How to set budget to purchase a home?

[MrRational]

Originally Posted by JonathanLB

I get the 25% (of net) number works for a lot of people ...
but it seems like people state it like it’s logical for all.

It does and It is.

It seems also people should state the 25% number for average incomes.

Nope ... but they should be more attentive to using Net or Gross.
And it sure wouldn't hurt if those rather few with an exceptional income or unique circumstances
would stop citing or imposing their own lives and numbers as exemplars of what 'normal' o 'common' is.
Congratulations that you have it. I have a nice pile as well. But these aren't common in any sense.

The formula c/should apply to just about everyone; even the top 10% of 'wealthy' and the retired too.
But it does have an especially critical meaning for anyone who would call themselves 'middle class'
and still need (to varying degrees) to accumulate generally, provide currently, and prepare for their own futures.
Who isn't in that pool?

If you’re making $20,000/month (Gross? or Net?)

That $240K less the taxes and save/invest commitment even at just 25% combined = $180K net.
That $240K plus less the taxes and save/invest commitment even at just 25% combined = $300K gross

...and your house total expenses including property taxes are $10,000/month
who cares if your housing is 50% of your expenses?!

Who? I'd hope that they would -- not least because that $10K is more like 70-80% of the net off $240K
Even at $300,000 annually it's unsustainable and a stupid position to CHOOSE to be in.

[HudsonCoNJ]

Originally Posted by MrRational

It does and It is.
Nope ... but they should be more attentive to using Net or Gross.
And it sure wouldn't hurt if those rather few with an exceptional income or unique circumstances
would stop citing or imposing their own lives and numbers as exemplars of what 'normal' o 'common' is.
Congratulations that you have it. I have a nice pile as well. But these aren't common in any sense.

The formula c/should apply to just about everyone; even the top 10% of 'wealthy' and the retired too.
But it does have an especially critical meaning for anyone who would call themselves 'middle class'
and still need (to varying degrees) to accumulate generally, provide currently, and prepare for their own futures.
Who isn't in that pool?

That $240K less the taxes and save/invest commitment even at just 25% combined = $180K net.
That $240K plus less the taxes and save/invest commitment even at just 25% combined = $300K gross
Who? I'd hope that they would -- not least because that $10K is more like 70-80% of the net off $240K
Even at $300,000 annually it's unsustainable and a stupid position to CHOOSE to be in.

Why is it unsustainable? And why is it stupid? Because YOU wouldn't do it?


If someone netting $20,000 a month chooses to have a $10,000 housing payment it doesn't mean they're necessarily stupid or mismanaging their finances. Maybe they just really value having a nice home and are more frugal in other areas.

[HudsonCoNJ]

Originally Posted by MrRational

There ya go... and it isn't.
Maybe we'll do the math someday and show it.


And isn't that just a PITA?
I mean, it wasn't always like this... right? Why are so many so eager to accept it?

I don't know what you mean by this. I wouldn't say I'm eager to pay more to live in this region of the country but it's out of my control. If my options are move to a low cost of living area or pay more to stay, I'm choosing to stay.

[BigCityDreamer]

Personally, I think that the monthly mortgage payment - including principal, interest, escrow taxes and insurance - should be no more than 31% of monthly gross household income.

Things are going to start feeling tight if it goes much higher than that.

[JonathanLB]

Originally Posted by MrRational

It does and It is.
Nope ... but they should be more attentive to using Net or Gross.
And it sure wouldn't hurt if those rather few with an exceptional income or unique circumstances
would stop citing or imposing their own lives and numbers as exemplars of what 'normal' o 'common' is.
Congratulations that you have it. I have a nice pile as well. But these aren't common in any sense.

The formula c/should apply to just about everyone; even the top 10% of 'wealthy' and the retired too.
But it does have an especially critical meaning for anyone who would call themselves 'middle class'
and still need (to varying degrees) to accumulate generally, provide currently, and prepare for their own futures.
Who isn't in that pool?

