How Much House Can You Afford?

We are, currently, saving up for our first home’s down payment. Our goal is to have $50,000 in savings by the time we start looking for a home. $30,000 will be for our down payment, and $20,000 is our general savings account. I have projected to be at our target by September. Right now, we have $36,500, and we are only $13,500 away from our goal. Our lease ends at the end of December, and I’m hoping we start the house searching process in early August.

I have been calculating what we can afford for a home and looking on Trulia.com to see what houses are on the market.

Most lenders propose the following guidelines to arrive at an “affordable” home price:

  • Allow a total debt-to-income ratio of no more than 36 percent.
  • Assume a housing payment-to-income ratio of 28 percent for a conservative estimate and 33 percent for the aggressive one.
  • Don’t forget to add property tax, homeowner’s insurance, and maintenance fund to your monthly expenses.
  • If you place a downpayment less than 20 percent of the purchase price, be prepared to factor in private mortgage insurance. This can average $50 to $80 per month.

Honestly, I think the figures are pretty high, and I can see why people got in trouble in 2008. I have calculated the maximum amount I want to spend/buy is a total of $150,000 including all closing costs, etc. I do not want to go over this amount. We can take a 30 year mortgage, and pay roughly the same amount we are paying now for our rent.

I understand our other costs will go up. After all the home will be bigger, maintenance costs will suddenly appear, and we will probably have an HOA. Our house will probably be farther away from my work, which means my transportation costs will, also, increase.

I’m considering all these costs as I try to figure out what kind of house we can get.

If our house costs $150,000, and our property taxes are $3,000 a year (typical of the area we live in), and our homeowner’s insurance is $1200 a year, I have broken out how much we will be paying below per month:

House: $150,000  Down Payment: $30,000  Loan: $120,000 Annual Tax: $3,000 Annual Insurance: $1200 Interest Rate: 4%

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Total PITI Payment of $922.89. Right now we pay $876 for our rent, and it’s doable. $876 is about 15.8% of our net income (after tax, and other deductions). Our new PITI payment would be roughly 16.3%.

Our electricity will probably double to $120, adding $60 to our expenses. I expect transportation costs to go up by $100. We will add $100 to a monthly maintenance fund. Frankly, I’m estimating our monthly expenses to go up by $300. Of course I will always try to figure out how to lower our expenses.

I actually fell in love with a house on trulia.com. Asking price is $148,000. I love the layout. It’s 3 bedroom/ 2 full bath, 1,470 square foot home. The master bedroom is upstairs, and it’s separate from the other bedrooms, which is what we want. CLARIFICATION – We have not bought a house yet. I’m just online browsing at the moment. 

 

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For homeowner’s: Did you figure out how much house you could afford before you bought your home? Are your expenses higher than you thought they were going to be? Any advice?

For soon to be homeowner’s: Are you searching for a house? What are you looking for? What’s your price range?

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32 comments

  • Wow. Your housing situation is almost exactly like mine. My bf paid $150k for his house 6 years ago and put $30k down. As long as you avoid PMI, I think you will be good.

  • Jessica Rodriguez

    It’s so funny you mentioned this I was looking into this very subject yesterday as we want to save up for a home too, although my number in NYC are daunting I think I can start calculating with the info in this post!. Good job :) and btw the house looks amazing !

    • Savvyfinanciallatina

      Right? Of course, it’s just pictures. I wonder if the house looks just as amazing in person. Real estate in New York is no joke! You can start saving up for a down payment. You never know, you might relocate for a job to a more affordable city, then you will have the funds to put a house’s down payment.

  • Wow, that’s a nice house. I think putting 20% and avoiding PMI is the first step. Houses in Texas is sooooo cheap. :)

  • Definitely an American house. That house in Canada near Toronto, would be at least $800,000….

    So for $150K…WOW.

  • Where I am, that house would be like $600,000! Crazy how geography changes things, isn’t it?!

    I bought a condo last year. I was paying about $100/year for renter’s insurance and that only went up to $200/year for condo insurance. So it might not cost you $1,200/year for homeowner’s insurance. My electricity costs have been WAY more expensive than I’d thought. I figured they’d stay about the same. But my bills have varied from $120 to $240 for two months, which is 2-4x what I was paying in my last apartment. That’s been the only surprise though, which is pretty good compared to some people.

    Yep, I spent a ton of time figuring out how much house I could afford before I bought. Here’s one of my posts on it: http://leightpf.wordpress.com/2011/12/21/deciding-how-much-i-could-afford/

    I would find a mortgage company and get a mortgage quote online. That should give you an idea of how much closing costs are! Chase or Wells Fargo should have a “custom mortgage quote” thing on their site.

