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    how much to spend on a house

    Im not looking to buy a house right now, but I want to someday. Ive heard that the general rule of thumb is that you can afford a house that is 2.5 times more than your annual income. So, if you and your spouse make a combined $80,000 a year, then you could afford a $200,000 home. Has anyone heard this or something different?



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    Re: how much to spend on a house

    I would think that would be possible depending on how you live.


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    Re: how much to spend on a house

    Quote Originally Posted by bpmcclain View Post
    Im not looking to buy a house right now, but I want to someday. Ive heard that the general rule of thumb is that you can afford a house that is 2.5 times more than your annual income. So, if you and your spouse make a combined $80,000 a year, then you could afford a $200,000 home. Has anyone heard this or something different?

    Figure out what you need based on what you need, not what you make. Kids or no kids? That is a huge variable right there because it will strongly dictate location. So many variables and this "income rule" --- whatever it is --- should be way down the list of factors. Since you'll want the negotiating power of being pre-approved with documentation in hand, the bank is pretty much going to tell you what you can afford anyway.


    Last edited by Senolcyc; 04-11-2011 at 04:35 PM.

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    Re: how much to spend on a house

    That rule of thumb does not take into account the interest rate on your mortgage or other debt, but I would say that it is close and conservative. When my wife and I bought our first home in 2007 our income was about $60k and we could afford a $250K home with a 5% interest rate, but we were only paying for one car and my tuition. If your income is near $80K then I would expect that you could afford something in the $225-300K range depending on debt.

    The post about children is a good point. We do not have kids, so that is a lot of money that we can save or put somewhere else. There are mortgage calculators that will tell you what your payments would be. I would take the previous posters advice and figure out what you can afford to pay toward your mortgage, then use that number as your maximum. Don't forget to put money aside for saving or a buffer.


    Last edited by jl112481; 04-11-2011 at 04:34 PM.

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    Re: how much to spend on a house

    Quote Originally Posted by bpmcclain View Post
    Im not looking to buy a house right now, but I want to someday. Ive heard that the general rule of thumb is that you can afford a house that is 2.5 times more than your annual income. So, if you and your spouse make a combined $80,000 a year, then you could afford a $200,000 home. Has anyone heard this or something different?
    Wow, that statement is about as vague as they come. Is that Gross or Net? What is your debt to income ratio? how much money do you have/want to have left at the end of the month? How much will you pay in utilities? property taxes?



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    Re: how much to spend on a house

    Quote Originally Posted by bpmcclain View Post
    Im not looking to buy a house right now, but I want to someday. Ive heard that the general rule of thumb is that you can afford a house that is 2.5 times more than your annual income. So, if you and your spouse make a combined $80,000 a year, then you could afford a $200,000 home. Has anyone heard this or something different?
    I've heard that stat too, and it's probably about right but there are so many financial factors that go into the purchase of a home. Other debt, what kind of debt it is, your credit ratings, spending habits, job security, how much you've saved for retirement, all those things matter. You can also Google front and back ratios to dig a little deeper into how much house you can afford.

    With good credit, even today banks will still probably lend you far more than what you feel comfortable with. My advice would be to buy less house than the lenders say you can afford. You can't go wrong that way.



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    Re: how much to spend on a house

    Quote Originally Posted by bpmcclain View Post
    Im not looking to buy a house right now, but I want to someday. Ive heard that the general rule of thumb is that you can afford a house that is 2.5 times more than your annual income. So, if you and your spouse make a combined $80,000 a year, then you could afford a $200,000 home. Has anyone heard this or something different?
    Another piece of advice: buy your second house first. In other words, if you want to buy a house just for the sake of buying a house but think you'll outgrow it or your needs will change in 3-4 years, just wait another year or two, keep saving, and make that second house your first purchase. You'll save a lot of money by only moving once, only originating one mortgage, and not sacrificing equity in your first home to a realtor to sell it.



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    Re: how much to spend on a house

    Quote Originally Posted by jl112481 View Post
    That rule of thumb does not take into account the interest rate on your mortgage or other debt, but I would say that it is close and conservative. When my wife and I bought our first home in 2007 our income was about $60k and we could afford a $250K home with a 5% interest rate, but we were only paying for one car and my tuition. If your income is near $80K then I would expect that you could afford something in the $225-300K range depending on debt.

