As a home inspector people often ask me questions regarding their purchase. Did I pay too much? this is my monthly payment is that ok? How much will closing cost? All these financial questions I always want to divert to the realtor and lender since they’re the subject matter experts but nonetheless I get asked often.
So how much home can you afford? A lot of financial experts will suggest 28% of your take home income. This is often over simplified, does this advice include both persons salaries? what about utilities? If you live in Alabama and have a heat pump your electric bill from the seasons is significantly different so how do you estimate it? What about kids and marriage situations? Lots of questions come to play with this quick reference number so lets break it down a little further.
Before I get there, let me state I am not a financial consultant or accountant, consider this neighborly advice from someone who's been in the industry and maintained a certain degree of financial peace and freedom.
Lets break it down by numbers from an example; John and Sara are married and John makes $4,000 monthly after taxes from his job in an automotive factory, Sara makes $1,000 per month selling a consumer marketing item. Combined for a total of $5,000 conventional wisdom says they can have a payment of $1400 (28%). For sake of argument lets assume that they have both been disciplined with their finances and owe no other debts.
John’s job is secure, he's worked for the same company for 10 years enjoys his job and has no intention of leaving. Sara’s fluctuates a lot from month to month since she is still growing her business. So let me throw one piece of advice your way, chose whichever partner has the most secure (not the highest paying) job in the relationship and base your necessities bill off of that.
This excludes Sara’s income, though it’s important to remember her business could grow exponentially so the roles may eventually revers where Johns position is no longer the most secure. Their income towards necessities is $4,000 per month which means they can afford a payment of $1120. Let me ask you how easy you find it to support a payment of $1120 when you bring home $4K every month? its doable but depending on your financial discipline it may not be easy.
Let’s lower that to $1000 (25%) and roll expenses in there i.e. utilities! Estimate an electric bill and water payment, it’s ok to be off since you built in the buffer. but lets say $150 for electric and $50 for water. John and Sara can now buy an $800 a month house or about $170,000 at 4 points over 30 years ($110,000 over 15 years). And all of their expenses can be covered with less than 25% of his take home pay.
Now we have some security with our mortgage! Yes we got a little less house but don't forget that Murphy is always around the corner. You can afford some car trouble, you can deal with an unplanned pregnancy, you can handle emergency trips for sick family members, and you might even be able to take a vacation!
Here’s a quick rule of thumb, if the economy goes to hell and you both are out of a job can you pay the bills with a $10 an hour job at the gas station? set yourself up for success and stay with a payment you can afford rather then just manage.
A little helpful advice from a neighbor!
I am a United States Army Veteran with over 10 years construction experience prior to my service. After my time in the military I enrolled in InterNACHI's rigorous course work to become a certified member and prepare for the National Home Inspectors Exam. I continue to push inspection courses and education, attaining and exceeding the required continuing education courses