House buying question

[CU]

I am looking at moving. I have heard a general rule is to not buy a house over 3 times your annual salary. Is that with no downpayment or a standard 10-20% down? Or, is that just don't finance anymore than 3 times your annual salary?

 

[ElFenix]

i thought it was 5x

 

[UncleWai]

Good luck finding that shack.....

 

[HeroOfPellinor]

It's a rough estimation, so don't sweat it.

 

[Midlander]

You hear this from realtors, who may or may not know much about finances. The real thing to monitor is your overall debt, both short and long term.

Thus, it is the amount you finance that is important, not the cost of the house.

 

[DBL]

wouldn't current mortgage rates play a huge factor here? The rule does not really give enough information. 3x seems reasonable if you are paying 10% but the lower your rate the more you should safely be able to finance.

 

[mugs]

Originally posted by: UncleWai
Good luck finding that shack.....

According to his profile, he doesn't live in California.

 

[Scarpozzi]

If it's your first home, buy a fixer-upper. Go for something cheap and get a roommate to help supplement the construction efforts. It's what I've been doing the last 2 years and my house is getting to be UBER sweet with the mods I've made.

Unfortunately, I've seen too many people run out and get expensive homes and end up getting stuck refinancing 2-3 times before paying them off. (meaning, they extend the life of the loan and end up paying 2-3 times the actual sales price) Just be careful in assessing all expenses (taxes, home owner's insurance, hazard/mortgage insurance from your lender, flood insurance if it applies, then take a deep look at utility costs.) be sure to call the electric water and gas companies to find out what the hi/low/average costs are before jumping into the house. There may be major efficiency problems.

If you want to score more house, buy a cheap one to start and try to pay it off in 10 years. If you pick the right house, you could end up getting plenty of equity out of the deal within 5 years and be able to afford something nicer sooner than you think.

 

[her209]

3x salary... Jesus, I'll be lucky if I could buy a room in a house.

 

[DBL]

Originally posted by: Scarpozzi
If it's your first home, buy a fixer-upper. Go for something cheap and get a roommate to help supplement the construction efforts. It's what I've been doing the last 2 years and my house is getting to be UBER sweet with the mods I've made.

Unfortunately, I've seen too many people run out and get expensive homes and end up getting stuck refinancing 2-3 times before paying them off. (meaning, they extend the life of the loan and end up paying 2-3 times the actual sales price) Just be careful in assessing all expenses (taxes, home owner's insurance, hazard/mortgage insurance from your lender, flood insurance if it applies, then take a deep look at utility costs.) be sure to call the electric water and gas companies to find out what the hi/low/average costs are before jumping into the house. There may be major efficiency problems.

If you want to score more house, buy a cheap one to start and try to pay it off in 10 years. If you pick the right house, you could end up getting plenty of equity out of the deal within 5 years and be able to afford something nicer sooner than you think.

Why pay off a house in 10 years when 30yr fixed rates can be had for 6% or less. Personally, I'd rather invest my money elsewhere.

 

[Nyati13]

Trying to stay within 3x annual salary for the amount financed is smart, but not a set in stone rule.
I think a better guide would be to have the mortgage, property tax, and insurance monthly payment to not exceed 33% of your net monthly income.

 

[m1ldslide1]

Yeah I don't know who is going to pay off a house in 10 years.. people with that much money don't buy that cheap. Maybe trust-fund kids.

Anyway, I just closed on my first house yesterday and it is almost 4x my salary. I put 0% down with a first-time buyer's program and got a pretty sweet deal. These first-time buyer programs are available in many shapes and forms in most states and can be had without too much trouble.

 

[child of wonder]

Originally posted by: Scarpozzi
If it's your first home, buy a fixer-upper. Go for something cheap and get a roommate to help supplement the construction efforts. It's what I've been doing the last 2 years and my house is getting to be UBER sweet with the mods I've made.

Unfortunately, I've seen too many people run out and get expensive homes and end up getting stuck refinancing 2-3 times before paying them off. (meaning, they extend the life of the loan and end up paying 2-3 times the actual sales price) Just be careful in assessing all expenses (taxes, home owner's insurance, hazard/mortgage insurance from your lender, flood insurance if it applies, then take a deep look at utility costs.) be sure to call the electric water and gas companies to find out what the hi/low/average costs are before jumping into the house. There may be major efficiency problems.

