How much of a House can I afford?

[cdodom]

Hey!

My fiancee and I have been thinking very seriously about buying a house. I just dont know how expensive of a house I can afford. I obviously know the top payment I could afford but I dont want to spread myself so thin that I'm living paycheck to paycheck. My parents were living that way and it sucked pretty hard at times. In some ways I'm happy I went thru something like that because it definitely taught me the value of money.

for over 3 years I have been working as a UAV operator for a company called Textron. Things have been pretty steady and each year I usually get a 3 to 4% raise. As of now I am making $29 per hour and my fiancee is making $15 per hour. I usually bring in a little over 62K a year with overtime and she brings in around 28K a year.

What I pay each month not including the rent and anything associated with my apartment is about $1200.00 roughly.

My Fiancee has about $850 she pays in Car payments, insurance, gas and groceries each month.

We both have zero student loan debt and zero credit card debt. Our Credit scores are pretty good both sitting around 760.

We both have decided to buckle down and start really saving each month for the rest of this year in hopes of buying a house. My hope is to not have to put any money down and not use the 10 or 12k but for maybe painting a room or two in the new house.

I know I havent been saving much. We are both 24 we have been doing too much playing and not enough saving. Saving is a LIFESTYLE change we are making now in hopes for a better life in the future for us. I feel like if I wait too long to buy a house Ill end up paying way to much with the way the market is going. Seems like a great time to buy in Utah.

I hate having my money go to absolutely nothing when it comes to rent. I would much rather my money go towards a house.

Questions

Is there a general rule when buying a house and how much you can afford?

Is it best to buy as much house as you can afford with the bare minimum going to savings? Is it best to buy a house you can COMFORTABLY afford with a bunch more going to savings?

[Jluke]

I hate having my money go to absolutely nothing when it comes to rent. I would much rather my money go towards a house.

Familiarize yourself with an amortization schedule. In reality, the first many years that you own your home your money is going to the bank for the interest you are paying on the mortgage.

Have at least 20% down, and try to get a 20 year loan, instead of 30-year (if possible).

Maybe 3x your gross salary is a benchmark. I'm sure others will chime in on how to determine this.

[Singuy]

Buying a house is not always the best option even though your rent is 1200/month.

I don't know the market for Utah but what kind of house constitute as a starter house vs a house in an undesirable neighborhood?

For example, in Orlando..if you want a decent starter house in a good neighborhood then you got to fork out 200k+(1500 squareft, nothing too crazy). Renting at 1200/month also gets you into a decent neighborhood.

So you really need to sit down and see if buying is actually worth the money.

Say if you buy a house that is 230k in Orlando with 0% down @4% interest and 30 year mortgage.

Your interest: 766/month
Your PMI: 197
Home insurance: 67
Property Tax: 239
HOA: 100

Total: 1369
Tax savings: 294 from interest and property tax
Total money you are throwing away: 1075

So you are actually throwing away 1075/month vs 1200 a month.
This doesn't even include any house maintenance, increase in electricity, water cost, lawn care, pest control, and the 10k you will spend on closing cost.

As for your original question
I generally recommend a debt to income ratio of less than 25%(for mortgage) with 20% down.

Use this calculator to estimate your true cost of home ownership.

http://usmortgagecalculator.org/

[TexasHusker]

At your age, you buy all of the house that you can afford. Your earnings will only go up (way, way up) in all likelihood. I am 49, and I make about 18 times as much now as I did when I was 24, fresh out of college.

Unless your job or the housing market are questionable, you are indeed throwing money away each month. The calculations in the previous post to this do not factor that you are holding an appreciating asset. Even if it only increases 3 percent a year, in 20 years you are looking at a sizable asset. And if you pay it off in 20 years, you won't owe a dime on that asset. The previous post also assumes you are paying PMI at $200 per month. Put 20 percent down and avoid that altogether. As for HOA, $100 per month sounds pretty steep - find a nice neighborhood without that, like I did.

The only caveat is whether your future wife will work when the babies arrive. We made the decision that my wife would quit work at that point. You will get along fine on your income, provided that you have no other payments besides the house.

When I was in my early 20s, a financial adviser gave me this advice: Give 10 percent, save 10 percent, and live on the rest. We have followed that rule for 28 years, and we have lived, and lived well.

[LivingAlmostLarge]

I'm not sure i'm into the whole buy as much as you can when young. If something happens it would be a terrible situation to be in. I think the 25% of income a comfortable solution.

[clatoden99]

It's cheaper to buy a house than rent. My mortgage is half what the local rental rate is. And a mortgage is fixed while rent goes up over time. So after the first few years it gets pretty easy to pay.

The challenge isn't paying for a house, but saving up enough for the 10-20 per cent down payment. Which you have to save for over many years (or inherit from parents). It's do-able though.

[Fishindude77]

My advice would be to have an emergency fund set aside that isn't needed to purchase the house, put at least 20% down payment on whatever you buy, and stick to a 15 year mortgage.

Everybody pushes the 30 year mortgages, but I don't recommend them. Do you really want to be still paying for the place in your 50's?

[feh]

I'm not sure i'm into the whole buy as much as you can when young. If something happens it would be a terrible situation to be in. I think the 25% of income a comfortable solution.

+1

I completely disagree w/ the "buy as much house as possible" idea.

When determining what you can afford, use your income only, not both of yours. That way if a job is lost (or if somebody wants to stay home w/ kids), you won't be between a rock and a hard place.

