So you are buying a new house and want to know how much house you can afford, but is that even the right question?
Why are we always seeking the maximum? Do we really believe that more is always better? Isn’t it possible that we really could get more out of life by having a small house?
Instead we could ask, how little house do I need to meet our family needs, provide a healthy home setting, and be free from financial restraint? Chances are, you would be better off answering that question than the first question – how much.
But, since it is the standard question, let’s address the question …
How Much House Can You Afford?
Sometimes I read something that I must write about – just for a personal outlet. While reading Tips and Traps When Buying a Home, I came across the following advice:
Most people can afford to pay far more than they initially believe they can. As we’ll see in the next chapter, it’s to your advantage to stretch when buying a home – trying to get into the most expensive house you can afford usually pays off later on when your income increases and property values appreciate. (pg 16).
Personally, I think this is dangerous advice.
Think 2008. Mortgage payment delinquencies, foreclosures, declining house values. And what was the biggest cause of that financial avalanche? Too many people made poor money choices by following this type of ill-informed advice.
To stretch means to risk. Thus, one could read the above phrase as saying it is to your advantage to risk (your house, your comfort, your marriage, your peace) when buying a home. Why take that risk? Because it usually pays off?
Don’t undermine the power of emotions. I would much rather have a smaller house, a cozy residence, than the emotional turmoil of wondering if I stretched a little too far. For this reason, I’d rather pay off my mortgage instead of investing – even if it doesn’t make math sense. Emotional peace should come before math equations.
The book (Tips and Traps) then suggests three factors that help people know how much they can afford.
- Down payment – you need to have enough cash to offer as a down payment
- Mortgage qualifying – how much will the bank willingly lend you?
- Closing cost
While I agree with #1 and #3. I disagree with point #2.
Don’t Buy A House Based On How Much You Qualify For
Buying a home is one of your biggest financial decisions. Thus, the home purchase cost should be determined based on your budget, your needs, your income, and your future plans. The bank only knows your income.
As an example, if a young couple plans for the wife to stay home with their kids they should buy a home based only on the husband’s income. The bank, however, might be willing to loan you money based on both of your incomes.
Please consider following these first time home buying tips.
The Home You Can Afford Is A Home That Fits Comfortably Within Your Spending Plan
Your total housing related costs should not exceed 35% of your take home pay. Otherwise, your house payments will take up an unhealthy percentage of your budget. Be sure to include all housing related costs: Mortgage payment, taxes, insurance, utilities, association fees, Private Mortgage Insurance (if needed), maintenance, and telephone bills. All of those numbers should not add up to more than 35%.
However, I’ll finish this post once again by challenging the ‘how much’ approach. Sometimes the better question is how little house can I purchase that meets all my family needs. This will give you some financial margin and the emotional benefits will amaze you.
Photo by Jsome1.
What do you think – should people try to buy as much house as they can afford or as little house as they can?
{ 15 comments… read them below or add one }
The late Larry Burkett says the house payment should be no more than 40% of your take home pay. This includes payment, taxes, insurance, utilities. Everything. If you can’t find a home in this price range, you would be better off renting your entire life than to get in a home that will swamp your budget.
The advice you mentioned in the beginning of this article (from the book you are reading,) sounds scary. Sometimes it unnerves me that many people lack common sense when it comes to such large decisions. It’s true that sometimes in life it is necessary to take risks, but so many tragedies in this world would have ten times better outcome if someone just took the time to think ahead.
People need to begin to remember that everything we do, every decision we make has a consequence. And some of those consequences are forever.
S
Craig,
I love framing the entire discussion by asking, not “How much house can I afford?” but “What size house will meet our family needs?” I admit I don’t think that way, but it is a great starting point, and will alleviate many possible financial stressors when, after buying that big house, the unexpected (injury, lost job, etc) happens.
Way to challenge us to think outside the normal box!
I totally agree with all you have said. My parents and inlaws were people of modest incomes, however, many now think they are “rich” Why……because they both bought small homes, paid them off very very very early in life. My parents have not had a mortgage since I was In 5th grade. There is no way anyone can convince me that they would some how have been better off had they “Keep your mortgage..you will save on taxes” To me…that is a bunch of bologney! I know they have saved thousands and thousands of dollars and they both have had such freedoms that most people only dream of…such as vacations to Hawaii and the abilities to pay cash for almost anything. Both…my in laws and my parents are financially secure due to living debt free lifestyles…including their home.