    The post about children is a good point. We do not have kids, so that is a lot of money that we can save or put somewhere else. There are mortgage calculators that will tell you what your payments would be. I would take the previous posters advice and figure out what you can afford to pay toward your mortgage, then use that number as your maximum. Don't forget to put money aside for saving or a buffer.
    Did you get that interest rate with a 20% down payment?



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    Re: how much to spend on a house

    It's hard to give good advice like this without knowing your full financial situation. You are best seeking the assistance of a financial advisor on this (as in someone associated with investing and financial planning not someone that works for a bank or mortgage company.) Some people have credit card debt, student loans, and car loans to factor into what you can really "afford" and the bank usually will approve you for more than what is practical with your financial situation too. Your lifestyle and spending habits also figure into this too and you also have to consider a new home means having to be able to afford to furnish it too. Everything from furniture, to window coverings, lamps, rugs, lawn mower and tools, etc. chances are whatever you currently own isn't going to furnish a house entirely and you are going to spend a few thousand dollars fairly quickly right off the bat getting what you need.

    Even years after I bought my first home, after I got married my wife and I talked to a financial planner since now with combined income and assets our situations had changed and he helped us map out a plan to pay down debts quicker without eating into savings or drastically altering our spending habits and we've paid off quite a bit more than we thought we would by this point by putting more money down on 1 debt at a time then "rolling over" the money that was budgeted for a debt now paid off into the next one in line which in turn pays that one down even quicker. What the bank tells you can afford and what you can "actually" afford are 2 different things.


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    Re: how much to spend on a house

    Quote Originally Posted by Senolcyc View Post
    Figure out what you need based on what you need, not what you make. Kids or no kids? That is a huge variable right there because it will strongly dictate location. So many variables and this "income rule" --- whatever it is --- should be way down the list of factors. Since you'll want the negotiating power of being pre-approved with documentation in hand, the bank is pretty much going to tell you what you can afford anyway.
    The bank always oversells it. When I got pre-approved they gave me a value about 50% higher than the number I came up with myself. I could have afforded it, but it would have meant giving up season football/basketball tickets, cyclone club donation, other charitable contributions and much of my other entertainment dollars.



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    Re: how much to spend on a house

    Good points by all. 2.5 times is a blanket statement that doesn't apply to all. My wife and I are a perfect example...

    We are 2 years out of school with no kids. Our combined income is probably around $100k. However, we have a lot of school debt. So, we bought a house worth around $130k.

    I keep a pretty tight handle on our spending and have a detailed budget spreadsheet. So, I looked at our monthly spending and determined what mortgage payment we could afford (interest, taxes, insurance, etc) and still have a little bit of a buffer at the end of the month (a few hundred dollars).


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    Re: how much to spend on a house

    Figure out what the payments would be on a $200K house including insurance and taxes. Then start putting that money into an account that you can't touch while still paying the rest off your bills and saving for retirement. Then imagine that your wife/husband loses their job. Could you still make the payments? If you can do this for 6 months without much pain then you probably can afford that house. Yes it's conservative but when my wife lost her job it made me feel a lot better knowing that we could make it just on my salary and her salary is very close to mine.



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    Re: how much to spend on a house

    Quote Originally Posted by clone52 View Post
    The bank always oversells it. When I got pre-approved they gave me a value about 50% higher than the number I came up with myself. I could have afforded it, but it would have meant giving up season football/basketball tickets, cyclone club donation, other charitable contributions and much of my other entertainment dollars.
    The bank and a relator will both try to over-sell you. When I bought my first home I had a pretty good idea what I could afford, once my relator got word on what the bank approved me for which was much more than the price range of homes I was looking at she was trying to talk me into upping the price range I was looking at just because the bank says I could "afford" more. That's BS, only you know your spending habits better than most people and know what you can afford when you start crunching the numbers. I stood pat on my price and looking back I'm glad because some months with ultilies or repairs you'll wind up having to pay for randomly, that little less a month can go a long ways sometimes plus the initial hit of buying everything you need just for upkeep that comes with owning a house adds up quickly too.


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    Re: how much to spend on a house

    Quote Originally Posted by bpmcclain View Post
    Did you get that interest rate with a 20% down payment?
    No, but banks were not as strict at that point. We were able to find a bank that only required 10% down.



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    Re: how much to spend on a house

    You should check out this website that Bank of America has to determine what you can afford based on everything including your budget. I've been working on trying to figure out how much my fiancee and I are going to be able to spend on a house this year, and it's got pretty much everything that you'd need to think about. Good tool to just mess around with and get an early idea of what you could realistically afford.

    Bank of America Home Loans



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