Tuesday, November 11, 2008

Can we afford to buy a house right now?


I have been researching a lot lately about the precautions my husband and I need to take as first time home buyers. Though we are not seriously looking to buy a house, I wanted to break down the numbers and see how my expense sheet will look if I were to buy and home and then decide if I would still want to buy a house based on that. This is how I approached it.

Determining how much house we can afford.

I wanted to keep our income estimate extremely conservative while coming up with this number. Most PF blogs or sites advice to spend around 28% of a households “pre-tax” income while determining the amount of mortgage payments they can afford. I have decided to use a different approach. Instead of the pre-tax income I am going to use the after tax yearly income to determine how much in monthly payments we can afford. Also, I am going to use only my income for this estimate (the lower of the two incomes) reason being if one of us were to loose a job we can still afford the payments without digging into our savings-if we have any by that time J .

My after-tax yearly income = $51,767 (Rounded to the nearest dollar)

According to financial pundits:

I can afford a house that is 3 times my yearly income = $206000(rounded off to the nearest dollar)

If I were to use my after-tax yearly income the number would be = $155,300. I like the 206000 number better because I would like to buy a house in a good community with easy access to highways and good school districts and I believe I can find something for that price in Houston. In fact the price I am looking at is between $175,000 – $200,000. So I am within the ball park.

Say if I were to buy a home for $195,000 including closing costs, my hypothetical expense sheet post home buying will look like this assuming a 6.5% interest rate on a 20 year loan and 2.5% property taxes and zero down payment.


Monthly Mortgage: 1941 (Used http://www.mortgagecalculator.org/)

Electricity : 250

Utilities : 100

Maintenance : 150

Taxes (Pro.Mntly) : 410

Grand Total : $2,851



Monthly take home pay: $4,313

Mortgage payment to Income Ratio: 66.10%


This is way more than the 28% that they suggest probably because they used pre-tax income to come up with that percentage.

Using the balanced budget formula, I can spend 50% of my income on needs but if I were to buy a home I will be spending 66.10% without including the food expenses. So I would have a to either wait until I get a good amount of raise, or save enough for the down payment that will reduce my monthly mortgage expenses. I guess I will go for the latter instead of waiting for a raise.

For now, Home buying is out of question.

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