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

[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]

Originally Posted by EricPeterson

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]

Originally Posted by 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

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]

Originally Posted by 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?

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]

Originally Posted by 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.

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/20...dards_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]

Originally Posted by 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.

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]

Originally Posted by jtees4

Minimum 20% down.

True. This also eliminates having to get, and pay for, PMI.

Originally Posted by jtees4

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.

Originally Posted by jtees4

Whatever closing costs you are told....expect double.

Not true.

Originally Posted by jtees4

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.

Originally Posted by jtees4

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.

Originally Posted by jtees4

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]

Originally Posted by VCuomo

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]

Originally Posted by 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?

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.