How much to spend on a house?

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dcr1984
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How much to spend on a house?

Post by dcr1984 » Tue Jan 17, 2017 11:03 pm

My wife and I are in the market as first time homebuyers and we are trying to decide on what our budget should be. Obviously there are a lot of factors that go into this equation and I have found a few online calculators that help out, but I was wondering if anyone has any advice or resources to point me to in order to help me settle on a budget range? We are both physicians and are relatively high earners but also have a lot of student loan debt to factor in to our monthly budgets.

pierremonfrere
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Re: How much to spend on a house?

Post by pierremonfrere » Tue Jan 17, 2017 11:23 pm

Get familiar with WCI if you haven't already

Buying A Home The Right Way

Although a mortgage lender may approve you for a home costing four to five times your gross salary, you would do well to make sure your mortgage is less than two times your gross income. So if you make $250,000, the general rule is that your loan amount should be less than $500,000.


It's probably a good idea to make a serious dent in the student loans, if not pay them off completely, prior to buying a home.
If you can delay gratification that long
i.e. live like a resident

Good luck

itstoomuch
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Re: How much to spend on a house?

Post by itstoomuch » Wed Jan 18, 2017 12:09 am

The first home reserves the 2nd house and every home thereafter.
Buy what you need today to determine what you need later.
An good first home is better than a perfect first home.
Find a Mortgage Broker that can spend some time with you rather than a order taker.
Find a Real Estate agent that helps rather than over sells.
A MB and RE build good relationships just like good MDs.
:mrgreen:
YMMV :beer
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Lafder
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Re: How much to spend on a house?

Post by Lafder » Wed Jan 18, 2017 8:03 am

Get pre approved for a loan amount. But that does not mean you need to take out that whole amount, it just confirms the range to stay under. It makes your offer more solid when you are ready to make one. And gives you an idea how much paperwork they need from you :? If it will be some time, look into prequalified as less time to prepare and get, but less guaranteed.

Have a down payment of at least 20% unless you have a special loan without PMI with less down.

When talking to the mortgage broker or whoever you go to get pre approved, have them run numbers on what payments will be for various loan amounts so you can compare to current expenses. Remember to include/add property taxes and insurance to the monthly payments (which will be estimates).

For me, comparing to current expenses was a good way to think about how easy/hard it would be. Once you think you know an amount of monthly payments, pay yourself the amount over current expenses to savings to practice that payment on an ongoing basis. (But remember a new to you house will likely have unexpected expenses plus moving expenses).

What amount will it take to get a home you like in an area you like? My advice is buy the least expensive home you can be happy in :) or to at least consider it.

We bought a house less than 3x our income, but put down a down payment to not have a jumbo loan, so our final loan amount was about 2x income. Unfortunately property taxes in the new home are more than double the old home :(

Happy house hunting!

lafder

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lthenderson
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Re: How much to spend on a house?

Post by lthenderson » Wed Jan 18, 2017 10:14 am

I usually take the lower number of what I'm think I can afford and what the bank is willing to lend me. I then divide that value in half to come up with a number I can easily afford. I've never had problems following that methodology.

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JamesSFO
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Re: How much to spend on a house?

Post by JamesSFO » Wed Jan 18, 2017 10:27 am

You don't provide any insight into what part of the country? In certain high-cost-of-living (HCOL) areas, housing prices are "insane" and some of the very good rules of thumb here don't work. E.g. I had to buy a place that was over 5x my income in the SF Bay Area initially. Good luck.

Hikes_With_Dogs
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Re: How much to spend on a house?

Post by Hikes_With_Dogs » Wed Jan 18, 2017 10:58 am

2x gross + downpayment = house price.


If you are both physicians, you should be able to find a perfectly acceptable home using the above. Don't forget to not fall into the white coat trap!

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jazman12
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Re: How much to spend on a house?

Post by jazman12 » Wed Jan 18, 2017 11:42 am

When I bought my second home when I was relatively young and had steady income I used the 7X earnings formula for max spend.
I made out pretty well after paying off that home and buying my last one with a much toned down formula (no mortgage allowed)

mhalley
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Re: How much to spend on a house?

Post by mhalley » Wed Jan 18, 2017 1:54 pm

Another rule of thumb is mortgage no more than 25% of take home pay (pref after 20% down on a 15year fixed).

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steelerfan
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Re: How much to spend on a house?

Post by steelerfan » Wed Jan 18, 2017 3:17 pm

mhalley wrote:Another rule of thumb is mortgage no more than 25% of take home pay (pref after 20% down on a 15year fixed).


