This website contains affiliate links and sponsored posts. A small commission is earned when you click and purchase via my affiliate links.
How Much House Can You Afford?
How much house can you afford?
OK, I admit it. I hate when someone tells me they want to purchase a home. It’s something that pains me deep down inside. Don’t get me wrong, there are different levels to this pain.
- Pain level 1 – ‘What are you thinking’ kind of pain
- Pain level 2 – ‘We will make it work’ kind of pain
- Pain level 3 – ‘I have to have’ kind of pain
- Pain level 4 – ‘I’m going to throw money at it anyway’ type of pain
I’ll explain each of these levels in a little bit, but I will tell you that sometimes I have all 4 levels of pain at the same time. I could take a whole bottle of tums and it still won’t solve the problem. I’m not a fan of you buying a home outside of your means and for the majority of people out there, that is exactly what they do. Don’t get me wrong, my family falls for the same trap too. If I haven’t told you before, my wife doesn’t think I know anything.
Me: Hey babe, we don’t really need to buy that microwave
Wife: Armond…….It is quality!
Me: Well, I’m not buying that level of quality
Then we land exactly where we always do. Conversing about how much money we have in the savings account. The amount we have in there is how much we are going to spend on the microwave and not a penny more. I hope that affords us quality.
Buying a home is different.
We don’t have a spending account for that, so it’s really hard to tell what you actually can afford. Then what happens next goes something like this; I tell you that you can afford $200,000 for a home. You find the home you think you NEED and it’s $350,000. Of course, you will look at me and say, we couldn’t find anything for $200,000 while you’re literally renting a place with the same square footage as a house that goes for $200,000.
Buying a home is a very emotional thing.
I also understand that when you go over to your friend’s house and you enter their home, it is really hard on you. You see their kids’ rooms decorated exactly the way they want it. The floor plan is to die for and the layout of the kitchen, well, I wouldn’t have decorated it that way but Denise liked it so it’s fine. As you whisper to your husband, “what was she thinking?” you start looking at new houses for your family. Your heart and your eyes start to do the shopping. You walk into the perfect home and mentally it’s already yours.
This is your home.
You enter a complete dreamland as you see your children run past you. You look over and picture you and your husband having coffee in the kitchen nook laughing about how great life is. Look over here! Here is where you will put all the board games. You look at your husband and say, this is where we should put the board games. Not realizing your husband was daydreaming too he says, no, this is where the office is going to be. You can’t put the board games there, that would be idiotic.
Anger takes over you and next thing you know, you are crying on the floor because you and your spouse are arguing in a house that is not yours about where the board games should go. By the way, that is a true story told to me by one of my realtor friends.
Buying a home is an emotional thing which is why hearing from my clients that they’re purchasing a new home causes me pain. I have seen the purchase of a home throw a family into a financial spiral.
Let’s talk about the four levels of pain that I endure and which level of pain you’re currently in if you’re planning on buying a home. Whether you are about to buy a new home or purchase a home for the first time, you really need to let this soak in.
Pain Level 1
What are you thinking?
Seriously, what are you thinking? You are in so much debt right now. Your debt keeps me up at night. I honestly don’t know how you sleep. When I was in that much debt, I couldn’t sleep either. My wife kept telling me ‘let go and let god’. I kept thinking to myself, well when god takes this debt, then I will let go. If you have any credit card debt that you can’t pay off every month, then please don’t look at purchasing a home. As a matter of fact, don’t even go into a home just to get ideas – you are just teasing yourself. If you have friends that have that perfect home that you want, drop them! If you can’t do that, meet them at a park or something. Don’t step into their home! Here is the thing, if you can’t dedicate yourself to paying off your debt, then you won’t be able to dedicate yourself to doing it in a home. You are just going to get more in debt.
Pain Level 2
We will make it work.
No, you won’t! You will not make it work.
Husband: Honey, I know I said we can only afford $2,000 per month but we can make $3,000 per month work.
Wife: Ok, I trust you
DON’T TRUST HIM GUURL! He lies and his breath stinks. OK….So he is not lying. He really believes that stuff that is coming out of his mouth. I would be skeptical in this situation because he is right, you could have made it work, but what if after that purchase the hot water heater breaks? Then, the microwave goes out and at the same time, you have to buy a new oven. All things that used to be covered when you rented. And yes, Charlie needed a tutor to help him through school and he needed to get a root canal because he doesn’t do a good job brushing his teeth.
I’m begging you.
If you say you can only afford $2,000 per month and you can’t find anything within that price range, it’s okay for you not to buy a home at this time. Just because you got prequalified and you have your realtor in place, you can tell them that you decided not to purchase a home at this time. Just because the mortgage broker tells you that you qualify for $3,000 per month doesn’t mean you can afford it. That mortgage broker isn’t the financial leader for your family. Imagine you just dropped $150 on school supplies. What does that mortgage broker know about what you can afford?
