Over the years my husband and I have lived in homes that were perfectly within our means, while others stretched our pocketbooks a little. Finding the right balance to what you can afford depends on more than just your income or how much your downpayment is. Here's a few things to keep in mind:
The highest most real estate agents suggest that your rent or mortgage consumes of your gross income is 36%. For some that may sound high, while for others that might seem low — it really depends on where you sit financially and the places available in your neck of the woods.
Many landlords verify that you make at least 3 times the monthly rent (and even run credit checks to verify that you don't have any loans waiting to suck your cash out of their hands). Others aren't as strict on the issue — leaving those with less income a little wiggle room.
Although money and income have been a concern when house and apartment hunting, there are other things to consider. When looking into the amenities of the area, things like grocery stores (and their prices), proximity to a laundromat, mass transit and retail shopping are all things to take into account.
From personal experience, just because you make 3 times the amount in rent, that happy home hunting parachute can quickly be shot down if your groceries are 3 times the price as other stores. Although it sounds small, tripling your budget for certain items (or gas to drive places) can really add up quick. Other things to be on the lookout for are necessary immediate repairs, landscaping (equipment or services), community fees, parking or Home Owner dues.
Finding yourself in a situation where you're paying more than you can afford comfortably isn't fun for anyone, no matter how great the space is (trust us, we've been wooed by accommodations and walk in closets before!). Even if you think you can tough it out and tighten your belt a little, the stress that comes from such an environment is off the charts.
What other things add up when looking at apartments or new homes? Did you once find the perfect place and try to swing the higher price, or are you ok with settling for something that is truly within your means to afford yourself the little luxuries life has to offer? Let us know below!
Image: Flickr member Cliff1066 licensed for use by Creative Commons
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The personal finance gurus suggest that your housing costs should be about 30% of your net income.
When I applied for my mortgage, I asked for an approval up to 200k which I got with no issues. Out of morbid curiosity, I asked the broker what was the max they would loan me. When he said $350k, I laughed at him and told him he had no business lending me that much money. And this was AFTER the market crash.
Oh, and I ended up spending $135k on a foreclosure/fixer-upper.
"The highest most real estate agents suggest that your rent or mortgage consumes of your gross income is 36%."
Used to be the payment guidleines were 25% of monthly after-tax income with a minimum 20% cash downpayment unless you went w/ a VA/FHA loan.
No wonder so many folks are getting foreclosed.
This drives me CRAZY: On HGTVs House Hunters, the first house the Realtor shows the client is almost always higher than the maximum of the price range given. Why do they do that? Or, perhaps a better question: why do the buyers put up with it?
Because House Hunters is taped after the prospective buyer has already purchased a house. Sorry to burst your bubble, but the other two houses aren't in real contention. A couple on that show bought a house in our neighborhood and they were already under contract when the show was taped.
my mom should read this, she pays 4 times the amount in gas since we moved, maybe more. My step-dad also has to pay somewhat more just to get to work.
and if I need to go somewhere(I'm 17 and carless)? well it costs my mom.
and why did we move to the middle of nowhere? To save a few thousand on somethign we didn't need in the first place.
when i'm home hunting i always look at things above my price range to see what one gets for the extra $$.
when searching for my studio 4 years ago, i thot i knew for sure what my upper limit was until i saw the wonderful place i own now and went up 10% cos it was worth it to me. that put me at just about 35% of my *take home* pay and my income has gone up enough that i'm now down to 30%.
in other words, you might not know what you're willing to pay for--in my case, top floor, 2 blks to subway plus easy access to good restaurants & organic grocery store--until you see it. while i did do the math to make sure it was indeed possible to pay my mortgage & still live a decent life, i have never once regretted stretching myself a bit and getting the place that made my heart sing.
it's also worth thinking about the trajectory of your income. i was young enough that i knew it would only go up and it has (knock on wood). however, i'm now about to search for a bigger place with a partner who's considerably older and maybe only 10-15yrs out from retirement, so while my income may grow for 2-3 more decades, his probably won't. we are planning on a 15yr mortgage instead of 30yrs which will mean less house and higher monthly payments, but i think it'll work out fine :)
I love our new, much larger home. But furnishing a larger home ain't cheap!
