ARM. And that your mortgage payment includes your property taxes.

[xjojox]

Give yourself plenty of cushion. You want to be able to weather the bumps in the road. Tranny falls out. Tires blow. A/C unit blows up. Mama wants a pool (oh no!). The guitar you've been waiting for has a great buy it now price on ebay.

Also, you want to be able to make some extra principal payments. The equivalent of one extra payment a year can shave many years off a 30 year mortgage.

[VCuomo]

Boy, some of the anwers in this thread are quite interesting (and entertaining)!

How much you can afford, how high a loan you will qualify for, and how high a loan (and loan payments) you are comfortable with may (and probably do) have different answers.

The answer that probably will limit you the most is the second one, how high of a loan that you will qualify for. Lenders typically use two different numbers to determine how much they will lend you: A "front-end" ratio and a "back-end" ratio. The front-end ratio is the monthly mortgage payment amount divided by your gross income. The back-end ratio is your total debt service amount (i.e., house mortgage + property taxes + PMI + car loan + credit card debt if all credit cards are maxed out + student loan obligations + any other documented obligations). The back-end ratio is what usually limits you the most. Note that the amount and term of the mortgage you are applying for has a large impact on both of the ratios. Also note that even if your credit cards are paid off, the underwriters will use the payment amount as if you were to max-out those credit cards, so paying them off doesn't necessarily help to get your loan app approved and if you have credit cards that you don't use you might want to consider closing them prior to applying for a mortgage.

Different lendors and different loan programs use different ratios - 33%/38% (front/back), 25%/35%, etc. So, as Midnight Lady suggested, you might want to talk to a mortgage broker to find out what loan programs are available to you right now and what the qualification ratios are for those programs.

So, how expensive of a home can you get? Well, the anwer is "it depends" - it depends on a number of things, some of which are listed above. Here's a link you might find useful: http://www.searchlightcrusade.net/2012/04/loan_qualification_standards_d_1.html

[jtees4]

Minimum 20% down. Fixed rate mortgage. Whatever closing costs you are told....expect double. Use a lawyer, no exceptions. Do not take money out of an IRA or 401K to buy it.
Assume one of your two jobs will be lost, and be able to scrape buy paying the mortgage.
Good luck.

[mwc2112]

Don't let the BANKS or the REALTOR tell you what you can afford. They will always try to upsell you to something larger.

Well... the banks just tell you what you're 'approved' for, they don't tell you what you 'can' or 'cannot' afford. That's not their job.

As for the Realtor, good ones don't do what you are suggesting they do. They get parameters from you as to what you are looking for (size, location, features, etc) and they will tell you if your parameters meet your price expectations. If they ever try and talk you into something you can't afford, you should drop them like a hot potato.

[VCuomo]

Minimum 20% down.True. This also eliminates having to get, and pay for, PMI.

Fixed rate mortgage. Not necessarily true, especially if the buyer is very certain that they will sell the property in a short period of time.

Whatever closing costs you are told....expect double.:facepalm Not true.

Use a lawyer, no exceptions.Depends on where the transaction is taking place. In many states (CA, for instance) lawyers are not used for simple residential property purchases.

Do not take money out of an IRA or 401K to buy it.Generally true. Although sometimes taking a 401(k) loan, and then paying yourself back in a short period of time (12-24 months) is fine. Assuming you can afford the quick pay-back.

Assume one of your two jobs will be lost, and be able to scrape buy paying the mortgage.A better strategy is to make sure you have 12 months (or even more) of your mortgage payments in a savings account and do not touch this money except to use it to pay the mortgage if you lose your monthly income for some reason. And if you're considering a 15 year loan, I recommend instead that you get a 30 year loan and make payments as though it were a 15 year loan - it'll cost you a little more than a 15 year loan, but if you ever lose your income source you can drop back to making just the required 30 year loan payment.

[mwc2112]

Depends on where the transaction is taking place. In many states (CA, for instance) lawyers are not used for simple residential property purchases.

Yup, here in TX too. We're required to use a Title company and they generally handle all the research-portion that a lawyer would do. Plus it's so heavily regulated they can't really throw in anything sneaky, so it would probably not do much good for a look-over by someone for legal reason. Plus he (jtees4) lives in NY and is *required* to use a lawyer, so it's truly a 'no exception' in his case (as well as several other states too).

Now, even in states like TX or CA, a lawyer can be helpful under certain circumstances, but those are mainly for non-standard sales. I'd probably get one if I were buying a foreclosure or purchasing a property with someone else (besides my wife... such a business partner) or if it was seller-financed. It also might be a good idea if you are moving into someplace with a homeowners association and there are some questionable rules that you are unsure of the legality of.

[Julia343]

My note + taxes + insurance (it's all lumped together) is around 1/3 monthly income. I've got 16.5 yrs left on it. It's fixed rate. It gets tight at times, but I can manage. If I get COLAs on SS and Govt Pension over the years it'll shrink in percentage.

[Snowdog]

My fiance and are just starting to look, and it's tough to know what we can and can't afford. How do you all calculate how much to spend on a house? Anyone got any good methods?

More than likely, you are renting something right now, correct? If that is the case, take a look at your monthly rent - is it fine, too high? Owning a house, as far as outlay of cash, is really not much different than renting (rent=mortgage and utilities=utilities). The only real difference is that you are now responsible if the house needs repairs or appliances. So, let's say you are renting for $1500 a month now, and that is comfortable. Well, look for a house that would be in that range (probably 200-225k). If you can afford some more, then look for more house.

[jtees4]

Quote:
Originally Posted by jtees4 http://img.thegearpage.net/board/images/buttons/viewpost.gif (http://www.thegearpage.net/board/showthread.php?p=13001267#post13001267)
Whatever closing costs you are told....expect double.

:facepalm Not true.

I think you are dead wrong. I've seen this many times. What generally happens is a financial institution tells people what their closing costs will be based solely on the mortgage aspect of closing costs which is fine and legal. What happens with new buyers is that they do not at that point realize that there are many other things that go into closing costs, legal things like title search, whatever. Sure...it's not always 2X but planning for 2X makes sense. As far as the lawyer...I didn't say you HAD to have a lawyer, but I personally would always recommend using a lawyer. The fact that some States let you do it without one is irrelevent to me...my money...my purchase...I want a lawyer to protect my interests. I also always have the house inspected, no exceptions.