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Message
Is the 28% rule too much?
Posted on 5/30/20 at 9:59 pm
Posted on 5/30/20 at 9:59 pm
We're first time home buyers, just now shopping for a house. When we calculate 28% of pre-tax income it gives us a pretty damn optimistic prediction of what we can afford. Dave Ramsey's rule is 25% of take home pay, which I think is a little too conservative. Is there a happy medium somewhere between these? What says the money talk?
ETA: forgot to add background info. No debt for either of us, mid 20s. I know we could be getting a starter home right now, but we both have very stable, long term careers. Add in the fact that mortgage rates are stupid low right now and I didn't think it made sense not to go ahead and get a nice house for the long haul.
ETA: forgot to add background info. No debt for either of us, mid 20s. I know we could be getting a starter home right now, but we both have very stable, long term careers. Add in the fact that mortgage rates are stupid low right now and I didn't think it made sense not to go ahead and get a nice house for the long haul.
This post was edited on 5/30/20 at 10:01 pm
11
Posted on 5/30/20 at 10:14 pm to Ingeniero
I think these percentages have a lot of nuance to them. What is really important is how much free cash flow exists after the requirement monthly expenses.
I'm in the same situation as you and we are closing in the next month. I baked in 'everything': PMT, Property taxes, home insurance, HOA to determine the percentages below.
With both our base incomes (take home): 17%
With only my income (take home): 29%
With both our base incomes (gross): 11%
With only my income (gross): 19%
I exclude any variable income or expected base income growth. I presume some people will think "that's too much house" while others will say "perfectly normal". I have no way of really judging what's typical but I'm financially conservative and we still have plenty of monthly FCF for other expenses even on only my salary.
I'm in the same situation as you and we are closing in the next month. I baked in 'everything': PMT, Property taxes, home insurance, HOA to determine the percentages below.
With both our base incomes (take home): 17%
With only my income (take home): 29%
With both our base incomes (gross): 11%
With only my income (gross): 19%
I exclude any variable income or expected base income growth. I presume some people will think "that's too much house" while others will say "perfectly normal". I have no way of really judging what's typical but I'm financially conservative and we still have plenty of monthly FCF for other expenses even on only my salary.
This post was edited on 5/30/20 at 10:15 pm
Posted on 5/30/20 at 10:15 pm to Ingeniero
Every person is different but for my wife and I we are really really happy we "sprung" for the bigger house. We found a great 4/2.5 that was about 100k more than a few of the other spots we were looking at that were 2 and 3 bedroom places. We got a kid on the way now after only a couple years of living here and we plan on staying in this house at minimum 5 more years (probably longer).
If we had gone the more "sensible" route and gotten a 1500 sqft starter home we'd probably be itching to move only 2 years in which is usually sub-optimal.
My advice is to buy the biggest and best that you can afford (this is KEY) and settle in. If you buy small and sensible at the start and then feel compelled to get some more space due to life changes in the near future, what little equity you will have amassed will get eaten up by fees, closing costs, etc.
ETA: We're at 21% take home. It was much higher when we first bought this place (refi'd to get out of PMI which saved us about 400/month on the monthly payment and I got a new job that pays about 30% more.)
If we had gone the more "sensible" route and gotten a 1500 sqft starter home we'd probably be itching to move only 2 years in which is usually sub-optimal.
My advice is to buy the biggest and best that you can afford (this is KEY) and settle in. If you buy small and sensible at the start and then feel compelled to get some more space due to life changes in the near future, what little equity you will have amassed will get eaten up by fees, closing costs, etc.
ETA: We're at 21% take home. It was much higher when we first bought this place (refi'd to get out of PMI which saved us about 400/month on the monthly payment and I got a new job that pays about 30% more.)
This post was edited on 5/30/20 at 10:19 pm
Posted on 5/30/20 at 10:17 pm to JohnnyKilroy
quote:
JohnnyKilroy
Agreed. We are a bit older for our first home so we 'skipped' a starter home. This could be our 'forever' home if we wanted it to be [albeit, highly unlikely]. With that said, I'm really hoping the closing goes smoothly.