I agree with this. But just to clarify I believe (I could be wrong) mhalley is referring to "monthly mortgage payment no more than 25% of monthly take home pay"

In addition you should be debt free and have 3-6 months of expenses in an emergency fund before you are ready to purchase a house.
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Gropes & Ray
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Re: How much to spend on a house?

Post by Gropes & Ray » Wed Jan 18, 2017 3:44 pm

I found my comfortable spot to be a mortgage that is 2x my yearly salary. So purchase price, less down payment, equals 2x yearly salary. That makes my student loan payment + my mortgage payment about 28% of my take home pay.

toto238
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Re: How much to spend on a house?

Post by toto238 » Wed Jan 18, 2017 4:34 pm

First I would determine whether buying or renting is better. As a general rule, for buying to be the better deal, you would want the expected mortgage on the home to be less than rent. The bigger the difference, the better. In my area, a mortgage is typically 30-40% less than the cost of rent on the same property (e.g. An apartment that would rent for $1,200 per month can be bought for a mortgage of $720 per month). If the per-month costs are the same or the mortgage is more expensive, it is very likely that you're better off renting. Buying in that environment is basically making a bet that your home value will increase by a lot and never decrease, or that rents will explode sky-high and you'll be glad you have a monthly mortgage payment locked in. While those things could happen, it's best not to rely on them.

Then for a first home I would advise only buying as much home as you need. As physicians, you likely have fairly significant income and could likely afford a very expensive house. But you'll likely be a lot happier over the long-term just buying as much as you really need for your first home. Factors to consider:

1. Do you want to have to do any work to this house? Or do you prefer it to be move-in ready? (move-in ready is more expensive, but as physicians you may not have the time to commit to working on the house yourself)
2. How important is the length of your commute to you? If you both work at the same place, maybe picking a place close to work would make sense
3. Are you planning on having kids anytime soon? This will help determine how many bedrooms you might need, and whether you should be considering school districts when picking a home.

There are many other factors, but these are some of the bigger ones.

Your home, especially your first one, should be first and foremost a home, not an investment. It's best to buy cheaper, and use the excess income to pay down high interest rate loans (such as the student loans you mentioned) or to make investments in tax-advantaged accounts (401k, 403b, Roth IRA, etc). Once you've maxed out your tax-advantaged accounts, and paid off higher-interest rate loans, you can start debating as to whether to use excess income to start making taxable investments, or to pay down that mortgage. Remember the mortgage deduction makes its after-tax interest rate effectively lower.

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Re: How much to spend on a house?

Post by Ace$ » Wed Jan 18, 2017 5:35 pm

steelerfan wrote:
mhalley wrote:Another rule of thumb is mortgage no more than 25% of take home pay (pref after 20% down on a 15year fixed).


I agree with this. But just to clarify I believe (I could be wrong) mhalley is referring to "monthly mortgage payment no more than 25% of monthly take home pay"

In addition you should be debt free and have 3-6 months of expenses in an emergency fund before you are ready to purchase a house.


It sounds like the members above are at least somewhat familiar with Dave Ramsey and The Total Money Make Over philosophy.

First, you would need to be debt free - so all those SLs need to be paid off as well as any credit cards, auto payments, personal loans, medical debt, etc.

Second, you would need 3-6 months of expenses in cash which represents the Fully Funded Emergency Fund.

Then you need at least 10% plus closing costs down (20% + closing costs is preferable to avoid PMI) and the mortgage payment would need to be no more than 25% of your monthly take-home pay on a 15-year fixed rate mortgage. Another rule of thumb is that the mortgage be no more than 2-2.5x your annual pay.

If you follow this route, you'll be insanely wealthy in relatively short order.

Ace$
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Re: How much to spend on a house?

Post by Ace$ » Wed Jan 18, 2017 5:36 pm

dcr1984 wrote: We are both physicians and are relatively high earners but also have a lot of student loan debt to factor in to our monthly budgets.


IIWY, I'd live like a broke college student and plow every extra dollar into paying off all the consumer debt. Buying a home while broke is a really horrible idea.

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Toons
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Re: How much to spend on a house?

Post by Toons » Wed Jan 18, 2017 5:41 pm

Save enough for a 15 year fixed.
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toto238
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Re: How much to spend on a house?

Post by toto238 » Wed Jan 18, 2017 5:44 pm

Ace$ wrote:
dcr1984 wrote: We are both physicians and are relatively high earners but also have a lot of student loan debt to factor in to our monthly budgets.


IIWY, I'd live like a broke college student and plow every extra dollar into paying off all the consumer debt. Buying a home while broke is a really horrible idea.