Definitely think ahead. Can you swing the rent/mortgage on one salary if someone loses a job? For how long? Are you planning to have kids? What are local child care options? Thinking of getting a dog? What will it take to fence in the yard?
I'm all for buying below your means, but a family member regrets not stretching on their first house fifteen years ago for the reasons k in ditmas says. They and their salaries would have grown into it, but now they can't afford the dreamier house. But if you go that route, use YOUR plans and salary potential as a guide, not some sense of what the housing market is going to do.
If you're looking at a fixer upper, get a sense of construction/landscaping costs in your area - they do vary by region - and add it to the cost of the place. Don't rely on HGTV!
And think of your life priorities. Would you rather save $200 a month and take a sweet trip to Europe/Hawaii once a year, or would you rather spend more year round and stay home?
From experience working in real estate, then subsequently in home mortgage & home equity modification departments...take note:
PLEASE PLEASE PLEASE do not purchase/rent a place that is going to cost more than 30% of your income.
if you do, you're setting yourself up for a big mess if an unexpected expense comes up.
i speak with customers on a daily basis that overextended themselves, not only on their home but with auto loans, credit cards, even taking out home equity loans to buy things they didn't need. if you're purchasing a home, you should be financially savvy enough to know this isn't a good idea. and if you're not financially savvy, find someone that is to handle your expenses, or just don't buy. it's VERY difficult to prove that you're in need of assistance if you've got thousands of dollars in debt that you racked up because of your incompetence.
also, to be safe...if you're renting, make sure that this rule is in effect EVEN IF you share a roommate. because let's face it, roommates aren't always forever...and if they move out, you're left holding the bag.
"Experience of 30 years, owning 5 houses/condos and never losing money: with all the usual considerations, buy the best you can just barely afford and grow into it - your income will increase, mortgage payments decrease."
Um, that's what got people into this mess - Buying more than they could afford and their rates & payments going up, not down...
...and now as values continue to drop all over the country, it's not getting better but worse.
"And think of your life priorities. Would you rather save $200 a month and take a sweet trip to Europe/Hawaii once a year, or would you rather spend more year round and stay home?"
I agree with that - I love taking major trips 2-3x a year: This past winter it was a 2 week cruise to Hawaii, this coming it's a 2 week cruise to the Caribbean and next fall, 3 weeks in Europe...
...definitely worth it for me to have a smaller/more affordable space so I can afford those big trips!
and don't listen to ladymantle.
income is NEVER GUARANTEED to increase and mortgage payments are NEVER GUARANTEED to decrease.
that's just not accurate or intelligent in today's market.
Wow, some people... Heard about loads of people being unemployed all over the world thanks to intelligence level zero in some parts of the world?
Lots of entitled 90s-era Gen Xers (and older) post on here I see. In America in this day and age, steady income is not a guarantee, home values are not a guarantee and certainly INCREASING income beyond inflation (if it's even possible anymore) are not a guarantee.
Good lord people. If you don't work for a company that actually MAKES anything, and chances are you don't, your job is not secure. Some of these comments made me want to barf. Ahmygawd, should I go for the annual Europe vacay or gaht the place with the Subzero fredge? Or the $1500 show quality French bulldog puppy for dog park validation?
Something else to consider when buying a home and calculating affordability is that a monthly mortgage payment does not include maintenance, a new roof, water heater, dishwasher, etc.