My husband makes nearly 100,000 a year and we live in an area were the median household makes under 30,000. Needless to say…most of my husbands co workers live in huge houses while we live in a very modest $118,00 dollar house..that is around 2000 sqr feet and we have 4 boys. We have made the most of it…we have sqeezed our teen son into a room in our basement. Somedays I feel tight…but then I realize…very soon (too soon
My boys will be grown and gone and this simple ranch house will be perfect for my husband and myself.
It amazes me how people jump into “big” houses. My wife and I live in a one-bedroom apartment. We’ve been here for almost a year now, and have managed just fine. Recently we looked at moving into a two-bedroom apartment so we could have the extra room. Eventually we decided that not only do we not want to move but we don’t really want to spend the extra little bit every month. That little bit can be saved and will add up over time.
So many of our friends have moved into nice, big houses. Sometimes we get jealous, then we remember that we don’t really want that. We are happy renting and not having the debt that comes with a house.
I definitely agree that you shouldn’t buy as big as you can. Only buy as big as you need, instead.
Craig – I agree that the conventional wisdom to stretch and buy as much house as possible often does people more harm than good. When I was writing the “Money, Purpose, Joy,” workbook I spent a lot of time developing detailed recommended cash flow plans for households across 9 different annual incomes and 4 household sizes. I found that a good guideline is to spend no more than 25% of your monthly gross income on the combination of mortgage, property taxes, and home owner’s insurance. Keeping it to that level while avoiding all other debt provides the freedom to give generously, save and invest adequately, and live with margin and peace of mind.
I like the “how much home do you need” concept, but I’m really surprised at how much square footage people think is necessary these days. If you get a home that is well-designed and meets your family’s needs, the square footage itself is not as big of an issue.
For example: when we were house hunting several years ago, I knew we needed at least a bath and a half. This took a lot of affordable older homes with just one bathroom in our city off our shopping list, but this was not a negotiable detail. We had lived in rentals with one bathroom for long enough. It was schedule chaos for my family when we all had to be at school or work at the same time. Mornings immediately became less annoying after we had access to two full bathrooms.
Another example: the square footage in my home is technically about the same as the square footage in one of my friends’ homes. But the layout in my ranch home is much more functional than her townhouse home. We also have a lot more storage space than my friend does.
Dumb dumb dumb advice in that book. Sort of. We bought our home in 2003 when I was still in law school and DH was just out. We “stretched” to buy this house, but knew that once I started working it wouldn’t be such of a stretch. And if DH left his job and got one like my job, we would still be able to afford this house. Or sell it fairly easily if we needed to. The house fit our needs for space at the time and for growth down the road. That was the kicker.
Fast forward 6.5 years. We have been blessed and our income and family have increased. Now the house payment is just a bill (our biggest, but not a stretch). We’ve grown into our house and while we could move even if we have another kid, there’s no real reason to even though we could afford it. The houses we’d buy would cost 2x as much and wouldn’t be as nice.
We’ve decided not to stretch this time around (which most of our friends havent…they’re jealous of our low mortgage payment now) and wait until we absolutely positively need to move.
@FinancialBondage
40% seems high. At 40% I’d start to think about selling my house. It might work for others, but with my dreams and my income I don’t want 40% going to a house.
@Shirley
I think you’re right that risk is the key word. There is a lot of bad advice out there.
@Joe
I guess where we start the discussion has a significant impact on our conclusion. Ask the right questions and you’re more likely to get the right answer.
@D
I think you guys are an awesome example of the main ideas behind this point. Keep up the good work.
@Matthew
I think you guys did something that most people don’t do much these days. You looked into getting something bigger and decided the time was not right. I’m sure it was a great choice that will reap rewards down the road.
@ Matt Bell
Our household expenses are just under 25% and it feels like the right amount. I’m glad your guidelines confirmed it.
@Monroe
I think you’re right. Functional space is the key. A smaller house with a solid design can be much better than a bigger one with lots of wasted space.
@leah
Sounds like you guys are really on top of things. Another person who is waiting when they can afford to move. I hope this is a new trend …
I would have to agree that the question “how much” is the wrong one to ask. My wife and I have bought modest in the attempt to be both debt free and mortgage free before our first child is out of high school. We feel this will allow us to help even more during the college years.
You can also end up with the larger house for much cheaper if you are willing to by small and step up. The website I provided for this comment shows some of those numbers being compared. Great article though!!
