Advice Needed - Including daycare in mortgage affordability

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Advice Needed - Including daycare in mortgage affordability

Postby dsmil » Thu Oct 21, 2010 10:31 am

Hello bogleheads,

In five years or so, my wife and I would like to have a child and buy a house. We know about the 28% and 36% ratios and we would like to fall below those and be comfortable.

What we are trying to figure out is whether to decrease our estimated salary amounts by a huge expense like daycare. For instance instead of estimating 100k of gross income we could estimate 80k if daycare is 20k. Or even estimate 70k gross income since it would take 30k of gross income to pay for 20k of daycare.

If we have 2 or 3 kids, we could be paying daycare for quite awhile! We feel like this is too big of an expense to ignore.

Is this the right way to go about it?

Thanks
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Postby Ted Valentine » Thu Oct 21, 2010 10:54 am

The answer to your question is yes, daycare is a huge expense to consider. You'll need to do a budget and include all your expenses like day care, food, utilities, cars plus savings. Whatever is left over is what you can pay for a house.

The ratios you mention are rules of thumb and I think they are too high. I would shoot for 20-25% of take home pay, max with the number of kids you've proposed (I have 4).

Do you both want to keep working? If not now is the time to start living on one salary. That's what my wife and I did. She is a SAHM.

Keep in mind there is no way to know what interest rates will be in 5 years. This will have a big effect on how much house you can buy.
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Postby Grt2bOutdoors » Thu Oct 21, 2010 11:09 am

Here is how I would approach it:

Figure out your current annual net take home pay.

Then inquire with local daycare providers (today) what the going rate is for monthly service (figure the rate goes up 5% per annum). Daycare is ridiculously expensive. Multiply the monthly number by 12.

Now deduct the daycare expense from monthly take home. That is what you will have available to meet all your expenses, including the home.

You may be in for a SHOCK! You may have to downsize your expectations.
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Postby tyrion » Thu Oct 21, 2010 11:17 am

When you buy your house, plan ahead so you can afford it on one income. Kids are expensive and so is daycare. But daycare doesn't last forever and once the kids are in school there are after school alternatives that aren't that expensive.

If you need both of your incomes to afford the house and related lifestyle, it will be tough to afford kids and enjoy kids. If you can dial the expenses back now (by forced saving, maximum retirement contributions, etc) it will make the transition much easier.

Alternatively, you could hope for some family daycare options. I know a few people who utilize grandparents for some or all of the workweek.
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Postby arthurb999 » Thu Oct 21, 2010 11:52 am

What line of work is your wife in? Do you have any retired parents?

Why I ask is, we were able to have my wife switch to part-time per diem (medical field) and utilize parents and saturdays to not have to have daycare and still be comfortable.
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Postby dsmil » Thu Oct 21, 2010 12:16 pm

arthurb999 wrote:What line of work is your wife in? Do you have any retired parents?

Why I ask is, we were able to have my wife switch to part-time per diem (medical field) and utilize parents and saturdays to not have to have daycare and still be comfortable.


She is a teacher and our parents are still working so they wouldn't really be able to take care of anyone.
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Postby epilnk » Thu Oct 21, 2010 3:10 pm

I suppose it's a good thing to get yourself into the mindset of not buying more house than you can afford. But if both the child and the home purchase are 5 years off, all the calculations in the world won't make a bit of difference. Because there's just one thing to do right now - save like the dickens.

That said, remember that your costs will vary a lot within those child care years. Infant to two is expensive. Your peak cash drain will come if you have one infant and an older child (or heaven forbid, kids aged 4, 2, and 6 months). How long those peak flows last depends on the spacing between kids, so you may be able to accommodate a short term strain on the finances. But you're not home free when they start kindergarten; kids are expensive, and there's always college.
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Postby Watty » Thu Oct 21, 2010 4:04 pm

Another option to consider. When my son was little, my wife took care of him and provided daycare for several kids in our house for several years. Since she was not earning a real high income in her regular job, the numbers worked out pretty favorably compared to her working and paying for daycare.