We bought our current house at the height of the housing boom (were moving for jobs and couldn't help it). Our major guideline regarding price was could we afford the house on one income. Even though we qualified for a higher amount, by focusing on one income, we had the security of knowing we could always make the house payment (hubster is a tenured full professor so the chances he might lose his job are slim to none). We got a great house in a great neighborhood; while we are a bit further from our uni. than we would like (about 15 minutes by car versus 15 minutes on foot), we got twice as much house as we could have afforded by the university, have been able to do upgrades as wanted/needed, and can afford to enjoy our lives rather than suffer with being house poor. IT is so nice not to have to worry about whether we can make the house payment.
Ahaha, 30% of your net income? Don't move to Australia.
Housing bubble here hasn't burst and doesn't look likely to in the near future, it's ridiculously unaffordable because no govt has the balls to do something about it or they'll upset the rate payers.
Interesting perspectives on this post. Every financial institution is going to be different, but as a soon to be CPA, we are taught to advise 30% of income towards mortgage and utilities.
I have followed Apartment Therapy via Google Reader for a long time, and this post finally made me register (mainly because of the picture).
I love this home, and need it in my life. Does anyone have any information about it?
Hey renters! What do you think of all this?
My rent and utility bills is 16% of our take home pay. It used to be around 12% before my husband was laid off. We rent in an awesome neighborhood, are on the major bus line, 2 blocks from grocery store, car share (we ditched the vehicles) etc. It takes 10 minutes to get to work by bike, 15 by bus. We looked at buying in another neighborhood with the same conveniences. (the hood we're currently in is extremely expensive to buy). I did the math on a 160,000 home with insurance, utilities, longer commutes, saving for repairs. Our percentage was more than double than our current situation. Really! More work, more money, less play. As much as I have the American Dream, I value a carefree lifestyle and some $ to retire on.
I believe I'd be less secure owning than renting and think the housing market is smoke and mirrors. And to those who believe I'm throwing my money into someone else hands, isn't that what happens with a mortgage? The other 20% + of the recommended 36% is going into a savings account instead of paying down interest.
Simply put:
- know what the full big picture is
- know what your values are
- decipher how you feel from what popular culture is telling you
- have someone who to review your figures that will in not benefit from your home purchase.
I just bought a house in July. Our mortgage is 8% of our net monthly income and 6% of our gross monthly income (and a librarian and grad student don't make much). I would feel uncomfortable paying much more in this climate. Living in a fixer upper that is in a less than fashionable town and in a neighborhood that is "turning around" enable us to live pretty much like kings. I've never spent more than 30% of my take home pay on housing expenses (utilities included) and wonder why anyone would? Why not get a smaller place or a place in a more colorful neighborhood? The biggest trade off is just pride.
I agree it's a bad idea to buy based on projected increase in earning potential. We bought 1.5 years ago and, aside from the down payment which we'd been saving for for years, we kept our monthly expenses pretty much the same (even though we were in a rent stabilized apartment before.)
We also based our mortgage range off of just one salary. The two-salary projections of what you can afford are just not a safe bet in this economy - even long term, good employees are getting let go - and is what fueled this housing mess in the first place. You need a built-in buffer to withstand the unknowns, and you also have to assume several hundred dollars in maintenance fees per month - you will eventually need a new washer, hot water heater, roof, sidewalk, rotor rooter, etc. - there's always something that is demanding a fix, and your budget should assume that.
Grow into a house? No thanks. I just want one that fits - nothing more. I guess if you're planning on starting a family, I could see getting an extra bedroom or two, but that's about the only reason for getting more than you currently need in my opinion.
"Some of these comments made me want to barf. Ahmygawd, should I go for the annual Europe vacay or gaht the place with the Subzero fredge? "
Considering that a house can burn down or be foreclosed on after a job loss or catastrophic illness...
...but nobody can ever take the memories of a vacation experience from you.
Few people die wishing they bought a SubZero or a larger house, but lots of folks wish they had spent more time with their family or had taken a trip to Paris.
