How much to spend on a house

[maptome]

Backstory: I don't like where we currently live. I wish that we had spent more money on a house in a nicer part of town, but this was our first one, and we were being too conservative. Every month, we spend less than 25% of DH's salary and put the rest into savings and investments. That's for everything, housing, food, taxes, etc. I want to get the nicest house we can comfortably afford.

Anyone know a good way to calculate how much to spend on a house based on income? I don't like the 25% of income rule because it doesn't make sense for all income levels. Or, convince me that it makes sense... Or, is it just way to hard to generalize, and in that case, how am I supposed to know? Trial and error does not work for mortgages.

TIA!

[nola79]

Well, I am no expert, but I would start with how much you are comfortable paying each month on the mortgage and then match that up with housing prices to see what is out there and affordable for your family.
I don't know of any formulas or specific percentages besides the 25% you had already mentioned in your post. Good Luck with it!

[tinuviel_k]

We are right in the middle of purchasing a house. I also am not in love with the "percentage of income" model because I feel it doesn't take into account enough factors.

*What I did was calculate and track ALL of my monthly expenses, including general non-budget spending. This included current rent/mortgage, utilities, groceries, activities, debt payments, clothing, recreation... anything you'd spend money on. I estimated high and totaled it up.
* Then I calculated all of our annual expenses, including projected auto maintenance for the year, once-a-year bills and membership fees, CSA and bulk food payments, and the like. I also gave us a vacation budget.
* I took these annual expenses and divided them by 12 months, and committed to put that total in special savings accounts for those purposes each month. ($225 a month for annual expenses, $150 for auto maintenance, $200 a month for vacation fund, etc).
* Next I calculated how much money we wanted to put into savings each month. We decided $500 a month until we have 6-12 months expenses saved up was a good place to start for us.

I added my monthly expenses, the monthly-annual expenses, and our savings, then added a few hundred bucks for padding. This gave me a total of what we actually spend to live on a monthly basis.

At that point I took a realistic look at our income. I subtracted all of the above expenses from our income. I took the amount left over as "surplus" income.

Make-believe Example:
$4800 -Monthly take-home income
-$3500 - All monthly and divided annual expenses
-$500- money for savings

=$800 surplus income to apply to mortgage and house related expenses

So with this scenario I could justify adding $800 a month to a mortgage payment. Say the folks in this scenario had been paying $700 a month for mortgage. They might now feel comfortable taking out a $1500 a month mortgage, knowing that they could cover all of their expenses and savings goals.

If the people in this scenario had been renters I would say that they would be smart to take out a mortgage for up to $1300, and put the extra $200 a month into a savings account for eventual large home repairs.

[MyTwoAs]

How much to spend is a personal comfort issue. Some aren't comfortable with more than 25% of monthly net and others go with a percentage of gross. I'm not sure how these percentages don't make sense for all income levels, though. Can you please explain what you mean by that?

Our current house payment is only about 12 percent of gross and 17 percent of net. We are in a nice house/neighborhood but our income has tripled since we moved in 8 years ago. We are paying off consumer debt before we move but we will probably go up to about 30% of net as the top end of our budget.

[maptome]

Originally Posted by MyTwoAs

...I'm not sure how these percentages don't make sense for all income levels, though. Can you please explain what you mean by that?...

If you make $1000/month, surely you would have to spend more than 25% on housing. Also, if you make $20,000/month, you could probably spend a higher percentage on housing. Your gas/food/utilities/medical/childcare wouldn't be 20 times more than someone who makes $1000. So those kinds of need-based costs would be a smaller percentage of your budget, thus leaving more for housing. I think the 25% rule is probably good advice for people in the middle-class, which is most people, but not everyone.

[MyTwoAs]

Gotcha, thanks Pearl. That makes total sense.

[TiredX2]

Originally Posted by Pearl H

Anyone know a good way to calculate how much to spend on a house based on income? I don't like the 25% of income rule because it doesn't make sense for all income levels. Or, convince me that it makes sense... Or, is it just way to hard to generalize, and in that case, how am I supposed to know? Trial and error does not work for mortgages.

ITA

First, here are some other threads that have covered this topic (it's a popular one ):

Mortgage and Income
What percentage of your income is your mortgage?
How much would you be comfortable paying for housing?
Would you buy a house without 20% down?

For us, we lived in an appartment before buying our house. So, it was a relatively simple matter to look at what we were currently paying towards rent and what we were currently saving for our house, add them together and say "that's what we can pay for our mortgage (including insurance & taxes)." Now, there are other things to take into account (increased utilities, repairs, etc... but those were balanced by being able to itemize deductions in our case) but it worked well for us. We did run the more complicated calculations (to make sure the "other" expenses and benefits would balance) but it worked out fairly well.

We originally went with a 30 year fixed mortgage. When interest rates fell (this was in 2003) we refinanced to a 15 year fixed. At our most "lean" we were paying 65% of take home pay to the mortgage. That was definately tight but totally doable. But we knew it would be doable because we *knew* (from tracking our expenses) that we could live on 35% of DP's income. Because we are in a HCOL area until we are rid of our mortgage we will never be in a "great" mortgage payment place, percent wise, but it is totally comfortable for us. I think I could make a pretty good arguement that it is an appropriate level of mortgage debt given that we have been paying on it for 8.5 years and it hasn't given us problems AND we are on track to paying it off entirely within 15 years (we paid extra towards the principal to bring it to a place where it was like we started with a 15 year mortgage--- we did that because if things go as "planned" DD will start college exactly 15 years, 1 month from when we moved in and we'll suddenly have another giant cash suck ).

Now, personally, I feel your home is not just a financial choice so I don't think you should calculate what you can afford according to some random set of numbers and buy a house that fits. Instead, you should put everything together and find what fits your values and goals. For you, I would argue that if you are living on less than 25% of your income you already have a great background of budgeting and saving and I would take your word for it if you thought something was a good financial fit for you.

Good luck!

[RollerCoasterMama]

So you currently live on just 25% of your income? That puts you into a fantastic position to make some cool choices! Think about how much more there would be to invest and save if you had a paid off house? If I were in your shoes, I'd play with the numbers a bit. If you redirected some of that 75% surplus income into pay off your current mortgage and getting a great down-payment...you could take advantage of the great deals out there for buyers. So instead of thinking about what mortgage payment you could afford, you'd think about in terms of how quickly you could pay off that house. Then you'd be sitting in a really enviable position! No mortgage! And if you ever wanted to move again, that whole sale price comes to you to put into your next house. A few years of redirected financial priorities would put you in a really neat position for the rest of your lives!

Just a thought! (I am really hoping I can start that same plan in a few years!!)