How to Buy a House (and Still Have Money for Other Goals!)
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Buying a house soon? Find out how you can find an affordable house that you love!
Buying a House – Run the Numbers!
Owning a home is a dream of some people, but there are many that either feel like it's impossible for them to achieve it.
I will say up front that I don't think home ownership is for everyone.
If you're not willing to put in the legwork and run the numbers, it can be a huge financial and emotional burden.
Taking the time to get a financial plan in order can be a huge step in helping you reach your goal.
It can also provide you a way to make home ownership a relatively enjoyable experience.
Keep Your Total Housing Costs 25% (Or Less)
When we first were married we had a desire to own a house at some point in the future.
At the time
We focused on handling that first before we even gave serious thoughts to house hunting.
The biggest financial preparation was getting into the mindset of living off of one income.
Even though we've been a two income couple, we felt that living simpler and below our means would help us reach some of goals quicker.
At the time, they included:
- Having a decent size emergency fund.
- Pay down high interest debt (like my car loan)
- Have some savings set aside for a house down payment.
- Have wiggle room in the budget to go on some vacations and eat out a bit.
It would've been impossible if we tried to do it all while having our day to day budget be based on both incomes.
I was an intern at the time, so it made sense to us to base the family budget on my husband's pay. We've done our best to keep to this system.
When we were looking at a house to buy, we again made the choice to focus on only one income.
We also focused on keeping the numbers based on net pay, not gross income.
While we could've looked at more houses in “our price range”, we decided to stay within our
Another reason for us to be conservative was our goal to have a reasonable interest rate with our mortgage.
We knew that in addition to the down payment we'll put down, the lenders were looking at a couple of other numbers to determine the interest rate they offered.
Debt to Income Ratio
Having a high amount of debt can ruin your chances of getting a loan. Lenders want to know that you can make these payments for years down the line and your debt to income ratio is one thing they analyze.
Your debt to income ratio is calculated by simply taking all your debt (student loans, credit cards, car loans, etc) and dividing that amount by your income.
You want to make sure your ratio is lower rather than higher. If your debt to income ratio is higher than 36%, you could have a hard time qualifying for a mortgage.
Loan to Value Ratio
Another reason to take your time and build a down payment is the loan to value ratio and how it affects your chances of getting a mortgage.
The loan-to-value (LTV) ratio is basically the mortgage loan amount you’re hoping to get divided by the appraised value of the property you’re considering to buy.
Don't Forget Your Other Goals!
This is important becuase lenders and real estate agents don't figure this into their calculations.
Your lifestyle will be affected significantly unless you plan accordingly.
- Do you have enough to save for retirement?
- Can you stash money away for your child(ren)'s college fund?
- Can you go on the vacations you want to go on?
What If You Really Want to Buy a House?
Buying a house can be a great financial and personal goal to have if you prepare ahead of time.
You have basically have some options to look at carefully before you make a final decision.
- Be patient and wait a bit until you buy your house. Give yourself more time to have a bigger down payment. This will lower your mortage loan amount you’d need. Prices could stay lower than normal with unemployment problems continuing.
- Focus on getting a starter home. You can still buy a home, but you might consider getting something a bit more inside your price range, so you have a bigger amount of wiggle room. If you’re buying your first home, a starter home can a better option. You may upgrades years down the road or you might find you like the house and stay.
- Go for the home. If you’re in a position to get the home you want, that’s great. Just make sure you double check it is something within your budget. Otherwise, consider the first two options.
Thoughts on Buying a House You Can Afford
How did you figure out how much mortgage you could afford? Did you rely on the estimate from the lenders or did you run the numbers yourself?
Did you receive any pressure from your real estate agent to get a more expensive house? If so, how did you cope with it?
If you’re a homeowner, what kind of mortgage did you get and why?
This post was originally released in March 2016. The show notes have been updated in March 2019.
Of course the bank and real estate agent will try to get you to spend at the upper limit of your budget so you may want to come in and quote a lower number than you are actually willing to spend. I have always been an advocate of spending no more than 2 times your annual salary on a house. I actually ended up at about a multiple of one. I elected for a 30 year fixed rate mortgage. Number one, I chose fixed to know what the payment would be throughout the term of the loan which allows for better planning. No way I wanted to risk an adjustable rate. Second, I picked 30 year since I can always add to the principle if necessary but can’t decrease a payment if I get in trouble financially.
Good tip on focusing on finding a rule of thumb that works for you financially. Having some flexibility with the 30 year made it appealing to us as well.
I have a 15 year mortgage, 5% fixed. I selected that mortgage because I knew I wanted it paid off by the time I retire.
Thanks; our plan is to have the mortgage paid off completely before retirement too. Wish you well on your goal!
where do you live that the mortgage payment is less than $700?!
We’re in the Raleigh, NC area – good spot to buy a place. Houses are moving slowly in some parts, but it’s steady.
That’s quite a nice payment you’ve got there – I currently rent for about that, but I dont have to pay the HOA fees, etc. I havent bought yet, but when I do, I’ll be keeping my budget rather small – you can get a lot of house here, and I dont want to spend a ton of cash on a house.
Great to know that you have some option with housing. Buying a house can be a wonderful experience if you keep it simple and reasonable.
The starter home idea is awesome. I wish we had bought a lower end home for our first purchase. We waited for 9 years, as a couple, before purchasing. Military moves and a little sacrifice left us feeling a bit “worthy” I suppose. Anyway, we’re managing, but it would be nice to have a little more room in our budget, especially considering our home value has done nothing but go down for the last 3 years!
Great post and great advice! I think the tide is turning slowly but surely in the mortgage origination industry. I have been a mortgage professional for the past 10 years and two years ago I went back and got my CERTIFIED FINANCIAL PLANNER(TM) designation with the goal of helping my mortgage applicants make better choices with regard to their mortgage debt. I know of other colleagues who are pursuing similar approaches. Keep up the good work!
By the way, the biggest mistake I see home-buyers make is that they neglect or ignore other savings & accumulation goals (i.e. retirement, college, debt reduction) when making home-buying decisions because they are so linearly focused. I love your advice to SLOW DOWN, take a breath, and consider all the other financial objectives in conjunction with buying a home.
My wife and I are in the process of purchasing a house right now! I alone could have “afforded” a 160k house, but we decided to keep the house quite a lot under that. In fact, we are closing on a house that’s less than 80k! 🙂 If both my wife’s and my income continue, we could easily pay off this house in 4 short years!