General Question

chelle21689's avatar

How do I know if I make enough to buy a home?

Asked by chelle21689 (7405points) August 20th, 2016

A lot of people tell me I shouldn’t buy because I’ve never lived on my own. I don’t see why it is seen as impossible? Nearly my whole family has moved out and bought a house rather than rent an apartment with their boyfriends (now husband)

I know I mentioned to some of you on here about me and my boyfriend getting a place. I know it is a serious step so I know that revisiting the talk of marriage and expectation should be set before making the decision.

So a lot of people online say don’t do it. Also, apparently I’m paying too much on a new car which is just a Honda Accord 2016 and was told I should give it up for a cheaper car. So I“m seeking second opinions.

I make about $2,500—$2,600 net per month. I save about $1,200—$1,300 per month. I pay for some groceries, car insurance, my new car, retirement, health and dental insurance, lunch money, and entertainment.

Houses around where I live for a 3 bedroom in a decent area are $130,000—$160,000 on average. I can find small 2 bedroom condos for $100,000. I’d like to spend no more than $800/month on mortgage.

I’m sure with my boyfriend it’d be a lot easier to spend but since we are not married I know a lot of people advise me to also get a house I can afford if anything were to happen. He makes about $36,000 a year. I am not sure on his exact savings.

Also, I’m not sure what to take in to account when it comes to fees, home owner insurance, etc.

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20 Answers

Dutchess_III's avatar

What is your income and your credit score? That is number one.

Rule of thumb, the principal payment on a house will be roughly 10% of the cost of the house. So payment on the principal on a $13,000 house would be $1,300 a month. However to that you have to add interest rates, home owners insurance and escrow. I’m guessing your actual payments would be closer to $2,000 a month.

Another rule of thumb, you can only afford a house that is about twice your annual income. $36,000 a year is not enough to buy more than about a $60,000 home, and that’s only if you don’t have other loans, like, car payments, etc.

I will wait to hear from the others. These are rules of thumbs that I’ve always used as my standard, and they seem pretty accurate to me.

chelle21689's avatar

Credit score is 730 last I checked. Gross income is near $40,000.

imrainmaker's avatar

It’s always good to have your own house but living in a rented apartment isn’t too bad as well looking at the interest needs to be paid to the bank and number of years.

Dutchess_III's avatar

Plus when you own your own home and the hot water heater goes out you have to buy a new one yourself. You can’t call the owner of the house, like you can when you’re renting, to come fix it on his dime.

I definitely think you should rent first, to get an idea of what being a real grown up is all about, before you make the leap to owning your own home. When you rent you’ll get an idea of all the things that can, and will, go wrong with a house, while still having the safty net of someone else being responsible for it.

Plus, you should get a home that you can afford on your salary alone. Hm. Bring that up to him and see how he reacts.

imrainmaker's avatar

^^ yup..rent it then own it..)

chyna's avatar

here is an app to determine how much you can afford.
here is a calculator that I took the liberty of calculating a 100,000 home with a 10% down payment, 3.3 % interest (going rate) with insurance and taxes and the term of the loan is 30 years. Your payment would be 606.00 a month.
I’m not sure where @dutchess got her figures, but they are way too high.

If you don’t have very many bills, it looks like you could afford a 606.00 payment.

ragingloli's avatar

The real question is this:
Is your job situation secure enough that you can take the risk of endebting yourself for decades to come?
The times where you could count on working for a single company until retirement, in a single location, are long past.
What do you do when you, likely inevitably, get fired at some point, and can only get a new job by relocating to another city? Because then you are saddled with a house you can not live in, but have to continue paying for anyway.

kritiper's avatar

Your insurance and property taxes would be part (included) of your monthly mortgage payment.

CWOTUS's avatar

@Dutchess_III, your rules of thumb make no sense at all. Zero.

A $13,000 house? Who can live in a garden shed? And who would pay $1,300 per month for the privilege? No. I have a house that I bought 14 years ago for just over $150,000, with a 15-year mortgage at higher interest rates than are current now, and my payments have been in the mid-$1,500 – $1,600 range. (Until this final year of the mortgage, that is, when the final payments + the local tax increases have bumped me out of that range. But that’s beside the point.)

So I say again that your numbers do not make sense in terms of how much a mortgage payment would be based on the value of the home. (If you meant 1% of the value of the home per month, then that makes a bit more sense as a rule of thumb, but that’s still for a 15-year mortgage, which isn’t the norm for most people.)

But to get back to @chelle21689‘s question: Lenders have typical benchmarks where even if your credit is outstanding they will not generally consider a loan that requires you to pay a monthly payment greater than, I think, around 30% or more of your disposable (net) income. So you’ll want to shop for a mortgage that you can afford to pay off at no more than around $800 per month.