If you want to score more house, buy a cheap one to start and try to pay it off in 10 years. If you pick the right house, you could end up getting plenty of equity out of the deal within 5 years and be able to afford something nicer sooner than you think.

QFT

My wife and I purchased a custom built home with only the upper level finished. We're finishing the basement ourselves and it will end up running us around $12,000 to do and will increase the value of our house by more than $15,000 immediately. Plus, our home is in a small town only 5 miles outside of a much larger one that is expanding in this direction, which will also drive property values up.

We pay $145,000 for the house and our hope is to sell it for $180,000+ in 10 years while owing less than $130,000. Then that $50,000+ in equity will be a down payment on a $300,000+ house.

 

[vi edit]

It tends to stretch a little more as you go up in income. At $45,000 a year you don't have a ton of money left over each month after an $800 house payment.

At $150,000 a year you will have quite a bit more left over each month with a $2400 a month house payment.

3x may be stretching it for the lower income, not so much on the higher incomes. Plus with the higher incomes you typically have more interest based deductions helping lower their effective tax rate.

 

[TheNinja]

I've heard that you should typcially nto spend more than 33% of your gross income on housing per month. If you make $5500 per month, you should spend around $1800 on mortgage, interest, prop taxes, and insurance for your home. That's not always very realistic as many people now go up to 40% but 33% is a good number to shoot for.

 

[Ameesh]

i use a different rule,

you should be able to pay the monthly payments without using more than 50% of your take home pay. e.g. if you make $2000 take home pay after taxes and such then you can afford a monthly payment of $1K.

this will leave you room for a car payment, bills, entertainment and some amount of savings without being house poor.

 

[child of wonder]

Originally posted by: Ameesh
i use a different rule,

you should be able to pay the monthly payments without using more than 50% of your take home pay. e.g. if you make $2000 take home pay after taxes and such then you can afford a monthly payment of $1K.

this will leave you room for a car payment, bills, entertainment and some amount of savings without being house poor.

Really?

So with that $1000 say a guy has a $200 car payment, $50 car insurance, $100 for elec, water, sewer, garbage and gas combined (which would be quite low), $100 for gasoline, and $100 for cable TV, internet, and phone.

That leaves $450 a month for entertainment, food, clothing, car repairs, and savings.

Ouch.

With $2,000 income per month I'd try to keep my house payment below $700 or find a $500 apartment until I made enough to afford a house.

 

[CU]

Yeah I forgot to say I live on the east coast. I am looking to move to Franklin NC. I have heard of 33% rule also, just forgot it.

 

[child of wonder]

There are so many unforeseen expenses in life I would stick to that 33% rule or better.

My family spends only 19% on our house/interest/insurance/taxes each month and we could use MORE money!!! lol

 

[dullard]

Like everyone else said, it depends on far too many circumstances to fit into one simple number. It depends on other expenses, income level, interest rate, etc. However, if you just want a very crude estimate of what you can get (before you talk to a mortgage broker for a real estimate), 3X is a good conservative starting point today.

Most people now are approved at a value near 4X. Over the last couple of years, mortgage money has been too easy to get and 5X or higher wasn't too uncommon. Of course, foreclosures are now at an all time high (so while you may be approved for the money, it might not be a good idea). I like to be more conservative, yes you can get approved and probably afford 4X now, you probably might not enjoy that life. Go slightly cheaper (closer to 3X) and you'll have plenty of money for remodelling, for vacations, for furniture, for entertainment, etc. I don't like to encourage people to be house-poor.

Ameesh's number of 50% is another similar benchmark. For years people tried to keep that at 30% and they did just fine. Recently mortgages were too easy to get and people often used 50% or more. But then, like Child of Wonder pointed out, that doesn't leave much if any to actually enjoy life. Life is about enjoyment, not about getting as much house as you can possibly get away with.

But then again, your circumstances may vary and maybe you can afford far more than those two crude estimates.