How much can I spend on buying a house?

[maptome]

We're in the process of looking at homes and our finances and deciding how much to spend. I'm seeing online 30% of gross monthly income.  Ultra conservative FIL says your house should be 2.5 times your gross yearly income.  These two numbers are VERY different.

So, in figuring out how much house we can afford, how much should we be cushioning for savings?  Can we less conservative because I will most likely be contributing to our income once my youngest is in school?  Market and interest rates are low now, should we be speculating a bit and spending more?

The reason why I am so confused about this, is that DH has been looking at jobs in Silicon Valley and Seattle, and we currently live in Texas.  The real estate markets are very different.

Currently, we only spend less than half of DH's net income.

Here's us now:

Single-income. We have a 3 YO and 8 MO. We're 30. 

DH makes  a hefty 401k contribution, which is deducted from his paycheck.

Here's what we have saved:

EF. DH insists on 2 years net income, which I find to be absurd.  But that's what we have.  This is in money market and short-term bond funds.

Fully-funded college accounts to pay for both kids for in-state college.

Goal-specific savings for cars, vacations.

We also both have retirement accounts.

Plus cash for a down payment.

How do we figure out how much to spend?

[CarlyVHT]

I've always found it easiest to do a monthy budget with your current spending and savings goals build in, then from that you can figure out how much you can comfortably put toward a mortgage. Then figure out a purchase price based on current interest rates & your downpayment that will yield that monthly payment. Since you guys seem like BIG savers, you may even want to figure in some monthly savings for household things that come up when you own (things breaking, repairs that come up, etc). For us, we don't do that specifically, but we have enough leftover every month that those things don't generally impact us too much. We do try to do some saving for bigger things: like if we knew we were going to need a new roof in a few years, etc.

30% of income has always felt uncomfortably high to me.

2.5x yearly income seems a bit arbitrary ... but when I calculate it out, that is roughly what we spent on our current home after the downpayment. I think that's kind of a silly way to come up with a figure though :)

[katelove]

I wouldn't go over 30% of your current income. Interest rates are good at the moment but that is unlikely to last for the term of your home loan so unless you know for sure that you can make some big payments off the principal then you need to factor in an increase in your initial payments.

We always make sure we can pay a little bit over the minimum repayment to help get the principal down faster as well.

[erigeron]

Originally Posted by katelove 

I wouldn't go over 30% of your current income. Interest rates are good at the moment but that is unlikely to last for the term of your home loan so unless you know for sure that you can make some big payments off the principal then you need to factor in an increase in your initial payments.
We always make sure we can pay a little bit over the minimum repayment to help get the principal down faster as well.

That only applies if you get an ARM, and there's really no reason to do that. A fixed-rate mortgage will stay at the same payment. 

When figuring out how much of your income you can spend on a house payment, be sure to factor in taxes and insurance... those are a big chunk for us. :/

[chel]

Our house is also 2x yearly income and about 25% take home pay goes to mortgage/tax. Currently living in a high col area.
In lower col area house was 1x yearly income.

[A&A]

30% of monthly income was the old advice.  The "gurus" now state that no more than 25% of your monthly income should go to housing, if possible.  

[CarlyVHT]

And DEFINITELY go with a fixed rate loan. It would be extremely unwise to get an ARM (adjustable rate mortgage) right now when interest rates are so low!

[ItsBasilThyme]

We live in a HCOL area (sf peninsula) and stayed with the 2.5x annual income rule. It was hard because a lot of our friends out here were telling us that no one stuck to that rule here - everyone does 30% monthly gross because it's so expensive.

Honestly, I'm so glad I didn't listen to my friends. We're comfortably saving, and have enough room in our budget for most realistic emergencies. If we had done 30% of our gross, our house payment would have been something like 50% of our take home - maybe more. That may be doable as a renter, but knowing how much can break in a house, I'd feel really uncomfortable.

Anyway - you mentioned silicon valley and Seattle, so you'll probably hear a lot of the same advice i did. Personally, I think it's nuts to choose to spend that much on housing.

[laura-belle]

We live in the Silicon Valley and also "under bought" compared to what other people thought that we could afford. Our minimum required payments for all housing expenses are 26% of gross (we currently actually spend 37% because we are aggressively paying down the mortgage). Even at the higher payment rate, we are pretty comfortable. That said, I would absolutely not go over 30% of gross on required payments for all housing expenses, and I think that 25% is much safer.

A couple of things to consider, since you're coming from Texas: 1: Housing prices in either location that you mentioned are going to seem obscene, especially when you see what you get for the money. 2: You will probably have at least a 30 minute commute and gas costs a lot more here than it does in Texas.

Good luck!

[maptome]

Thanks all!

What about investment income? Do you count that in approximations?

@laura-belle and @itsbasilthyme, Do you have other debt that you are paying off as well? Do you homeschool, public school, or private school?

@laura-belle, We used to live in south Orange County, so I totally get the vast difference in real estate market.  We chose to live in Austin, because it's nice and so darn affordable.

[laura-belle]

We automatically reinvest all investment income and consider it part of how our investments grow, so no we do not count investment income in our calculations. If you have investment income that you normally treat as incoming cash that is available to spend, I would count that in your calculations.

DH and I have no debt beyond our mortgage. I am (barely) pregnant with #1, so we don't have education expenses yet. We paid for IVF out of less than a year's extra cash, so I think that even with kid expenses we are ok for Catholic school if we don't end up homeschooling (and don't move to a better school district).

[Buzzbuzz]

Out of curiosity, have you met with an investment planner to discuss what you should be saving for retirement versus what you are saving?   I found having those numbers in front of me to be helpful when we were figuring out how much we wanted to spend on our house. 

I did feel that we were generally ahead of many of our peers in terms of savings (as you seem to be as well), so having a reminder that while we were ahead, we certainly weren't done on the savings front really helped me focus on what would really work for us economically.