When you figure what kind of mortgage you can afford at $800 per month (financial calculators abound on the internet and in mobile phone apps; I’m sure you can easily find one that will allow you to reverse-calculate “how much of a mortgage can I get for $800 per month?”). Combining the mortgage that you can afford with the savings that you already have will help to guide you into how much capital you can afford to pay for a house.

I would also counsel you – in general, because I don’t know you well and personally – to continue to save for the house you want while you’re still young and “not quite settled”, career-wise, significant-other-wise, and while you still have that relatively hefty new car payment going on, too. (Plus, every dollar that you save which you can pay down on the house will save you multiple dollars years from now in interest cost.)

So keep saving and window-shopping – for a while, anyway – until you either lock down on the career you love and the job you want to keep for awhile, and/or the boyfriend turns into much more than just “a boyfriend”. I never advise young people to buy a house “with” someone that they’re not married to.

ARE_you_kidding_me's avatar

Well the biggest question is are you ready to stay put for five years or more. If the answer is no then buying is a poor choice. If it is yes then consider it but do your homework. Many first time buyers don’t know what to look for. A good rule of thumb is total payment including taxes, insurance and any hoa fees etc should not amount to more than a third of your take home pay. A 100,000 condo will be around $700 a month, 130,000 house will be about $850–900 monthly on a 30 year note. A 15 year is a much better deal but if you must you can get a 30 and pay it like a 15. There is additional risk with condos so it’s not usually the way to go but it depends on the location. If you do decide to buy let us know I’ll put up a huge wall of text and info about what to look for.

Now one last thing look at what rent will cost you. If you can rent really cheap and save do that but most places a mortgage is cheaper and you are building equity. When you are ready to get out of the starter home you may find a nice nest egg in equity and appreciation. I purchased a $100,000 condo and when we moved and sold it less realtor fees and some closing costs there was a nice 40k down payment on the new one without even digging into savings. Something to consider.

Earthbound_Misfit's avatar

Great tips above from @chyna, @CWOTUS, @ARE_you_kidding_me and @ragingloli. The questions and suggestions they make are exactly the advice I would give you. I know you work for a university, so whether you’re in a permanent, fixed term or casual position is an important consideration. And yes, what are your future plans? Are you happy in the city/location you live in? If not, renting may be a better option.

My advice would be to work out your monthly expenses and make sure you can put that away each month without feeling in a financial bind. You’re already saving each month, so this should give you a good indication.

The other thing is your relationship. Check out the legal situation if you buy property and then break up. Do you need an agreement (pre-nup) to protect your individual assets and to set down how any equity will be divided if things don’t work out? It seems depressing to consider this, but look to your friends relationships and think about how many break up even after a few years. Better to be safe than sorry.

Dutchess_III's avatar

@CWOTUS your post caused me to go back and check. It was a typo. I meant, $130,000 based on the low average she listed for her area.

Do my rules of thumbs make more sense with the right number?

Did it seriously not occur to one single person that it must have been a typo?

Darth_Algar's avatar

@Dutchess_III

Well even regardless of the numbers in terms of dollars, with a monthly at 10% of the cost of the house, then the house would be paid off in under a year. So I’m not sure your rules of thumb do make sense.

Dutchess_III's avatar

How much was your house and what are the monthly payments, @Darth_Algar?

ARE_you_kidding_me's avatar

@Dutchess_III I think the number you were trying to arrive at was 1% thats close to true on a 15 year note but still a little off.

Dutchess_III's avatar

^^^Oh, and you are so right! Thanks.What about on a 30 year note? Until recently it’s the only kind of note I’ve had on either of my houses. It will still be off, though. That’s why it’s called a “Rule of Thumb.

ARE_you_kidding_me's avatar

A 30 year note at current interest rates will be roughly half a percent principle and interest. ~6/10 of a percent when including things like PMI, Insurance and taxes. A 30 year mortgage is a really shitty deal though. Most people assume the interest is a constant thing but it’s not. Say you are on the front end of the 30 year loan. Most of your payment is interest and a tiny amount chips away at the principle. The first 10 years you are paying mostly interest and over the life of the loan you could pay nearly double than if you had payed that additional 20% a month or so on a 15 year. If you have a conventional 30 then you can simply pay it like a 15 and the math works like a 15. This is what I do so if we hit hard times we can lower the payment without doing a thing. which just happened as my wife is now unemployed The cost of that is the interest rates are a point or so higher on a 30. Interest rates are at like 3.5% right now on a 30 which is a historic low. In 1980 they were nearly 20%!!!!

Darth_Algar's avatar

@Dutchess_III

I rent, but I don’t have to have a mortgage to know that you’re not going to be paying 10% of the property’s cost per month.

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