What you can afford will depend on who you talk to. In my opinion, one of the worst things you can do is let your home own you. Being “house poor” doesn’t make a lot of sense for most people. There are a few situations, where I think it is okay to push a home purchase, but not many.
First of all, I am not a fan of the moving every couple of years home plan. There are significant costs with buying and selling a home. If you aren’t sure you want to live in an area for at least 7-10 years, you might need to rent instead.
Ideally your debt/installments payment to income ratio should be less than 35% of your total income.
A sample scenario:
A couple with two children makes $100,000 a year in gross income. They have one car payment and own their other one. They both work and pay daycare expenses every month. They have no other debt.
$100,000 means $35,000 can go towards debt/installment payments.
Their car payment is $400 per month which is $4800 per year.
Their day care cost is $12,000 per year
Remaining amount available for a mortgage payment, property taxes and insurance $18,200.
This is a monthly mortgage payment of $1516 per month. In Oregon we have higher property taxes and income taxes since we don’t have sales tax. $400 should be left for property taxes and insurance. Which leaves $1116 per month for the actual mortgage payment and interest.
So with a 30 year fixed rate of 6.25%, buyers with these criteria could safely have a mortgage of $181,252. If a buyer has 10% saved up that means a home selling for around $200,000 and if they have 20% that is a home purchase around $220,000.
That doesn’t sound like a lot for a couple making $100,000 a year, but it is the smart choice. Life happens. The question is when life happens badly for you, do you want to have to move out of your house too.
Now most lenders aren’t going to take into account daycare expenses and other “regular” payments into your home purchase, but you should. If there is one thing that the current market has taught homeowners is that speculating on home prices is risky. The fundamentals of budgeting were overlooked in the past few years and the consequences are obvious.
(c) Copyright, 2008. Melina Tomson, All Rights Reserved (ie…be nice and create your own content. Don’t steal mine…)