Can we afford $550K house?

Non-investing personal finance issues including insurance, credit, real estate, taxes, employment and legal issues such as trusts and wills
Post Reply
Topic Author
davos8923
Posts: 27
Joined: Sat Mar 03, 2018 1:14 pm

Can we afford $550K house?

Post by davos8923 »

I (husband, 35) am sole earner, making ~$350,000 a year. Income is a bit volatile as I'm an entrepreneur. Wife (doesn't work, 35) and two very young children. Looking at homes around $550,000 in the midwest (although in a city where taxes are kind of high). We'd do 20% down payment and so the PITI would be around $3,000/mo.

We have zero debt, and our net worth is ~$450,000 ($300K is liquid; $150K is in retirement). Once we'd make the 20% down payment (plus closing costs), we'd have a ~$170,000 emergency fund (although $110K of this in a taxable account). New savings accumulating rapidly given my income, but which leads me to my only concern. . .

My only concern if there is one would be if my business went south. It's trending up (significantly), but you just never know in this crazy world. Worst case scenario if my business went to zero (hard to fathom, but I like to assume the worst) I'd just get a job in my field (wife could too), but this would be for significantly less money (perhaps $100K for me, wife could maybe make $25K part time).

Thoughts?

P.S. - for anyone wondering if we could go cheaper, yes, of course, but this would be for an ideal location, top school, etc.
User avatar
Brianmcg321
Posts: 895
Joined: Mon Jul 15, 2019 8:23 am

Re: Can we afford $550K house?

Post by Brianmcg321 »

Paying 20% down the mortgage would be for 440,000. With a 30 year loan at 3.5% your monthly payment would be $1,950.

Worst case, would you be able to pay that only making $100k. It would be a stretch, but with your savings it would be doable for quite awhile.
Rules to investing: | 1. Don't lose money. | 2. Don't forget rule number 1.
Topic Author
davos8923
Posts: 27
Joined: Sat Mar 03, 2018 1:14 pm

Re: Can we afford $550K house?

Post by davos8923 »

Brianmcg321 wrote: Wed Sep 16, 2020 8:44 am Paying 20% down the mortgage would be for 440,000. With a 30 year loan at 3.5% your monthly payment would be $1,950.

Worst case, would you be able to pay that only making $100k. It would be a stretch, but with your savings it would be doable for quite awhile.
I think rate would be 2.8% FWIW, and PITI would be $3,000, so a lot more than only $1,950. Yes, would be tight if business went to zero. I guess in an absolute WORST case scenario could always even sell the house as we (should, disaster permitting) would have good equity. But obviously would never want to have to do that.
000
Posts: 2163
Joined: Thu Jul 23, 2020 12:04 am

Re: Can we afford $550K house?

Post by 000 »

Probably, but you may be happier in the future with less house and more stocks.
mbasherp
Posts: 491
Joined: Mon Jun 26, 2017 8:48 am

Re: Can we afford $550K house?

Post by mbasherp »

Very high income
1.57x annual salary on home
Large emergency fund
20% down
Contingency plan if business goes south

You didn’t talk a lot about other expenses, but in general if you can’t do it, there’s not much hope for the rest of us!
KlangFool
Posts: 17299
Joined: Sat Oct 11, 2008 12:35 pm

Re: Can we afford $550K house?

Post by KlangFool »

OP,

In order to answer this question, we need more information:


A) What is your annual expense?


B) What is your annual saving before buying the house?


C) Why are you asking this question?


D) Do you plan to pay your kids' college education? If you buy this house, you may not have money to pay for their college education.

Your numbers do not adds up. Your annual income is 350K per year but your net worth is only 450K. You probably have this new and higher income for a short while.

<<Worst case scenario if my business went to zero (hard to fathom, but I like to assume the worst) I'd just get a job in my field (wife could too), but this would be for significantly less money (perhaps $100K for me, wife could maybe make $25K part time).>>


That is not the worst case. With about 30+ million folks unemployed, it is likely that your business went to zero and you would be unemployed for quite some time.

IMHO, you are asking this question because your gut tells you that it is not safe to buy this 550K house given the uncertainty of your new higher income. Listen to your gut.


KlangFool
User avatar
Watty
Posts: 20428
Joined: Wed Oct 10, 2007 3:55 pm

Re: Can we afford $550K house?

Post by Watty »

Brianmcg321 wrote: Wed Sep 16, 2020 8:44 am Paying 20% down the mortgage would be for 440,000. With a 30 year loan at 3.5% your monthly payment would be $1,950.

Worst case, would you be able to pay that only making $100k. It would be a stretch, but with your savings it would be doable for quite awhile.
+1

You would also have things like property taxes, insurance, and maintenance but overall if you buy a house your monthly housing expenses may not be dramatically higher than if you do not buy a house and keep renting someplace to live.

What are you paying for rent now?

You really need to do what is comfortable for you, and there is a lot of weirdness in the world right now so I can understand your uncertainty. If you don't feel comfortable buying a house yet then you could postpone the purchase and save like crazy and have another $100K or so saved up so that your numbers might feel more comfortable next spring or summer.
oldfort
Posts: 1547
Joined: Mon Mar 02, 2020 8:45 pm

Re: Can we afford $550K house?