That $240K less the taxes and save/invest commitment even at just 25% combined = $180K net.
That $240K plus less the taxes and save/invest commitment even at just 25% combined = $300K gross
Who? I'd hope that they would -- not least because that $10K is more like 70-80% of the net off $240K
Even at $300,000 annually it's unsustainable and a stupid position to CHOOSE to be in.

No, it isn’t, and it’s not whatsoever any sort of financial fact. You’re also assuming a bunch more things that shouldn’t be assumed. I never need to save one dime of my income. My assets appreciate in value anyway, they ARE the savings, already built in. Income is “money off the top” as it would be for anyone with business investments. It’s like spending stock dividends - you still own the stocks, the underlying asset. If you make $20K/month after taxes let’s use that example, it doesn’t make any difference if you spent $10K/month on housing, it’s very easy to live on $5,000 let alone $10,000 per month even for two people. You can live extremely well on that and I’m including all housing expenses in the $10K from insurance to property taxes to mortgage to HOA dues. That would be the vast majority of your major expenses besides food, health insurance, and auto insurance. The rest would be smaller bills like cable, phone, gas, electric, etc.

The higher the income, the more percentage-wise you can spend on housing. If you made $100,000/month and spent 75% on your house (not like any bank would allow that, but that’s besides the point here), you can live on $25,000/month unless you’re completely brain dead.

[MrRational]

Originally Posted by JonathanLB

I never need to save one dime of my income.

Good for you and the other top 10%ers.
And for those doing well on employment earnings in one of the 15% areas... double good on you.

But like with every other thread and comment... these experiences are an exception.
STOP citing them as any sort of exemplar of common or normal circumstance.
Hasn't this been hashed out enough already?
= = =

EVERYONE else does in fact need to save and invest (and often to pay down debts).
People have two choices to make regarding this: How much to save and when to do that.
The brighter among them will commit to saving FIRST and to save as much as they can (5%? 10%? 15%? more?).
(the questions of HOW that pool of money can/should be managed require other threads)

And everyone else also needs to pay taxes and contribute to SS/FICA etc.
We can tweak the withholding some but at the end of the year that comes home to roost.
NO ONE gets away with not making these payments and few will pay less than 20% of their gross.

For the purposes of this exercise at least...whatever the taxes and save/invest commitment might
all add up to, then deducted from their annual gross, becomes their annual NET income.

Divided by 12 or 52... that total becomes their monthly or weekly "allowance" number.
Their household/family budgeting and planning NEEDS to be based on these NET amounts.

The largest single expense category for most will be their housing expenses.
Rent & Utilities (and parking?) for renters; PITI, utilities, HOA, PMI, upkeep, etc... for buyers.

Whatever the entirety of their life needs and desires might encompass...
this set of monthly obligations is the one CHOICE that can (will) set the tone for all the rest.

Be smart. Keep this recurring monthly obligation to a minimum/comfortable level.
Figure a way to make your WEEKLY net cover your MONTHLY housing costs.
Allow yourself to have enough to have the rest as well.

[galaxyhi]

Andre, OP,:

Mr Rational is right, and well, rational.

We bought our first house 4 years ago. The mortgage company MADE SURE the mortgage ( principle, interest and insurance, and in our case because we only put 10% down, the Private Mortgage Insurance [PMI]) WAS NO MORE THAN 25% OF OUR NET INCOME.

So, its not just a rule, but at least here in NY, anywhere we checked mortgage rates and loans, THAT was the rule. WE HAD NO CHOICE.

The poster who said housing costs should be no more than 31% is also on a good track, IF it includes maintenance costs and savings towards big ticket items such as a new roof, new heat/ac system, etc.

Think about it...if you earnings get cut due to downsizing, due to job loss ( NONE of us are indispensable), etc, which would you rather have... a lower payment of 25% of your income now, or a higher payment of 50% of your income now? Think long and hard on that.