The house in the picture is the Allyn mansion in Delavan, Wisconsin. I grew up only a few miles away and I recognized it immediately! Here is some more info: http://math.uww.edu/~mcfarlat/pictures/allyn6.htm
Another plus to basing housing costs on just one income of a partnership is that, just like roommates, partnerships end; sometimes suddenly (death, divorce etc). Cash flow problems on top of major life change/emotional devastation is never a good thing. I keep all my living expenses (mortgage, all utilities, phone, cable, car, insurance, fuel, groceries) etc to about half a months take home. I take a nice trip every year and I am still on track to retire at 50. I don't make a lot of money (about the average income for my area), however once you get used to spending less it is easy to spend less.
Oh and it is easier to sleep at night too.
I bought a house about 6 months ago, on a single wage. I was lucky - I'm in Australia where, as TheDanMan says, it's stupidly hard to get into the market. But I had a deposit and some parent equity from my mum, and I found a slightly dilapidated but structurally fine house that the government was selling off. It will need work, but it was $20k under my limit and I used that to redo the bathroom and other immediate things. Anything else can wait.
The payments are just on 36% of my wage, but I'm currently paying closer to 45% off. I can afford it right now (I don't have a car, I think that makes the difference) and it makes SUCH a difference to see the capitol going down, not just the interest. I'm probably going to have to redraw some to do some renovations in a year or so, but it's better than having a savings account. The amount I can redraw after six months is more than I will need, anyway.
It was worth the little extra stresses to me, to own my own house. I have had a few freakouts, because owning a house on your own is scary. But I am young enough that I am ok cutting back a bit on luxuries. And as gf says, it becomes normal and easy with practice. And this way, I MIGHT be able to afford regular holidays in five years or so. Right now, the thought is a bit laughable, and would be if I was renting (stupid baby boomers, buying up all the houses. WHY WONT YOU DIE).
BUT. I made sure when I got the loan that I was comfortable paying it off, and had budgeted for bills and living expenses, PLUS a bit extra every pay (there's always something). As glad as I am to have my little house, if I hadn't gotten lucky with the price, I wouldn't have bought. It's just not worth the risk. As everyone else has said, you never know - things change suddenly and painfully.
Oh, Kaviare, most Boomers bought up all those houses by living below their means, saving (sometimes for a LONG time)for a down-payment and starting small. What a concept.
I'm sorry if we're not dying off quickly enough for you. Your parents must be so proud...
Having worked in construction during the bubble, I was fully aware of the shocking disconnect between someone's actual income and the size of the mortgage they were "qualified" for. One of the factors people also seemed to ignore were their PROPERTY TAXES, often a $1,000 or more a month. A PITI of $3,800 or more was common among those whose annual gross incomes were in the range of 60 to 80k. Do the math on that. It was often horrifying to speculate on the quality of life one could possibly enjoy with that kind of pressure, and that amount of debt. No one said no to them, and those who should have said no (the lenders) didn't. If there is a single piece of advice I would give any couple, it is TO LIVE ON ONE INCOME. If you are single, live below your means. It's not pretty...but the peace of mind is invaluable.
Ladymantle's strategy is how we got into this mess...betting on an increase in income and equity.
Oh, and Kaviare, wasn't it your mum who loaned you the money for your place? She must be a boomer...wonder how she would feel about your comment wishing they would all die.
@Kaviare, maybe I'm the only boomer with a sense of humor, because I LOLed -- nay, I ROFLMAOed -- at your little aside.
"Why won't we die"? Because we need to work more to buy more stuff to put in more rooms and eventually buy a bigger place, but that won't please mother now will it? No, no! "I noticed your neighbors have a new lawn"... so you grab a shovel and dig and dig "I'll show you MOTHER!" But she doesn't even notice your new lawn when she says "you have such a <cozy> little place" and that just sets you off...
When you say 36% of you net income, is it for the couple?
My BF and I are looking to buy a house, because we've met so many people telling us: «you pay more for the appartment you rent than we pay for our house» (appartment are not cheap in Rimouski, but houses are right now, and interest rates are very low, around 2.9%)
Is it 36% of both our net income together, or 36% of each of our incomes?
Thanks for your help!