How much house?

DH will be finishing fellowship in June and is already starting to interview for jobs. I've been looking at real estate online and I'm totally overwhelmed. Part of it is that we've been poor for so damn long that I have no concept of how much we'll make afterwards. I've tried using the Paycheck calculator but I guess I still don't know what we can afford.

Is there some simple formula to know how much you can afford to spend on a house, either based on annual income or on monthly income? The houses we're looking at seem over-the-moon expensive but the're not really, when compared with prospective income. But then, factoring in student loan repayments.....Aarrgh! I'm confused.

[DCJenn]

Re: How much house?

I would advise that you talk to a financial planner, NOW. I cannot tell you how helpful ours has been in navigating our personal finance problems. (especially w/ the house in DC that didn't sell last summer...if you're looking in DC, let me KNOW!)

Ours has been able to give us realistic plans of day to day stuff along w/ a "here's where you should be in one year" and "here's where you should be in five years." It's so helpful to have it all worked out.

and we included all of the crazy stuff that we want to do like take Nikolai to the Russian Olympics in 2014, etc.

Jenn

[mommax3]

Re: How much house?

Some guidelines are no more than a third of your monthly income should go towards housing, and I have also heard the guideline of 2.5 times your annual income.

My advice is to buy much less house than you're told you can afford. Give yourself some room to enjoy the new salary without having to pour it all into new furniture for the empty rooms in your house. It takes awhile for the financial aspects of the first job to shake out. DH has been at his first (non-military) attending job for over two years now and we are just now feeling like we can predict the future a little bit financially.

Don't put pressure on yourself to buy a "dream house" your first time around....just my 2 cents.

Sally

Re: How much house?

I think Jenn and Sally make some good points. A financial advisor could be helpful. I think the 1/3 of monthly (take home?) income is a good guideline. It does take a while for the pay stuff to settle out. If there is any bonus or production pay, it can take a while for the billing to come in -- we expected that but it still creates a sort of limbo feeling.

Have you considered renting for a year? That can be a good way to get a sense of the community, schools, real estate market, etc. And what is reasonable in some parts of the country doesn't make sense in others.

One thing I noticed when we were looking at houses here and in other cities -- big variation in the property tax and how that affects your monthly payment and what you would want to take a loan for. I'm sure you know this but it bears repeating that you can often get financing for way more than what you can afford or really want to be paying.

[Vishenka69]

Re: How much house?

Not knowing the area or having a feel for our monthly income/expenses, we're renting for the first year. My plan is to find something within 1.5 - 2x DH's annual salary. I don't like the idea of being housepoor and want to still be able to have nice car and travel around the world. I think if you buy within 2x the annual salary, you should be on the safe side of making it work financially.

[Flynn]

Re: How much house?

Great advice.

When we were told what we "could" afford with our new income we were shocked. What we "wanted" to afford was more our speed. We decided to have our mortgage be a bit less than 1/3 of our monthy salary after taxes and it has worked well for us.

Furniture and moving expenses do add up quickly.
Talking to a financial planner is a great idea. Ours has been EXTREMELY helpful.

[peggyfromwastate]

Re: How much house?

When we were shopping, we were surprised at how much lenders were willing to give us. We had no income, and basically below poverty level for our area, but they were ready to loan us huge amounts of money b/c that's how much it costs out here. Our living expenses are just barely approaching the 33% of our take-home. We were sitting at around 45% to 50% for mortgage alone...

So it's great if you have a firm idea before hand! Renting, if you aren't in a big hurry, sounds like a good option.

[locumtenenswife]

Re: How much house?

I bought our condo three years ago, before my husband and I got married, and I'm a little scared of how much money we may lose on the house if the housing market crashes.

My advice would be rent for at least a year until you know how much money you have to work with and to wait to see what the housing market does in your area. Even though mortgage brokers will offer you zero-down loans and approve you for outrageous loan amounts, don't consider these offers unless you want to be "house poor". Mortgage companies will approve physicians for outrageous loans because they are at least risk to default on the loan, even though financially the loan may strain you. You'd want to put at least 20% as a down payment to keep your monthly payments and interest expenses manageable, and you'll also need to consider your monthly mortgage payments amount, property taxes, HOA fees, closing costs and the cost of just fixing up the place, getting furniture and new carpeting/flooring/window treatments, and the expense of moving in.

I wouldn't be in a hurry to buy right now, as housing prices in most areas of the country are coming down. Even though interest rates are going up, if you can save money on the purchase price just by waiting a year or two, its totally worth it. Besides, renting will give you time to work out your finances so you know exactly how much house you can afford.

[DCJenn]

Re: How much house?

Our pattern has always been to rent for 6-12 months and then buy. It does help to get to know the neighborhoods AND to foster relationships w/ realtors via open houses, etc.

I just looked at Realtor.com for a 3br house in my DC zip code and prices are still holding steady which is really all I can ask.

(anyone want a 3br house in the city? Walking distance to everything? Under 500k?)

Jenn