I don't know if I would call student loans "consumer debt". Makes it sound like debt they went into to buy a new pool table and some fancy jewelry. Those student loans are the reasons they're likely making six figures and have the ability to buy a house.

Ace$
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Re: How much to spend on a house?

Post by Ace$ » Wed Jan 18, 2017 6:14 pm

toto238 wrote:
Ace$ wrote:
dcr1984 wrote: We are both physicians and are relatively high earners but also have a lot of student loan debt to factor in to our monthly budgets.


IIWY, I'd live like a broke college student and plow every extra dollar into paying off all the consumer debt. Buying a home while broke is a really horrible idea.


I don't know if I would call student loans "consumer debt". Makes it sound like debt they went into to buy a new pool table and some fancy jewelry. Those student loans are the reasons they're likely making six figures and have the ability to buy a house.


Call it "non-mortgage debt" then - it doesn't really matter to me.

And I'm not knocking them for having debt, I'm advising on what I believe to be the best course of action to eliminate it so it's not an anchor around their neck.

Doctors and lawyers are notorious for racking up large sums of (SL) debt and immediately moving into living doctor/lawyer lifestyle even though they're broke. I'm not saying OP is that way, but the fact he/she is even entertaining buying a home is not the appropriate path in my opinion.

Pacman
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Re: How much to spend on a house?

Post by Pacman » Wed Jan 18, 2017 6:44 pm

Hikes_With_Dogs wrote:2x gross + downpayment = house price.


If you are both physicians, you should be able to find a perfectly acceptable home using the above. Don't forget to not fall into the white coat trap!



I like this rule of thumb because its easy to understand. However, I feel like its still too simplified. It doesn't take into account net worth and retirement savings. For example, if I have a $100K downpayment ready and make $200K annually with my wife, this is an implied $500K house price. Outside of that downpayment, our savings could range on the low side to just an emergency fund to the high side of having maxed out retirement accounts for years with additional investments in taxable accounts.

Bossman_18
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Re: How much to spend on a house?

Post by Bossman_18 » Wed Jan 18, 2017 7:02 pm

I would say that location has a lot to do with how much you should spend. Although the ratios provided are ideal if you are looking to purchase in California it will probably take up a lot more of your income. If I waited until my loan was only 2 times my income I would have never been able to buy a place. Probably the most important factors are your other financial obligations. If you don't have any student loans, car loans, credit cards and are putting away a solid 15-20% of your income towards savings then you could probably afford more house. Although housing in California is expensive there are other factors that make living here not as bad. There are so many free activities like hiking, going to the beach and just being outside in the great weather that you can pay a little more and be ok. So i would say it really depends on location and your financial situation.

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Re: How much to spend on a house?

Post by FloRidaRocky » Wed Jan 18, 2017 8:04 pm

Remember the mortgage deduction makes its after-tax interest rate effectively lower.


I think people over value the mortgage interest deduction. If you aren't already itemizing, you have to give up the standard deduction. For a married couple, that's $12,600. So, you have to have at least $12,600 in mortgage interest deduction before you even start to see a benefit. Then after that you are essentially getting back your income tax rate on the interest you blew, 28% for alot of people.

So, if you had $14k of mortgage interest to deduct, you gave up your standard deduction, you're getting back a whopping $392 (14,000 - 12,600)*.28.

And if you are following alot of advise in this thread to buy the least expensive home you can afford, that may end up being $0, because you could be better off with the standard deduction. At least that was my case with a $115k mortgage at 6%.

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Re: How much to spend on a house?

Post by tim1999 » Wed Jan 18, 2017 9:22 pm

What does the average 4BR 2.5BA home in a subdivision fairly close to where you work go for in your area? I can guess what you are probably earning but the advice I would give you in San Francisco, CA is different than what I'd tell you in Springfield, MO. You two plan on having kids?

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Re: How much to spend on a house?

Post by White Coat Investor » Wed Jan 18, 2017 9:59 pm

dcr1984 wrote:My wife and I are in the market as first time homebuyers and we are trying to decide on what our budget should be. Obviously there are a lot of factors that go into this equation and I have found a few online calculators that help out, but I was wondering if anyone has any advice or resources to point me to in order to help me settle on a budget range? We are both physicians and are relatively high earners but also have a lot of student loan debt to factor in to our monthly budgets.


I would try to live on the equivalent of a single resident salary for 2-5 years after residency until the student loans are gone. That will allow you to:

# 1 Pay off the student loans and get that millstone off of your neck
# 2 Max out your retirement accounts and catch up to your college roommates
# 3 Save up a 20% down payment on your dream house.