My OH ( Other Half for those who still dont know the abbreviation) had TWO PAY CUTS in the last year. My OH has 2 part time jobs to assimilate a full time 40 hours plus 10 hours bonus. Now my OH gets 30 hoyrs between the two, and is looking for a third job or replacement job. This area os largely part time jobs. And full time jobs are hard to come by, and often only minimum wage full time still with no benefits.
My point here is: it is still possible to meet our mortgage payment with the cut in income BECAUSE it WAS less than 25% of our former income.

Think long and hard before taking on a higher percentage of income mortgage, EVEN IF you pay more renting. You can always move at lease end to a cheaper place, trying to sell a house quickly, well, not so much. Plus renting doesnt come with ancillary capital maintenance expenditures.

As far as ypur original question about saving, here are some ideas:

1) take your net, and after 15% put away for retirement ( don't skimp here, you will lose compounding growth and will never be able to make that up as you age ), make a dedicated savings account for as much as you can save towards down payment. If you can or need to, male it a specific amount: say 20% goes into a money market savings account, or $1500/m goes directly there . ( do NOT invest monies needed in 5 years or less in the market, even when its appearing to do well, you want safeguard and protect that money for the house).

2) decide EVERY purchase.. even a candy bar. Wouod you rather have that item, or a house? ( the first time we went to Hawai'i, we dedicated as much extra savings towards funding the trip in a year. When my OH wanted to buy something not crucial to living I'd say " do you want that now, or Hawai'i "? Invariably Hawai'i was chosen)

3) take on a second, and/or third job. Its only temporary but save every dime of that income. Or, pick up ectea hours at work.

4) first time home buyer? Check around your area. There are financial institutions, city governments and county governments that offer to MATCH your down payment dollar for dollar up to certain amounts. Fir example, you save $10k, they will give you $10k . But if you save $20k they still will only match that first $10,k. Check online for such too. They have kind of dried up in a strong housing market, but they may still be available.

5) check with city/county govts for distressed or foreclosed properties they want to get back on the tax rolls. They may assist you in acquiring one if thise properties by making very low interest loans or assist with with free or very low loan rates if you buy one.

6) get into a roommate situation, where you rent out roons or rent a room to reduce your current living expenses.

7) cut every expenditure...vacations, cable electric heat etc to bare bones. And save that money, see #2 !above.

8) last resort...ask parents or grandparents if they are willing to help with a down payment. They may give, loan, or match your money for down payment.

Other than those, short of putting your nose to the grindstone and save save save, there is no magical way to get a down payment that i know of.

Also, as noted above buy only what you need, not what you think you want. We bought a "starter home", one of the smaller houses in a very desirable neighborhood. We can always move up to a bigger home later.

And i think lastly, real estate advice has always been two things: "location, location, location ", and " buy the smallest/cheapest/worst house in the best neighborhood " ( that's what we did, the smallest in the best neighborhood)

Best to you as you prepare ...

[Citykid3785]

I like to start with some of the rules of thumb, particularly roughly 30% of income (and I think total debts up to 40% of income (i forget, you can google).

But as others have said, you really just need to do a budget. Pull you past spending (if mostly done by card), or take a month or two and track current spending.

Also, you mentioned you're a first time home buyer. How long do you anticipate staying in said house? I ask because many buy a temporary house (condo, townhome, etc.) and hear it's better to buy than rent. They are single and next you know they get married and have to sell or upgrade a year later and the fees end up costing them in the long run.

[Annagamana]

Originally Posted by Citykid3785

I like to start with some of the rules of thumb, particularly roughly 30% of income (and I think total debts up to 40% of income (i forget, you can google).

But as others have said, you really just need to do a budget. Pull you past spending (if mostly done by card), or take a month or two and track current spending.

Also, you mentioned you're a first time home buyer. How long do you anticipate staying in said house? I ask because many buy a temporary house (condo, townhome, etc.) and hear it's better to buy than rent. They are single and next you know they get married and have to sell or upgrade a year later and the fees end up costing them in the long run.

Think income 50%

[Moonwalkr]

Not sure why a $10k/month mortgage was brought up because the bulk of the folks asking questions here are not going to be affording that kind of house. And remember there are always expenses on top of the purchase price, so factor in a couple % each year for maintaining the house.