May 10 2011

Thinking about how much house we can afford

How did you come up with your house-hunting price range?

We have a finite amount of money available for a down payment. It’s enough that we can put 20% down on a decent house. We do not want to put less than 20% down because we want to avoid PMI. I’m not sure if lenders do 80/10/5 loans (or some variation) anymore, and I’m not really interested in one anyway.

We would like to get a 15-year mortgage and thankfully the interest rates are low enough now that we should be able to do so. A year or two ago when rates were in the 5s and 6s, we wouldn’t be able to do that at this price point.

We thought about what we wanted our monthly payment to be. We still want to be able to set aside money each paycheck for general savings, college savings, vacations, etc. We don’t want to be house poor, ya know?

So all of those factors pointed us to one general top-dollar amount and we are considering houses around that number but also some substantially cheaper, too.

I called a lender today to get pre-qualified. A pre-qualification is much more relaxed than a pre-approval. The lender is taking the info I tell him as truth, and isn’t doing any fact-checking. He’ll do the verification for the pre-approval later.

The guy acted surprised when I told him we didn’t have any debt. It’s kind of a fun thing to tell a lender you’re on the Dave Ramsey plan!

I told him how much I wanted to bring to closing, and how much I thought we wanted to spend on a house. He told me that would work for them.

I could tell he selected his words carefully here, but he also hinted that we could go much higher if we wanted. I told him to stop right there — that I knew how much was comfortable for us and I wasn’t interested in spending more, and Dave Ramsey-Dave Ramsey-Dave Ramsey.

Apparently lenders still think it’s ok to approve someone to take on a 45% debt-to-income load. That is nuts.

Anyway, I think it’s best to figure out how much you can afford by carefully considering your budget and adding a huge buffer. As Karen recently pointed out on her blog, buying a house is much more than the house payment!

Lastly, one of Shane’s coworkers said we should look a little above our price range because we can probably talk people down to our desired price point. I think that’s a dangerous idea. I wouldn’t want to get emotionally attached to a too-expensive house, have them stay firm with their price, and have to make a decision whether to walk or pay more. I will try and leave my emotions out of this as best as I can, but I’ve never bought a house before and I don’t fully trust myself.

Run the numbers and figure out what works for you. Then, tell a lender your intentions. Don’t let the lender tell you what you can afford if it is more than what you want to pay. THEY aren’t the ones who will have to live with the payment.



5 Responses to “Thinking about how much house we can afford”

  1. So, so true! You are going to do great. I think it’s a great idea to not depend on someone coming down on their price, too. It is definitely easy to get attached to a house. You are a wise woman, Kacie :)
    Becky´s last post ..Larry White

  2. We bought three years ago when our area was still in a boom, though houses in our neighborhood are still selling within a month. We were just looking for a nice, small, cheap home in a safe neighborhood. Sounds like the vague criteria everyone has, but we were in no rush and I narrowed the search down to two possible neighborhoods. I tend to research everything to death and pulled crime stats, commute to work (etc), and checked zillow and trulia constantly since I was intentionally being picky.
    Three other buyers had put in offers on the house and ours was the lowest ($113k). Ours was the one accepted because we had gotten preapproval by a local brick-and-mortar bank, according to our realtor. She mentioned the others had gone the e-bank way and the sellers didn’t want to chance funding not going through. We also had 40% down, though I don’t know if the sellers were aware of that.
    We’re a few years older than you with no kids (yet) and will be paying the loan by the end of the year (happy 10th anniversary to us!).

  3. Don’t dismiss houses a bit above your range too quickly. If you’re completely firm on your top price and can leave some emotion out of it, you’ll be the one in the driver’s seat during negotiations. Ask your realtor for help with this. If a house has just gone on the market, they won’t likely drop the price much. But your realtor should know if the house has been on the market for a few months, or if there’s a reason the sellers want to sell fast. If the sellers have already moved out, that’s a great indicator that they may take a much lower offer.

  4. We based the price of a home we could afford solely on the 20% down payment. We had just under 40k to use for down payment, so only considered homes under 200k. Like you experienced, some lenders wanted to tell us how much “more” we could afford. This was a big turn off for me and I decided to borrow from a different bank.

  5. We went extremely conservative with our first house (which we are still in and on year 5 of our 8 year plan). That means our house is much, much smaller than a lot of our friends who did not go extremely conservative with their first buy (or for our friends who already moved on to their second homes). Sometimes — when I’m feeling emo about putting money aside for our next down payment — I get verklempt about the size of our home. Then I remember that comparisons are stupid. And then I remember how we bought just before the housing bubble burst and the subsequent recession… and because we were smart (fixed rate, well within our budget), we didn’t lose our home like some in our circle.

    We’ll be conservative next time around, too, but thankfully we make a bit more now. ;)
    FireMom´s last post ..Important Fishing Lesson

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Hey! I'm Kacie, wife to Shane and mother to Jonathan (7), Vivienne (5) and Amelia (2) . I write about my family's finance: how we save money, improve our spending, and plan for the future.

I hope I can inspire and encourage you to improve your situation. See disclosure.

I'm adopting a much slower-paced posting schedule, and treating this as a hobby blog now.

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