Posted on 5/30/20 at 10:20 pm to lynxcat
quote:
Agreed. We are a bit older for our first home so we 'skipped' a starter home. This could be our 'forever' home if we wanted it to be [albeit, highly unlikely]. With that said, I'm really hoping the closing goes smoothly.
People we bought our home from raised 3 kids from birth to college in it.
We have plenty of space for 1. Feel like we'd have adequate space for 2. TBH kinda shocked they were able to juggle 3 kids in this space. It's not small, but it definitely ain't big.
Posted on 5/30/20 at 10:35 pm to lynxcat
Completely depends on other debt service requirements and other factors. I have a huge emergency/cash to buy a rental fund, zero debt outside of my house. I put 10% down and and my house is at about 25% of net. I don’t feel any strain from it
Posted on 5/30/20 at 10:43 pm to jimbeam
quote:
Completely depends on other debt service requirements and other factors. I have a huge emergency/cash to buy a rental fund, zero debt outside of my house. I put 10% down and and my house is at about 25% of net. I don’t feel any strain from it
That's why I think the percentages are pretty useless. First and foremost, everyone defines those percentages differently because sometimes it's just the mortgage payment and others include everything in escrow.
Add in a couple expensive auto payments and what looks reasonable for a home purchase becomes a tighter rope.
As I said previously, monthly free cash flow [take home less required expenses, namely home, auto, insurance, utilities, and groceries] is going to be the best indicator of what is or isn't 'too much house'.
Posted on 5/30/20 at 10:51 pm to lynxcat
Yep
Posted on 5/30/20 at 11:06 pm to Ingeniero
28% pre tax is way too generous for most people. But you should try putting a budget together and see what you can afford that way instead of just using an arbitrary rule
Posted on 5/30/20 at 11:20 pm to Ingeniero
By that math, I’d be completely fine with a $3,500 a month mortgage. If you think I’m even completely okay with half of that, then you’re out your mind.
If somehow you’re spending 25-28% of your gross income, you’re completely out your depth. I don’t care how much value you think appreciation will off set.
Hell, 20% of net income I would argue is beyond problematic.
If somehow you’re spending 25-28% of your gross income, you’re completely out your depth. I don’t care how much value you think appreciation will off set.
Hell, 20% of net income I would argue is beyond problematic.
This post was edited on 5/30/20 at 11:23 pm
Posted on 5/30/20 at 11:40 pm to Upperdecker
quote:
But you should try putting a budget together and see what you can afford that way instead of just using an arbitrary rule
The best advice.
If you're budget is set up and you see you can afford to put 30% towards housing go for it. If you set up a budget and see you can afford to put 20% go for it etc.
Posted on 5/30/20 at 11:46 pm to DiamondDog
quote:
Hell, 20% of net income I would argue is beyond problematic.
How so?
Posted on 5/30/20 at 11:47 pm to Ingeniero
Bigger houses have larger utility bills, higher taxes, higher insurance, and more things to repair. Our kids were in college when I was transferred, so we decided to go from a 4,000 sf house to a 2200 sf house. The difference in expenditures and requirements of my time is huge. Previously there was always something that needed to be fixed. More toilets and HVAC’s mean more opportunities for you to learn to fix stuff and ways you can share your money with repair companies.
There is more that factors into the cost of a bigger house than the mortgage note. Just something to keep in mind.
There is more that factors into the cost of a bigger house than the mortgage note. Just something to keep in mind.
Posted on 5/30/20 at 11:49 pm to Ingeniero
quote:
Dave Ramsey's rule is 25% of take home pay,
I like Dave, but due to the nature of his show he is forced to give generic one size fits all guidelines that will be applicable to the largest number of people. The real answer is like the other posters here have said, make a budget and see what the largest payment you can easily handle will be taking into account possible unforeseen changes in income.situations.
