Saturday, May 13, 2017

Money Crashers: How Much House Can I Afford?

When Brian and I first decided to buy a house, back in 2006, we spent over a year shopping before we found one we were happy with. That's mostly because we absolutely refused to compromise on two things: location and price. We didn't want to buy a house at all if it wasn't in a walkable town, with a short commute to work for Brian - which, around here, pretty much narrowed it down to Highland Park or Metuchen. And we didn't want to buy one if it would stretch us too far financially, which pretty much capped our price range at $350,000 total. And frankly, houses in Highland Park and Metuchen for less than $350K were pretty few and far between.

From time to time, people would try to persuade us we should consider looking outside our price range. Our real estate agent, and even occasionally my mom, would encourage us to "just take a look" at a house that was priced somewhere between $350,000 and $45,000, arguing that if we liked it, we could probably talk the seller down on the price. But we held firm. If it didn't fit our budget, we didn't want to see it - because we didn't want to take the risk of falling head over heels in love with a house that we couldn't really afford. If we ever started feeling like we "just had to have" this home, regardless of price, we knew we could talk ourselves into a mortgage that would stretch us thin - and leave us no wiggle room if either of us were ever out of work for any length of time. And in the end, our stubbornness paid off; we found this house, which ticked off all the boxes on our "must have" list and came in well below $350K.

So how did we come up with this number in the first place? In a word, math. First, we determined how much of our monthly income was already spoken for, and how much wiggle room we wanted our budget to have. Based on that, we worked out what percentage of our income we could afford to put toward our housing payment and still feel comfortable. Working backward from that, we were able to figure out how big a mortgage we could manage. And finally, we figured out what we could afford for a down payment, and added that in to come up with the total price.

If that whole description was a little too fast for you, don't worry; my latest article for Money Crashers covers the whole process in much more detail. First, I go into some detail about the hazards of buying too much house - the problems that Brian and I were so eager to avoid when we bought this one. Then, I go through the whole process of finding the right price, including the factors that affect what you can afford (such as your down payment). And finally, I talk about what you can do if you find - as we did - that your target price is so low you can't find any houses in your area to fit it. (Ideas include saving up a bigger down payment, paying off outstanding debts, improving your credit, or looking for special programs to help low-income buyers.)

Get the skinny here: How Much House Can I Afford?

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