Craig, I really enjoy your common sense approach and this definitely is a breath of fresh air from the conventional wisdom of just five years ago. I would never say that the Recession is a good thing; however, the lessons people have hopefully learned will go hand-in-hand with your wisdom. The old adage “home is just a place where I keep my stuff” comes to mind. The more expensive house requires more expensive furniture, a nicer car, homeowner association fees, etc. that add up to a tremendous cost but don’t add much value to one’s life.
Personally, I like living in my modest ‘starter’ home, and it gave us the freedom for my wife to stay home with our twin boys and now our soon-to-be-born daughter. The garage is a little cramped (especially for a pregnant woman trying to squeeze in), but it keeps us warm and dry and is less costly to maintain and keep warm or cool. It also makes us clean house annually to avoid being overrun with too much junk. I’ve seen the problem with having extra space; you tend to fill it in with knickknacks.
I enjoyed your piece thoroughly. Keep it up!
I have seen this debate MANY times over the years.My hubby and I are 55 and we paid off our small cape cod at age 50.We bought 1st house(also small) in 1978 then basically did a flip in 2 years LOL in those days we called it the started house.Then bought this house in 1981 small house needing repairs but 1 acre of land.Each year we did a project-some years not much money we squeezed the pennies to do something small other years we accomplished a roof.Both of us work a day full time job,I work an evening part time job and hubby takes care of all cleaning/laundry etc.Family and friends always thought we were crazy not to buy bigger or better ..interesting now we are in better shape than most of those people.We were able to raise 1 child, pay for college and a wedding in cash,take a simple vacation each year,help our daughter and son-in-law,donate to causes,share our resources with neighbors etc.a simple life has afforded us our freedom.It is VERY true when the children grow up parents need little space for just the 2 of you.Needs true needs versus wants is the key.I have always been happy with small and comfortable.Our home is sparkling clean with gardens and homecooked food from scratch.We are lucky enough to be happy as clams…none of it came from money.
Great advice! When my husband and I were house shopping in 2008/2009, I know I drove our real estate agent nuts because I had such high standards of what the house I wanted should be, and low expectations on the price. He and our loan person at the bank tried really hard to raise our price point, since we qualified for around $50,000 more than what we wanted to spend. That combined with I wanted a decent-sized yard for the dog I dont have yet, and at least 2 bathrooms to make room for our growing family (of all girls, except my husband!), and without any major repairs (I was pregnant with my second child, I wanted the house move-in ready!)… basically something I would want to live in for years to come. I wasn’t looking for an “investment” or a “great flipping oppertunity”. I was looking for a home.
Long story short, a house is such a major purchase you shouldn’t settle or buy the first house that you look at just because it’s easier. If I couldn’t find the house that would fit my family’s needs and was a price I was willing to pay, then I would still be renting. But we did finally find something that well exceeded my standards, so no worries.
@Philip
Sounds like you guys have a great financial plan and I think the modest house will help you accomplish those goals.
@Erik
I think your right – every event of life has a lesson to teach. The recession definitely taught some important lessons. We learn lessons from our own mistakes and the mistakes of others. Personally, I’d rather learn from other people’s mistakes than my own.
I do think a modest home offers a lot of freedom.
@Pat
I think the key is that the smaller house freed you up to do other things. That freedom is priceless. Some people think they need a big house to be happy. I like the fact that you shared you are happy with a small and comfortable house.
Keep it up!
@Amber
Great advice. Shopping around can provide some significant savings. It is important to know exactly what you’re looking for in a house. Don’t let your real estate agent force you into anything.
After reading this and pondering for a week, I’ll offer this thought.
A 15 year mortgage. This serves two purposes. A young couple may not be so sure they’ll stay put, people move every 7 years on average, obviously this means than many move more often, some less. But that young couple has little use for the 4 bedroom house with three baths. Buying only what can be afforded on a 15 yr fixed rate (at 5%, this is just over 2/3 as much mortgage as at 30) throttles down the house size. The number of kids you’ll have isn’t always in your control, and living with empty rooms is wasteful. Two kids will also survive sleeping in a bunkbed. And no kid has ever died (of embarrassment) by having a friend sleep in a sleeping bag or on an air mattress instead of the guest room. 8-10 yrs later, you’ll have made a larger dent in the mortgage, and lived in a smaller house than you might have otherwise. Now if you really need bigger, you have a much higher down payment, not just from the house you were in, but from that time paying a smaller mortgage and 2/3 the property tax, upkeep, etc.