How much house can you afford? More than any other purchase or expense in your life this effects the quality of your life. There are factors that aren’t usually thought of when a house is purchased. The math of how many times your annual income you can afford is different based upon when you were born. In the 1970s there was a limit of two times your annual income was the most banks would finance (with 20% down of course)
Times have changed; I see loan qualifications of 3-4 times an annual income with 5-10% down. This may be legal but, is it smart? Everything that is legal may not be smart. I looked into the 2X formula my parents used in the 1970s and applied it to the purchase of my first home in the early 1990s.
That did a number of things, some I was aware of and some I was unaware of at the time. The stage was set with the following starting point:
- House purchased was cheaper than loan qualification
- More than 20% was put down as a down payment; private mortgage insurance not needed
- House insurance was cheaper; % of a smaller house is smaller premium
- House is smaller; maintenance is more cost effective- think less house to paint
- House is smaller; less stuff fills it up – you purchase less items to fill it
- Money saved in the above can be applied towards extra principle payments
- Recently when the housing prices took a major dive I remained right-side up on the loan
That last one was a real big because it was unforeseen the real estate market would take such a hit in the latest recession.
Do not overlook the holding cost of the house (utilities, maintenance, etc). This can make you a prisoner of a house and not the partial owner of a home (the mortgage company is the other partial owner – the one you want to buy out.) With the holding costs how far your home is from your work is also a major factor; 15 minute walk is a big difference from a hour ride in the car. Time is a currency – don’t waste it.
Another option would be a small house. The houses are built on utility trailers but, they are paid for with about 1/2 the average American annual salary. It doesn’t have to be the house you live in your whole life (unless you want to), but it could be a option for a starter home. More Info Here.
If you decide not to Small House your living space and want to own you have two choices; either save or finance. If you must finance try credit unions or a smaller community bank. The savings in money and stress can be significant. Credit unions are not for profit and often pass the savings to the customer. Smaller community banks are more dependent on your business and are usually more responsive on the customer support.
How much house you buy should be tempered with some planning. You have to live somewhere so why not own a house. (Of course your financial foundation should be stable before you attempt to buy a house.) The tent and tiny house of this post was partly “tongue in cheek” but, the point is to look at the costs before you purchase a home (both monetary and lifestyle costs).