[autoxer]

My hope is to not have to put any money down ...

Why? Your goal should be to put at least enough down to avoid PMI, because PMI makes it a lot more expensive.

My goal for my next house is to put as much down as possible, to keep my monthly payments down.

[Singuy]

At your age, you buy all of the house that you can afford. Your earnings will only go up (way, way up) in all likelihood. I am 49, and I make about 18 times as much now as I did when I was 24, fresh out of college.

Unless your job or the housing market are questionable, you are indeed throwing money away each month. The calculations in the previous post to this do not factor that you are holding an appreciating asset. Even if it only increases 3 percent a year, in 20 years you are looking at a sizable asset. And if you pay it off in 20 years, you won't owe a dime on that asset. The previous post also assumes you are paying PMI at $200 per month. Put 20 percent down and avoid that altogether. As for HOA, $100 per month sounds pretty steep - find a nice neighborhood without that, like I did.

The only caveat is whether your future wife will work when the babies arrive. We made the decision that my wife would quit work at that point. You will get along fine on your income, provided that you have no other payments besides the house.

When I was in my early 20s, a financial adviser gave me this advice: Give 10 percent, save 10 percent, and live on the rest. We have followed that rule for 28 years, and we have lived, and lived well.

1. While I agree that my calculation doesn't include the 3% appreciation(which is no longer guaranteed like the past which makes CD and treasure bonds a safer bet than houses), I also didn't include many cost of house ownership. Getting a starter house with the mindset of upgrading later will eat up your 3% appreciation from realtor fees and closing cost x2. You pay 10-15k for closing cost when you buy, you pay another 15-20k when you sell. If we use the 230k house as an example, that's 13% off the value of the house. So at 3% appreciation, you must stay in the house at least 3-4 years just to break even. Also the OP above said 0% down therefore the PMI.

If your interest, property tax, hoa fees, PMI and asset payments are lower than rent, then go for it! In my city, 800 dollars/month in rent for an apt can get you into a decent neighborhood but 800 dollars for mortgage gets you the ghetto.

2. I am not a huge fan of living off 80% of your money but this goes along with income. If you make little, then there's really no choice. If you make a lot, then you are just throwing potential away. My wife and I are totally opposite. We live off 20% of our income and save the other 80%.

[pflyers85]

My advice would be to have an emergency fund set aside that isn't needed to purchase the house, put at least 20% down payment on whatever you buy, and stick to a 15 year mortgage.

Everybody pushes the 30 year mortgages, but I don't recommend them. Do you really want to be still paying for the place in your 50's?

I agree. The 30 year mortgage is to home buying what car leases are to car buying. Some people have the restraint and knowledge financially to take the 30 year over the 15 year to be able to leverage the savings in their mortgage payment to invest in something that will return more than what they pay in interest. However, the behavior of the masses is to use the 30 year to buy a home that they otherwise wouldn't be able to afford with a 15 year.

[snafu]

A 20% downpayment is required to avoid expensive Mortgage Insurance [PMI] offers no benefit to you. Read documents very carefully because in some circumstances, mortgage insurance remains attached until the whole mortgage has been paid in full.

I think a lot of people are shocked by how much of their income is easily used up by housing costs with very little return on their investment. For the first dozen years, most of your money designated 'mortgage' actually goes to interest which is front loaded. Only a minuscule amount is applied to principal sum borrowed.

Added in your payment is municipal tax whose rate is determined on a formula of rate based on location and size of land times size and features of house. A lot of people roll homeowner insurance [fire/theft/sewer/flood] into the payment although it can be held with vehicle insurance.

You are responsible for heat, electric, water, sewerage, trash, and HOA if applicable. Landscaping and snow removal if you are in the snowbelt. If course as an owner, there is no 'super' to call if something breaks, electric, plumbing, carpentry bills are all expensively yours. I read you need to set aside 1% of the value of your home for annual upkeep.

I doubt you want me to tell you how many hours we've used up to do regular clean and organize and entire weekends to paint, decorate, update, repair and replace stuff that wears out or stops working.

Wishing you well...

[TexasHusker]

I bought my house - a 3500 sq ft custom home - in 2000 for $257,000. My payment was around $1800 per month when we bought it. The payment is now about $1950 per month, but the house is worth $400K.

Meanwhile, I own a rental house that is about 1600 feet, that rents for $1500 per month. It almost pays my house payment.

Buy all you can afford.

[Fishindude77]

Houses don't appreciate much in many parts of the country. And although the equity in a home can be significant, it's really not anything you can physically get your hands on until after you sell, and you may never get your hands on it, because you always need a place to live.

If you bought all you can afford when you purchased a primary home, I would interpret that to mean; as much as they will possibly lend to you, with as little a down payment as possible, and the largest payment you can possibly cash flow. How are you ever going to buy that investment rental property if you're strapped to an all you can afford house?

Buy something economical, that is easy to make payments on, pay it off quick and enjoy living mortgage / rent free while your peers are strapped to their monthly payments.

[TexasHusker]

How are you ever going to buy that investment rental property if you're strapped to an all you can afford house?

Because, unless the young man is an incompetent, his income will rise significantly in the next 5-10 years, while his house payment is going to stay roughly static, save adjustments for property taxes and insurance.

Rents rise just as houses do. When you are renting, you are on the wrong side of the math.