  • I am jealous ..here in South Florida it’s so damn costly!

  • My electric bill was extremely high, $350 in the summer months for a single guy in a 2300 sqft home. I was determined to downsize into a 1400 sqft home which cut my electric bills in half.

    It was a nice home until the airport decided to include a flight path over my home. I also noticed my neighbors moving and renting out their homes to section 8 renters. Suffice to say my wife and I would like to move.

    Our next home will be as close to a dream house as possible with our limited funds and income. We are going to max out the amount the lender will approve us for with a 20% down payment. It will be a single story, 4 bed, 3 bath, 3 car garage, with an open concept great room/kitchen, and huge walk-in closets. It will probably measure 2500 sqft but we plan on buying new and upgrading the insulation and air conditioning unit to minimize the utility costs. I hope to upgrade the finishes of the home to include nice cabinets, countertops, and flooring. I also want a spa-like master bathroom. The HOA and gated neighborhood will probably cost another $150 month. We are HOPING that our expensive neighborhood will yield us better neighbors than the current ghetto ones we have now.

    • Savvyfinanciallatina

      We definitely don’t want a house bigger than 1500 sq. ft Don’t know what we would do with all that space.

  • Don’t discount the energy loss due to high ceilings- it’s big!
    We had a range that we were comfortable with, and bought a fixer upper on the low end of the range.

  • OMG….I wish I could get a house like that for a price like that here in Boston!!!

    I definitely crunched all the numbers possible before making my purchase. I also saved enough to have an in-tact Efund like what you’re doing, and I saved extra for moving, furniture and miscellaneous repairs/upgrades. I couldn’t be happier about how the hours of planning paid off.

    So excited for you!

    • Savvyfinanciallatina

      Boston is expensive. I have a friend there and says rent is crazy expensive. I know properties are way worse.

  • Pretired Nick

    My rule of thumb is if you can’t afford the 10-year loan, you’re buying too much house. But, also just ignore the online calculators, they’re worthless. Just really analyze what your needs really are and resist falling in love with anything. I just wrote on this topic myself:
    http://pretired.org/the-system/how-do-i-know-how-much-to-spend-on-a-house/

  • That’s awesome! Congratulations. What I wouldn’t give to have that kitchen!

    • Savvyfinanciallatina

      Huh? What…Oh wait I did not buy this house if that’s what you are congratulating me for. It’s just a house I liked on trulia.com. We haven’t even started the home search.

      • lol I mean congrats on the “process” of buying…I say that because I have NO idea what that feels like. :) I knew that wasn’t your kitchen…I still would die for that kitchen (whoever’s it is)! I wish I could offer more on the process of buying…but that’s not in my wheelhouse. :)

        • Savvyfinanciallatina

          LOL Gotcha! Welp…looking at houses online is a start. Although it kinda makes me want to have a house now. :)

  • First off, here in suburban Chicago that house would be MUCH more expensive, like $350k with $10k annual taxes!
    As for as a home budget is concerned, I think far too many people just go by what they’re told they can afford, and just spend that much. In reality, I think it’s important to factor in job losses, potential health issues, etc. In other words, go conservative and don’t stretch for a house.
    Homes invariably cost more than a first-time homebuyer thinks. That was my experience, based on the costs of upkeep and repairs. Factoring in maybe 3% of home value for annual maintenance and future repairs may not be a bad idea.

    • Geography definitely influences the cost of a house. We are going conservative with the purchase of our first home. Especially since I think this will be our first home in our real estate portfolio :)
      I know a lot of people who are house poor and we don’t want to be them.
      Thanks for stopping by!

  • It sounds like a $150k house is well within your means. Great analysis!
    We’re not ready to buy yet, but are hoping to buy a home in the next 3-4 years. I’ve worked up a lot of calculations to see what our mortgage payment would be in various scenarios. I know homeownership is far off for us, but I like to plan ahead.

    I’ve also read that a good rule of thumb is that the total purchase price should not exceed twice your gross household salary. We’ve figured out what we can afford based on this calculation, and we’ve looked at homes (online) in that price range.

  • My advice is to spend wayyyyyyyyyy less than the bank will loan you. It sounds like you are doing that. I have a lot of friends who are house poor and their options are limited. Having a cheap house payment means that you have more mobility and freedom to make huge life changes if desire to do so.

    • We are spending less than we could afford. I’m sure the bank would approve a much larger mortgage, and technically we could afford it, but I don’t want to be house poor. Plus, we don’t need a bigger house.

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