Get to teach friends difference between "afford" and "able to make payments" tonight

[hans007]

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<< A good rule of thumb for buying a house is multiply your household salary by 1.5. >>


That HAS to be wrong. Consider:

The median price for houses sold in February 2002 was around $152,000. Does that mean the median household income should be around $100K? Most households don't make that kind of money, sometimes not even near that.

A ratio of 2.5 sounds more reasonable based on my calculations, assuming you can put down 20% and don't have to service an extraordinary amount of debt. This ratio would typically induce a mortgage payment that equals about 15% of your gross income. Using the 1.5x ratio means you'd only spend 9% of your gross on the mortgage payment. You'll easily spend more for an apartment rent. Remember that most lenders use 28% mortgage-to-income as a maximum, so 15% is rather reasonable. If you CAN find a livable cheap house, go ahead and buy it, but otherwise you'll be renting forever waiting to "afford" a real house using the 1.5x benchmark.

And, of course, there are geographical differences. In my suburban zip code, there are 2 houses currently available under $150K and 95 over $150K. If I search upstate Pennsylvania, those numbers will probably flip-flop. I have to buy what's available and I can't wait until I make 100K a year to buy a house. >>



you are forgetting that lots of people dont live in houses. so the median household income of people who live in a "owned" house , should be nearer to 100k that you think. This equation still sucks, because based on it, if i want to buy a $400000 house here in southern california someday my future spouse and i would have to make like $260k a year combined.

 

[Thegonagle]

Hey, Skoorbie

I just Amazoned myself a copy of Millionaire Next Door, after reading all of their preview pages online. Looks promising. I've never been all that good a saver, but I make just enough money (usually something just over $15/hr, 35-45 hours a week) that I should damn well start. PAWs everywhere, here I come!

Too bad the housing/rental market in these twin cities of Minneapolis/St. Paul and suburbs has been so ridiculous. My rent on a 500 sq. foot 1 BR is $540, but doing a little cleanup in the building gets that down to around $350-410/mo. It is an ultra convienient, half-decent urban location though, and I don't want to move (I hate moving!) until I buy a house of my own.

 

[wyvrn]

If they really want a place, why don't you recommend they start looking around for a duplex. Something that needs a little work and will sell for under market (once repaired). Spend a few weekends doing some painting. Then rent out one side to help pay the mortgage. This way they get to invest and have a house (well sort of) and can move into a better place once she finishes grad school and they have more income. Then they can rent out both sides and actually have a positive cashflow 🙂 It is great that you are doing this, I only hope they have the sense to listen to you.



BTW, nice home. Congratulations. My wife and I are dreaming of a home, but saving right now. She just got out of 8 years of school and I just started my own business, so we have a ways to go before we starting building ours. Right now we live with her parents, which is not that bad (they are really nice) and we save almost all of our income.