Post by oldfort »

Some of the responses are too conservative. At 1.57x gross income and record low interest rates, this home should be easily affordable.
as9
Posts: 200
Joined: Mon Jan 27, 2020 9:26 am

Re: Can we afford $550K house?

Post by as9 »

Yes, you can absolutely afford this. Even in that worst case scenario you'd likely be fine.

If it makes you feel better then you could create a house payoff fund (invested according to your comfort level). As long as your business is doing well you can set money aside to pay off or greatly reduce the mortgage in the event of a worst case scenario.
Hiker8
Posts: 8
Joined: Mon Sep 23, 2019 11:09 am

Re: Can we afford $550K house?

Post by Hiker8 »

Yes, you can very easily afford the house given your current annual income. The question you are really asking is whether or not its safe to purchase a house with a one-income family and a business that may go south. If that's a real concern of yours which will keep you up at night then my advice would be to rent.
User avatar
galawdawg
Posts: 1095
Joined: Thu Dec 14, 2017 12:59 pm
Location: Georgia

Re: Can we afford $550K house?

Post by galawdawg »

How long have you been earning $350k per year? The amount you have saved at age 35 appears low for that salary amount. If you have not been earning that amount as an annual average for a significant length of time, is it realistic to plan that you will continue to earn at that level?

You mention that your income is volatile as you are an entrepreneur. What has been your average gross annual income for the past five (5) years? Ten (10) years? How about your monthly expenses, including taxes, insurance, rent and such?

That will help with more informed suggestions!
bostonboglehead123
Posts: 28
Joined: Wed Sep 05, 2018 9:16 pm

Re: Can we afford $550K house?

Post by bostonboglehead123 »

Hilarious that there's even this much consideration (on the forum, not on your part). If you lived in say NY or SF with that income level, you'd be asking if you can afford a $1M house.

I'd say 550k is very well within budget, don't worry about it.
onourway
Posts: 2612
Joined: Thu Dec 08, 2016 3:39 pm

Re: Can we afford $550K house?

Post by onourway »

Beyond the very good question of how long you've been earning this amount and having a realistic view as to how long it will continue, I also question what your real take home is after covering your taxes, health insurance, retirement contributions, etc. $350k self employed isn't the same thing as a $350k salary.
User avatar
BolderBoy
Posts: 4983
Joined: Wed Apr 07, 2010 12:16 pm
Location: Colorado

Re: Can we afford $550K house?

Post by BolderBoy »

davos8923 wrote: Wed Sep 16, 2020 8:37 amMy only concern if there is one would be if my business went south. It's trending up (significantly), but you just never know in this crazy world. Worst case scenario if my business went to zero (hard to fathom, but I like to assume the worst) I'd just get a job in my field (wife could too), but this would be for significantly less money (perhaps $100K for me, wife could maybe make $25K part time).
Yes, you can afford this house but with this worry in mind, I would aim toward paying off the house in an expedited fashion.
"Never underestimate one's capacity to overestimate one's abilities" - The Dunning-Kruger Effect
csm
Posts: 411
Joined: Sun Mar 27, 2016 7:52 am

Re: Can we afford $550K house?

Post by csm »

Would the worst case scenario of your business dropping to -0- income be sudden and immediate? By that I mean, would you not see a gradual drop in income so that you can make adjustments?

If your business income decreased, could your wife work part time while you made adjustments to build it back up?

You can easily afford the payments on your income today, but I would strongly suggest keeping a budget and continuing to save a significant amount of your current income so you can weather any declines for a while, in order to give time to assess and adapt.
ajg189
Posts: 20
Joined: Tue Mar 26, 2019 3:11 pm

Re: Can we afford $550K house?

Post by ajg189 »

You can easily afford this
toocold
Posts: 136
Joined: Sun Jul 23, 2017 9:17 am

Re: Can we afford $550K house?

Post by toocold »

From a pure top line number (under 3x income), you can afford it. Whether you can truly afford it depends on your cushion between earning and spending, but from your over stats and the fact that you are concerned about this, you can likely afford it.
Lee_WSP
Posts: 3013
Joined: Fri Apr 19, 2019 5:15 pm
Location: Arizona

Re: Can we afford $550K house?

Post by Lee_WSP »

How long have you been earning $350k per year? The amount you have saved at age 35 appears low for that salary amount. If you have not been earning that amount as an annual average for a significant length of time, is it realistic to plan that you will continue to earn at that level?

You mention that your income is volatile as you are an entrepreneur. What has been your average gross annual income for the past five (5) years? Ten (10) years? How about your monthly expenses, including taxes, insurance, rent and such?

That will help with more informed suggestions!
These are my thoughts as well.

Although, with today's underwriting standards, most large banks are going to go through the same questions, so if Bank of America is offering you a loan in the $550k amount, yes, you can afford it. They're underwriting standards are strict for entrepreneurs.
Post Reply