At that point, I would purchase a home whose mortgage is no more than 2X your gross salary.

My wife and I did this and became millionaires 7 years out of residency on a single physician income (averaged $180K per year for those 7 years), so I know it works well. The financial freedom you gain by taking these steps is priceless.
1) Invest you must 2) Time is your friend 3) Impulse is your enemy | 4) Basic arithmetic works 5) Stick to simplicity 6) Stay the course

dcr1984
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Re: How much to spend on a house?

Post by dcr1984 » Wed Jan 18, 2017 10:13 pm

OP here, thanks for all the advice here. Maybe a little more info to flesh this out would be helpful.

We are physicians in our early 30's. Our gross annual income is about 390-400K.

We have 285K in student loans at about 4-4.5% (some variable at a lower % than that.) Currently paying ~$3500 a month on them. Other monthly financial obligations include a $450 a month car payment with 3.5 years remaining at ~1% interest, and daycare costs of about $3000/month (5K a year can come from our dependent care FSA). We currently max out our 403b and backdoor Roth IRAs.

Currently including retirement accounts we have about $165K in savings.
2 young children. Current jobs offer 50% college tuition paid each for 4 years (so in theory if we stay at these jobs longterm, college would be free)
Wife's job offers pension of approximately 1% of salary * years of service (5 years minimum).

4 Bedroom home prices in the area range from 500/550K to low 700's.

With that info, any suggestions on a budget?

I'd also be curious to hear from the "don't buy while you have any student debt" contingent. The idea of adding any more debt does make me rather uneasy. If we plan to remain in this area for the longterm though, there must be a point at which it is financially advantageous to buy rather than rent, even if you have some remaining debt, no? We could probably forego buying at this time and take all of our expendable income to aggressively pay off the loans and get them paid off in about 3.5 years. In that case, will we be in that much better a situation 4 years from now with 0 loans and searching for a home, than with 160K remaining in loans, but with 4 years of payments toward home equity, mortgage interest deductions, and the prospect of lower current mortgage rates? That's not a rhetorical question, I really don't know, that's why I'm posting on these boards :D

Thanks again!

dcr1984
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Re: How much to spend on a house?

Post by dcr1984 » Wed Jan 18, 2017 10:22 pm

White Coat Investor wrote:
dcr1984 wrote:My wife and I are in the market as first time homebuyers and we are trying to decide on what our budget should be. Obviously there are a lot of factors that go into this equation and I have found a few online calculators that help out, but I was wondering if anyone has any advice or resources to point me to in order to help me settle on a budget range? We are both physicians and are relatively high earners but also have a lot of student loan debt to factor in to our monthly budgets.


I would try to live on the equivalent of a single resident salary for 2-5 years after residency until the student loans are gone. That will allow you to:

# 1 Pay off the student loans and get that millstone off of your neck
# 2 Max out your retirement accounts and catch up to your college roommates
# 3 Save up a 20% down payment on your dream house.

At that point, I would purchase a home whose mortgage is no more than 2X your gross salary.

My wife and I did this and became millionaires 7 years out of residency on a single physician income (averaged $180K per year for those 7 years), so I know it works well. The financial freedom you gain by taking these steps is priceless.


Thanks, WCI! Does the prospect of rising mortgage rates change your calculation at all? If we focus our extra income on paying off the loans and saving for a down payment to avoid using a physician's loan, we will probably be waiting about 5 years and I don't know what mortgage rates will look like then.

My other question, if there a tangible financial advantage to paying off the loans early rather than paying them off more slowly and using some of the extra $ for buying a home earlier (assuming you plan to stay there longterm). This is the question/decision I am grappling with most. I understand it's a complicated equation and the answer is probably "it depends". Is the main benefit, in your opinion, just avoiding the trap of buying more house than you can afford and stretching your monthly budget too thin?

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Re: How much to spend on a house?

Post by surfstar » Wed Jan 18, 2017 10:35 pm

It definitely makes sense to buy now if you are planning on staying in the area a long time.

Usually I don't buy into the "rent is money thrown away" argument. We saved a ton while living in a 1br apt. BUT when it came time to think about a larger place, buying made financial sense, and not waiting another 1-2 years. Why spend money on rent when we could be paying principal? Lock in a historically low interest rate and hopefully a home price before they went out of control.

If you are disciplined in your savings and spending, it makes sense to purchase a home as soon as you are able to. The whole pay off your debts and save 20% down is just a "financial resume" that proves you can save and live below your means. (although I agree that you should avoid PMI at all costs)
The main thing is to not over-purchase. Doesn't matter when you buy, if you don't over-purchase, and stay there long enough, you'll be set.
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Re: How much to spend on a house?

