next »

[cranefly]

I see a lot in the papers lately about people buying more house than they can afford, due to the low interest rates.

Is there a general "rule of thumb" not for how much you can pay each month, but for how many times your salary a house should cost? (e.g. a house I like is 3 times my yearly net--is that too much house? Can I afford more? That's about 5 times my annual take-home pay.)

[oldadjunct]

Three times current net sounds like the traditional guideline.

The larger question is why would anyone stretch that to five times net after already having found something acceptable at three times net. Imagine finding a place for two times net, and slowly improving the property as circumstances allowed.

Have you read the recent news on housing prices and job security?

[cranefly]

Three times current net sounds like the traditional guideline.

The larger question is why would anyone stretch that to five times net after already having found something acceptable at three times net. Imagine finding a place for two times net, and slowly improving the property as circumstances allowed.

Have you read the recent news on housing prices and job security?

I'm not thinking of paying 5x net. I would be paying 5x GROSS (= 3x net where I am).
There's no way I could find a place for 2x net. The lowest I could pay would be 3x net. I'm just wondering if it's worth spending more. The banks (of course) tell me I can afford a lot more (4x net).

[anon99]

While you can't guess where interest rates are going to be when it comes time to refinance a mortgage, if you are maxing out what you can afford with current interest rates; you can't afford the house.  Also factor in property taxes, utlilities (sewer and water), and upkeep.  As oldadjunct said 3 times your net salary is what they figure.  From another perspective they say the monthly mortgage payments shouldn't be more than 1/3 of your GROSS monthly pay.  It also depends on what other debt you have.  Your total monthly debt load should not exceed 40% of your gross pay.

I can't recall if you are in the US or not.  I say that because the housing market there is different than in other locations.  For some reason I think you are in Canada, but I don't know why I think that.

[madhatter]

Three times current net sounds like the traditional guideline.

The larger question is why would anyone stretch that to five times net after already having found something acceptable at three times net. Imagine finding a place for two times net, and slowly improving the property as circumstances allowed.

Have you read the recent news on housing prices and job security?

I'm not thinking of paying 5x net. I would be paying 5x GROSS (= 3x net where I am).
There's no way I could find a place for 2x net. The lowest I could pay would be 3x net. I'm just wondering if it's worth spending more. The banks (of course) tell me I can afford a lot more (4x net).

The term for this is "house poor." You have a house, but you have no money left. Being house-poor is a bad thing. It crimps your ability to save, your ability to handle emergencies, your enjoyment of life, and your margin of safety should anything change (job loss, increased bills, new family member).

Being house-poor is also likely to land you underwater on that mortgage sooner, rather than later, if house prices continue to decline, as many expect they will.

[wanna_writemore]

I recently spoke to a mortgage broker about this.  He said that the current standard debt to income ratio (what you have to pay each month for student loans, car payments and other debts divided by gross income) is 35%.  He said that he starts folks at 30% to give them some wiggle room when they start looking at houses and decide they want a little more than they thought they did.  At the height of the free-for-all mortgage trend a few years ago, mortgage companies/banks were apparently going up to 43%.

I calculated mine for 25% because I want a comfortable mortgage, not one that makes me cringe every month.  Then when I find more house than I planned on, I'll still be under 30%.

[madhatter]

Note that the rule of thumb ratio (35%, or whatever it is now) will drop as interest rates increase, which is expected to happen once the government programs currently propping up the housing market end over the next few months.

[cgfunmathguy]

Whatever you get should not generate a (15-year) mortgage payment that is more than 30% of your take-home (net) pay. 25% is better. Once you know this number, add in the downpayment you have saved, and you will know how much house you can afford.

[cranefly]

Thanks. I am in Canada, where the housing market is currently much better than the US. There is fear here that rising interest rates will create a mortgage crisis, but so far all is good.

I will have no debt when I buy the house. The student loans, car loans, etc. will be all gone (yay!!).

My concern is that the bank will always tell you to take more than you need. But I also don't want to live in a slum if I can afford something nicer! I've tried the mortgage calculators online, but they factor in interest rates that are completely unpredictable of course.

If I bought a house 3x net, the mortgage payments would be about 20% of my take-home pay. 4x net and they bump up to nearly 40%. (of course there's everything in between, too)... But then without any debt I'm in a pretty good position to take on more. The university deducts pension and matches it, and the gov't has pension deducted too, although I still want my own pension savings outside of that (I'm aiming for 10% of gross).

I currently have no savings, though (been paying off my debt), so I'm nervous about getting into an older house that suddenly might need 10 grand in a roof/furnace/whatever. So a savings account is also a high priority for me.

Thanks for advice!

[pink_]

Savings should be your first priority.
My house was renovated just before I moved in--new wiring, new heat/AC, new floors, yu name it, and still there have been a TON of unforeseen expenses.

[clean]

I would be paying 5x GROSS (= 3x net where I am).

This is not right.  Gross is the big number.  Net is what is left after all the taxes and deductions.

So if you gross 100, and net 50, are you looking for a 3-500 house, or a 150-250 house?

Do you have a downpayment and an emergency fund of 6-8 months on top of that?

So... lets make up some numbers..

Lets say your take home pay is 4000 a month for all 12 months.  You can afford a house payment of 1000 per month on the 25% of take home rule.   Without including escrow ( and you should include it), then at 5.5 % interest on a 15 year fixed rate mortgage, you can borrow about 122K.  Add that to the down payment that you have and that will give you a number. 

IF you went with the 30 year mortgage, (not what I would want to do, but it's not me), you would be able to borrow 176K. 

Either way, though, with these numbers you are still OVER the 25% guide because there are still taxes and insurance to consider. 

(This assumes a 5.5 % fixed rate loan, if your interest is higher, the  loan number is lower.  IF you make other than 4K, then divide your number by 4K and multiply that number times the 122k to get a close idea.)

It is not a sin to rent!  You are not throwing money away!

[prytania3]

This is my rule of thumb and it's held up well: Can I rent this house for enough to cover the mortgage payment? If not, the house is too much. If I can, then it's an okay deal. I violated this rule *once* and had to sell the house in the end because I couldn't afford it and I couldn't cover the mortgage with a renter.

[parispundit]

You are starting with the wrong questions.
Where do you want to live? How much space do you want? How much space do you actually need (probably a lot less than you want). THEN see what the space you want costs in the place you want to live. Then decide which matters more, space or place. THEN do the math.

Don't buy a house/apt just because you can afford it if you don't actually want it.

And remember, house ownership (not apt) means an immediate drop of 25% in research productivity, unless you have a spouse who will take care of it all for you

[madhatter]

Savings should be your first priority.
My house was renovated just before I moved in--new wiring, new heat/AC, new floors, yu name it, and still there have been a TON of unforeseen expenses.

Very true. All houses have maintenance costs and unexpected repairs. My experience as a homeowner was that I could expect something or other to cost me between $5-10K each year. You really are going to need savings to be a homeowner, just to handle these predictable but unknown expenses. As a homeowner, you often can't let them just slide, either, as this may make your home unlivable or cause ongoing deterioration that will reduce the value of your home.

[concordancia]

I pretty much figure that the newly remodeled condo means I have the savings precisely for the unexpected, instead of blowing it on what I can see needs done before I even move in.

And despite upkeep, most of my colleagues claim that they are more productive, since they appreciate having their own space.