Posted on 5/31/20 at 4:49 am to Ingeniero
A house is a place to live.
We tend to overbuy.
People want a guest room, but you could spring for a hotel room for your visitors for less money. I sit here in this house with high end finishes and know I could already be retired if I had spent $300,000 instead of $400,000.
Houses can generate a gain over years, but they don’t pay dividends.
The industry is geared for you to spend as much as they can get you to on housing. I don’t think a realtor has ever shown me a house that was less than what I said was the top end of the price range. If I said “I’d like to look at homes with 4 bedrooms, less than 5 years old, in this school district ranging in price from $250k to $325k.”
Realtor,”I’ve found a great house. It meets your needs and the list price is $369,900.”
We tend to overbuy.
People want a guest room, but you could spring for a hotel room for your visitors for less money. I sit here in this house with high end finishes and know I could already be retired if I had spent $300,000 instead of $400,000.
Houses can generate a gain over years, but they don’t pay dividends.
The industry is geared for you to spend as much as they can get you to on housing. I don’t think a realtor has ever shown me a house that was less than what I said was the top end of the price range. If I said “I’d like to look at homes with 4 bedrooms, less than 5 years old, in this school district ranging in price from $250k to $325k.”
Realtor,”I’ve found a great house. It meets your needs and the list price is $369,900.”
Posted on 5/31/20 at 8:01 am to DiamondDog
I agree for myself too. But I think the whole point of the thread is there is no arbitrary number. If you have no other debt, company paid vehicles, public school, etc. then 28% would be manageable for some. Everyone needs to do their own budget.
Posted on 5/31/20 at 9:01 am to Ingeniero
I have done well on resale on three houses by buying the smallest house i could in an area of larger houses. but I only raised one child so YMMV.
I never had a house note more than 10% of gross.
the carrot at the end of the stick is that when you find the place you will stay long term, it’s easier to pay off.
our current (and last) primary home is 1500SF 2/2.
I agree with the poster who said we tend to overbuy. It’s just a place to live and park your shite
I never had a house note more than 10% of gross.
the carrot at the end of the stick is that when you find the place you will stay long term, it’s easier to pay off.
our current (and last) primary home is 1500SF 2/2.
I agree with the poster who said we tend to overbuy. It’s just a place to live and park your shite
Posted on 5/31/20 at 2:25 pm to Ingeniero
I’m at 30% take home for my payment on a 15 year loan. But my take home is after me putting 20% to retirement. Seems to work fine for us.
This post was edited on 5/31/20 at 2:31 pm
Posted on 5/31/20 at 5:02 pm to tigersfan1989
We are at about 16% gross and 24% net. No way I would want to go higher than that.
Posted on 5/31/20 at 6:01 pm to Ingeniero
We bought our first home about 3 years ago, and also skipped the “starter home” purchase. I was 29 and my wife was 26 at the time, but we also didn’t want to buy something smaller and end up having to consider buying something else in the next 5 years or so.
We’re at ~16% of gross (including mortgage, insurance, and taxes) and could easily afford more.
As others have said, your cash flow is really what matters, percentage isn’t the best way to look at it, because your expenses won’t really go up that much as you make more money. Gas, groceries, cable, internet, phone, entertainment, etc... can all cost the same whether you make 200k or 100k. Therefore as you make more money you should be able to afford to allocate a larger percentage of your income to housing (not saying that you have to, but you can).
We’re at ~16% of gross (including mortgage, insurance, and taxes) and could easily afford more.
As others have said, your cash flow is really what matters, percentage isn’t the best way to look at it, because your expenses won’t really go up that much as you make more money. Gas, groceries, cable, internet, phone, entertainment, etc... can all cost the same whether you make 200k or 100k. Therefore as you make more money you should be able to afford to allocate a larger percentage of your income to housing (not saying that you have to, but you can).
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