I would be careful about buying a house that you couldn't afford on one income if you needed to. The problem is that your plans not work out exactly like you hope and if something happens like you have twins or a special needs kid, then your working options may be limited.

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Re: Advice Needed - Including daycare in mortgage affordabil

Postby grabiner » Thu Oct 21, 2010 9:41 pm

dsmil wrote:Hello bogleheads,

In five years or so, my wife and I would like to have a child and buy a house. We know about the 28% and 36% ratios and we would like to fall below those and be comfortable.

What we are trying to figure out is whether to decrease our estimated salary amounts by a huge expense like daycare. For instance instead of estimating 100k of gross income we could estimate 80k if daycare is 20k. Or even estimate 70k gross income since it would take 30k of gross income to pay for 20k of daycare.


The 28% housing-to-income and 36% debt-to-income are standards imposted by the lenders to determine whether you can afford the payments. You know your own expenses, and will need to make a budget and determine what payments you can afford.

And it makes more sense to compute your payment out of net income (which will be increased if you have kids and keep working, due to the child tax credit, extra exemptions, and possibly a child care tax credit) rather than gross income, as you would do with a budget. For example, you might find that you need to reduce your retirement plan contributions while you have day-care expenses.
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Postby Rodc » Fri Oct 22, 2010 9:21 am

The only thing I would add is don't figure on a great deal of relief when the kids hit school. Daycare will go down, but there will likely be after school care, sports, maybe music lessons, summer camp, food keeps going up, etc etc.

I think we have realized some relief from full time daycare costs, but it has been modest.
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Postby dsmil » Fri Oct 22, 2010 3:33 pm

Watty wrote:Another option to consider. When my son was little, my wife took care of him and provided daycare for several kids in our house for several years.

Greg


We've been thinking about this and it does sound like a good idea.
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Postby Dagwood » Fri Oct 22, 2010 4:12 pm

My wife and I were in the same position as you are when we bought our current home.

While it is very difficult to know what your situation will be in five or six years, what we did, fwiw, is we bought a house that we could afford on one salary instead of two and allowed that margin to largely function as our buffer. This way, if we both continue to work, daycare would likely not be a huge issue, and if for personal reasons we decided one of us wanted to stay home, we could do so without really upsetting our life.

What I have found, now that we are on our second home, is that about ideally a quarter of your monthly take-home pay should be for your mortgage / housing payment, and in no event should your mortgage / housing payment exceed half your take-home pay. And don't forget to figure property taxes and homeowner association fees, if applicable, into the housing affordability mix.

And again, fwiw, we don't live in a dump. We have a very nice house. What I have found is that in most major cities there are nice neighborhoods and "prestige addresses". If you want to leave yourself some flexibility for the unexpected and wonderful events like kids, avoid the prestige addresses unless you are just rolling in dough.
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Re: Advice Needed - Including daycare in mortgage affordabil

Postby bbrock » Fri May 10, 2013 3:23 pm

Post for reference
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Re: Advice Needed - Including daycare in mortgage affordabil

Postby Meg77 » Fri May 10, 2013 3:46 pm

I don't think that worrying about the ratios is the best way to go about it; that's just the max banks will loan you and not what is ideal to make your particular situation comfortable. Your personal budget is going to be a much better indicator. What I would do is a two column excel spreadsheet with your "current budget" and your "5 years from now budget." There may be debt you can aim to pay off in 5 years (student loan, car loan) that will free up cash flow for daycare, for instance. You can set your target budget, including home ownership, and adjust it over the years as things become more clear (interest rates, home prices in the areas you like, new expenses added, etc).

One thing I'll say is that if your wife is a teacher then childcare costs may approximate her take home pay even after one kid but especially after 2. So I'd just budget for the home you can afford based on just your income. That way you are counting on the most conservative assumptions: no daycare costs but no second income either.
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Re: Advice Needed - Including daycare in mortgage affordabil

Postby Grt2bOutdoors » Fri May 10, 2013 4:00 pm

FYI - this thread is almost 3 years old. :confused
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