Post by White Coat Investor » Wed Jan 18, 2017 10:46 pm

dcr1984 wrote:
White Coat Investor wrote:
dcr1984 wrote:My wife and I are in the market as first time homebuyers and we are trying to decide on what our budget should be. Obviously there are a lot of factors that go into this equation and I have found a few online calculators that help out, but I was wondering if anyone has any advice or resources to point me to in order to help me settle on a budget range? We are both physicians and are relatively high earners but also have a lot of student loan debt to factor in to our monthly budgets.


I would try to live on the equivalent of a single resident salary for 2-5 years after residency until the student loans are gone. That will allow you to:

# 1 Pay off the student loans and get that millstone off of your neck
# 2 Max out your retirement accounts and catch up to your college roommates
# 3 Save up a 20% down payment on your dream house.

At that point, I would purchase a home whose mortgage is no more than 2X your gross salary.

My wife and I did this and became millionaires 7 years out of residency on a single physician income (averaged $180K per year for those 7 years), so I know it works well. The financial freedom you gain by taking these steps is priceless.


Thanks, WCI! Does the prospect of rising mortgage rates change your calculation at all? If we focus our extra income on paying off the loans and saving for a down payment to avoid using a physician's loan, we will probably be waiting about 5 years and I don't know what mortgage rates will look like then.

My other question, if there a tangible financial advantage to paying off the loans early rather than paying them off more slowly and using some of the extra $ for buying a home earlier (assuming you plan to stay there longterm). This is the question/decision I am grappling with most. I understand it's a complicated equation and the answer is probably "it depends". Is the main benefit, in your opinion, just avoiding the trap of buying more house than you can afford and stretching your monthly budget too thin?


You're right that it depends on information we do not currently have (future home appreciation rates, future investment returns, future interest rates, your future job desires etc). Obviously if homes in your area appreciate like crazy before you can pay off your student loans, you could come out behind. But I think this approach has a lot of behavioral aspects that will be advantageous for the rest of your financial lives. The discipline you learn to pay off student loans in 2-5 years will help you pay off the house in 10-15 and be financially independent in 15-25.
1) Invest you must 2) Time is your friend 3) Impulse is your enemy | 4) Basic arithmetic works 5) Stick to simplicity 6) Stay the course

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Re: How much to spend on a house?

Post by Impromptu » Wed Jan 18, 2017 11:02 pm

As others have said, don't buy as much house as you can, but rather buy as much as you need to make you happy. This usually turns out to be much less expensive than what you can afford. You will save on utilities, furnishings, property taxes, repairs, etc. Buy a house that is less than your annual income. At your income level, maybe even 1/2 of your annual income. This is your first home. Every subsequent house will be more expensive, so start off at a lower price point.
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Re: How much to spend on a house?

Post by GregLily07 » Thu Jan 19, 2017 4:19 am

Before you get a mortgage you should consider getting debt free and having a emergency fund with 6 months of expenses first. That gives you a nice safety margin should anything go wrong. The next thing to consider is that your house payment should be no more than 25-30% of your take home pay on a 15 year mortgage. Having a 20 percent down payment is also smart so you can avoid the PMI insurance.

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Re: How much to spend on a house?

Post by chrischris » Thu Jan 19, 2017 4:33 am

I didn't read all the posts on the thread, but everyone lives in different markets. I live in an area where home prices are drastically inflated throughout the region, much greater than the standard boglehead's area. Therefore I don't agree with any stand mathematical formula when it comes to calculating a decision that impacts your own family. Be reasonable with your decision and do whats best for your family based on your situation. If you live in SF, be careful with your purchase. If you live in Mobile, Alabama you likely have much greater margin for error. Meet your needs, maybe with a little luxury if you can afford it. Don't overspend and buy something you don't need with money you don't have.

Leemiller
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Re: How much to spend on a house?

Post by Leemiller » Thu Jan 19, 2017 11:43 am

One way to look at this would be taking your monthly net income and seeing how much house you can afford with 50% of your net going to fixed expenses. Or you can see what one spouse's income could cover in terms of necessary/fixed expenses - minimum debt payments, mortgage, food. You have more flexibility as a dual income couple than a single income couple, but your student loan payment is like a mortgage payment (as is daycare). We have a mortgage less than 2x our income, but we don't have a car loan or that kind of student loan debt, we do have childcare expenses. I don't think the 2x income works without considering the rest of your debt.

Because you're dual income, I'd be less concerned with paying off all the debt prior to getting a home - as long as you get less house because of the debt.

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