How Much House Can We Afford?

Anna and her husband have their house on the market. They're debating how much house to buy. What does Dave say?

QUESTION: Anna in Kansas City and her husband have their house on the market. They’re debating how much house to buy. Anna wants to buy closer to the 25% of their take-home pay in payments, and her husband wants to be more conservative. What does Dave say?

ANSWER: I tell people not to take out more than a 15-year fixed-rate mortgage where the payments are no more than 25% of your take-home pay. If you put $929 at 4% into the calculator, I get $125,600 as a loan amount. If you have $300,000 as a down payment, then that means you could buy a $425,000 house. My point is you add your down payment to your loan amount. About $125,000 is the most loan amount I’m going to recommend you take. It’s a rough and dirty figure, but the point is you can actually get a mortgage company to qualify you for over twice that. I would put you in the $125,000 or $130,000 loan amount, plus your down payment is $25,000, so we’re talking about a $150,000 or $160,000 house. Taxes and insurance are going to bump you up a little bit over that. Again, this is your maximum limit in my mind. You can get a mortgage company to give you twice that, so I’m being conservative. But if Murphy comes and knocks on your door, you’re not going to be in freak-out mode then. The house will be a blessing and not a curse.

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