topic Re: % of budget for housing? in Personal Finance

% of budget for housing?

Anonymous — Sat, 16 May 2020 21:50:05 GMT

Hello Fico Fam!

I have read many articles about the following methods:

1) Dave Ramsey 25% Net Income (Take Home)

2) 28% Housing Pre-Tax Income, 36% with all Debt Pre-Tax Income

3) 4x Annual Salary

etc...

Which one do you prefer or if you do not follow any of the ones above, what % or methodology do you recommed? We are looking to save up for our first house in Southern California and yes the cost of living is high. We understand there is not a one size fits all, but I do want to hear your input!

Thanks for your input and God bless!

Re: % of budget for housing?

recoveringfrombk7 — Sun, 17 May 2020 02:15:02 GMT

We went for the cheapest we could do and still be happy. A home should not be a burden. We went double our pretax income for purchase price (before downpayment). Basically we made the decision that we'd rather pay the house off in 10 years and travel. We are not socal expensive, but we are in NJ where it's not super cheap either. Lots of luck in your search!

Re: % of budget for housing?

Shooting-For-800 — Sat, 16 May 2020 22:09:07 GMT

completely depends on your situation.

25-40% after taxes is a good conservative number.

If you work at home and have no kids you are in a completely different budget than someone with 6 kids who drives all over the state for their job. Some people go out every weekend, some people cook at home and never leave their house. Some people love expensive cars, some people buy the cheapest car that fits their needs and keeps it for 10 years.

75% of whatever you prequalify for at the best interest rate?

Re: % of budget for housing?

VanderSnoot — Sat, 16 May 2020 22:32:10 GMT

I'm a fan of testing the cash flow waters. If you currently spend $2k/month rent and you think you can afford $3k/month, try "paying" the extra $1k for six months (stick the extra $1k in savings). See how the cash flow feels. Maybe it's tight, maybe it's comfortable; either way you learned something without taking a huge financial risk. And at the end of 6 months, you have a small savings (~$6k) for furniture, a downpayment, closing costs, whatever.

Re: % of budget for housing?

iced — Sun, 17 May 2020 01:04:45 GMT

@Anonymous wrote:
Hello Fico Fam!

I have read many articles about the following methods:

1) Dave Ramsey 25% Net Income (Take Home)
2) 28% Housing Pre-Tax Income, 36% with all Debt Pre-Tax Income
3) 4x Annual Salary
etc...

Which one do you prefer or if you do not follow any of the ones above, what % or methodology do you recommed? We are looking to save up for our first house in Southern California and yes the cost of living is high. We understand there is not a one size fits all, but I do want to hear your input!

Thanks for your input and God bless!

The numbers I've always lived by was not to borrow more than 1.5-2x your annual income (you can buy more, but be prepared to make a down payment big enough to bring the amount borrowed down to 2x). That will often result in a monthly payment that can be handled without drowning you in monthly obligations. If I were to follow some guideline based on monthly income, it would absolutely positively have to be net, not gross. The Ramsey number above (25%) is reasonable but probably close to my upper end. It blows my mind that people assume gross (pre-tax) is an OK number to budget against; if you go too high you just killed your ability to save or contribute to retirement savings, not to mention you will struggle to live beneath your means.

I live in a very high CoL area (properties often sell for $1,000/square foot or more), but would still advise people to not mortgage more than 2x annual income. If they can't afford a place in the areas they like, look further out or increase their down payment. If they still can't, take on roommates. There's just no valid justification for spending most of one's take-home on a mortgage for the next 30 years.

Re: % of budget for housing?

Anonymous — Sun, 17 May 2020 12:47:21 GMT

I base my comfort level on what we bring home each month. For me my gross income is irrelevant to me.

After you pay all your bills, how much money do you need to have left for future needs such as savings for vacation, christmas, kids, retirement, car, routine car/house maintenance and increasing the size of your rainy day fund?

I'm a fan of not exceeding more than 25% of take home for mortgage+taxes+insurance. I personally don't include utilities. If I had an HOA I would include that. Take home varies depending on what deductions come out of your check. For me, my take home is after taxes, 401k, benefits and HSA. I want to be a able to still have a life.

Re: % of budget for housing?

wa3more — Sun, 17 May 2020 13:04:14 GMT

It depends. Your PITI should be low enough to save 10 plus % for retirement and extra amount for rainy day, contingencies. Homeownership isn't cheap and there are always expensive surprises.

take your budget and back into a number you can afford

Re: % of budget for housing?

tcbofade — Sun, 17 May 2020 15:24:20 GMT

I've always used the 25% of net monthly income method...

We've been almost exactly there for the last seven years.... job change last year now has us at 16%.

Re: % of budget for housing?

Anonymous — Sun, 17 May 2020 15:28:53 GMT

@VanderSnoot wrote:
I'm a fan of testing the cash flow waters. If you currently spend $2k/month rent and you think you can afford $3k/month, try "paying" the extra $1k for six months (stick the extra $1k in savings). See how the cash flow feels. Maybe it's tight, maybe it's comfortable; either way you learned something without taking a huge financial risk. And at the end of 6 months, you have a small savings (~$6k) for furniture, a downpayment, closing costs, whatever.

Great idea! Think I'll give that a go before I decided what to do when my lease is up next year.

Re: % of budget for housing?

wa3more — Sun, 17 May 2020 15:37:02 GMT

Obviously location is major consideration.

i live on Long Island , New York. 12k in property taxes and another 4K in homeowner and flood insurance. Yes , incomes higher but not still very expensive to live here relatively speaking.

Re: % of budget for housing?

Anonymous — Sun, 17 May 2020 23:11:06 GMT

Absolutely agree that a home should be a blessing and not a curse! Thank you for your input

Re: % of budget for housing?

Anonymous — Sun, 17 May 2020 23:14:46 GMT

Yes! I figured that using your net take home pay is a more realistic methodology. My intention is that my first houese would not be my last as this would eventually be used as a rental property. I figure the less % of take home pay, the more I can save for both the next down payment and principal to refi the 1st house in the later years. Thanks for your input!

Re: % of budget for housing?

Anonymous — Sun, 17 May 2020 23:16:17 GMT

This is great! I never thought of it that way. Thanks for your input

Re: % of budget for housing?

Anonymous — Sun, 17 May 2020 23:19:00 GMT

100% agree on this! Net pay should be the indicator and it is crazy how loan mortgage originators try to upsell you by telling you all the bells and whistles since you can "afford more." Only hard part is just saving up that down payment! Thanks for your input

Re: % of budget for housing?

Anonymous — Sun, 17 May 2020 23:20:50 GMT

Absolutely agree with this! Are you doig 25% on a 15 year or 30 year fixed?

Re: % of budget for housing?

Anonymous — Sun, 17 May 2020 23:24:29 GMT

Absolutely, I could never ever fathom the idea of 50% allocated as a mortgage payment! Thanks for your input