At the end of the day, please stay within your budget
Pain Level 3
I have to have.
Friend: I have to have a pool, Armond.
Me: Wait, What?!
Friend: I have to have a pool, Armond. It’s hot here.
Me: Ummmm, back in my day, a pool was a sprinkler that we would run through. You want me to buy you hose? Until you get that sprinkler, you can just spray your children down. They won’t know the difference and if they do, who cares? As a parent, it’s in the job description to not care about your children’s thoughts from time to time.
Do you know what you have to have? Shelter.
Good ole fashion shelter. It comes with a roof that keeps the rain off of you. That is all you need. Everything else is a want. What pains me so much about this is that you put yourself in trouble trying to purchase things for the home and ignoring the things that your family needs or will need. Your children don’t need a pool. It would just be nice. You don’t have to remodel your kitchen either. If you are not saving enough for your financial goals or you’re already in debt, that have-to-have can wait. Don’t overextend yourself.
If you have ANY debt, then you can’t afford it. If you are not saving enough for your financial goals, then you can’t afford it. Please do not confuse a need with want.
Pain Level 4
You are throwing good money after bad money.
OK, so you can afford the home and you can afford the have-to-have’s. You are still throwing good money after bad money. Let’s get something straight here. Your home is not an investment. This will be the most controversial thing I will say. Your home is not an investment, it’s an anchor. Purchasing a home is a liability until you sell it. Maybe you made money off of it or maybe you didn’t. Maybe you broke even. Most of you will not do the math to figure that out. I could get into the math for you but that is a serious wormhole that I would rather not get into. Instead, let’s assume you are planning on flipping this home. Meaning, you are buying this home that you think is worth $300K for $200K. Your goal is to get the best return on investment (ROI) as possible.
Are you trying to keep the cost low or high? Are there any have to have’s in this equation? Would you put a pool in this house? Now you’re looking at this home in a completely different light. You just want this home to be good enough so that people daydream so hard about living there they absolutely can’t walk out of the showing without putting in an offer.
You are not trying to put top-of-the-line items in your home.
If you are, you don’t need to be in the flipping game. Point being, when you are buying expensive stuff for your home, it is for your enjoyment. Don’t lie to yourself and say it is an investment. You may make your money back from the sale of the home, but there is a very good chance you won’t. With every purchase, you are not funding your financial goals, especially, if this isn’t your forever home. More than likely, you are going to sell it and roll it into a bigger home.
How much house can you afford?
For starters, I can hit you with a rule of thumb that says your mortgage payment shouldn’t be more than 28% of your gross income. I can hit you with another rule of thumb that if you have credit card debt, then you shouldn’t go more than 33% over your gross income. For example – if you make $100,000/year, multiplying that by .28 = $28,000/year which is $2,333.33/month. However, every family is different. Our kids are different from each other and our spouses have different needs and wants that we have to manage. Our own needs and wants are different from everyone else’s.
Here is my advice.
As soon as your lovely spouse so much as hints at wanting a different home, you should start practicing for owning that home. For instance, let’s say currently you are renting a place for $1500/month. Let’s imagine you have no debt and you and your spouse combined, earn $100,000/year. You should be able to put $833.33/month into a savings account and not touch it while being able to fund the rest of your financial goals.
During this time, take note of your standard of living to see if you are happy with it. Can you hang out with your friends the way you want? Can you handle emergencies or random things that come up? Keep in mind that your home will have more upkeep than your rental property. Maybe you should try to put as much as $1,000/month in that savings account each month to see if you can handle it.
Doing this will help me get rid of all 4 pain levels.
- What are you thinking – I am debt free and my family can comfortably afford this home with no problems.
- We will make it work – We don’t have to make it work because we were putting $1,000/month into a savings account and we didn’t touch it. I am confident that we can afford this home.
- Have to have it – I now have about $12,000 or more in a savings account to use for some of these have to have’s. I also have a budget for what we can spend on everything. If I am going to want more, then we should wait longer.
- Throwing good money at bad money – This isn’t a hard ‘NO’ on purchasing what you want. If you are still on track for your financial goals and you have the appropriate amount of savings, then I say live it little.
This purchase is one of the most important purchases of your financial life. You have to make sure you don’t overextend yourself on this home. You also have to try to take the emotion out of the purchase of your new home and look at it for what it is…….SHELTER. Please realize that your main goal is to provide for the NEEDS of your family.
You have to properly define the difference between a need and a want.
Photo by Scott Webb on Unsplash
Sign up for our newsletter and be inspired to kick-off your own personal journey to living your best life. After signing up you’ll be able to instantly download my eBook The Financial Effect for free!
