How Much House Can You Afford?

Look! It’s stressed-out us, thinking about things.

House house house house house.

I know; I’m sorry. But I literally cannot think about anything else right now. Which makes sense: our house is presently filled top to bottom with boxes and bubble wrap. I now talk to our broker more than I talk to anyone else in my life, including my mother and husband (which is actually pretty fun because she’s super cool). And it doesn’t even stop when I go to sleep, because my dreams consist of house tours and failed offers and a large dose of panic.

We’re making an offer on a total dream house today (along with everyone else in the world, I expect, because the house is so lovely and beautifully cared for and perfect for us that in order for us to actually end up owning it a hurricane of luck dust will have to sprinkle down on our heads), so I spent all last night not sleeping, but rather worrying. Except for the three or so hours when I did fall asleep, and then worried. In my sleep.

(Speaking of dreams, my dreams are RIDICULOUS lately. Here is a smattering:

1. I dreamed that we found a huge, beautiful loft to live in, and it was only after I’d won the bidding war – which consisted of a huge room filled with people fighting about the house and yelling out numbers – that I realized that the loft was in Iowa. So I went outside and Instagrammed a sunflower. Obviously.

2. I dreamed that we drove out to California, and when we got there it was gone, having been replaced by the creepy nuclear testing site from Indiana Jones 4. I think we don’t need to analyze this one too deeply.

3. I dreamed that I went to Best Buy and talked to a salesman about purchasing a firewire. And then I called Kendrick and read him the specs from the box over the phone. This is such a boring dream that it may actually be the most boring dream that has ever been had, so much so that it makes the leap from boring to amazing.)

Back to house stuff. Allegra asked a question in the comments under this house-buying logistics post that’s an important one, so I wanted to call it out in its very own post.

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A. As with everything in life, there’s a short answer and a more nuanced one, and then a very extremely nuanced one. Let’s start at the beginning.

The traditional way to arrive at the house price you can afford is to look for a property priced at 2.5x your gross income (since I’m a freelancer and my income fluctuates, we arrived at this number by taking the average of my income over the past four years and then reducing that number by 1/3 to err on the side of safety). But what “you can afford” actually means two things:

1. What does the bank think that you can afford?

The first step in purchasing a home is talking to a bank about what kind of loan you’ll be able to secure. You’ll need to fill out a massive questionnaire asking about everything from your monthly expenses to your IRA to the exact amounts you’re holding in each of your bank accounts. This is obviously not the most fun process, but it’s actually incredibly helpful in terms of helping you lay out what you’re spending every month on everything from car expenses to daycare to groceries so you can get a good look at it.

2. What can you actually afford?

For most people, the bank loan will be a (relatively) accurate indicator of what they can “actually” afford. But – and this is a big “but”: Houses cost more than just your principal and interest (a mortgage calculator can help you figure out what your monthly payments will be based on the purchase price).

Home ownership expenses include, but are not limited to, the following:

Up-front costs: These include the down payment (which can be as low as 3.5% if you’re a first-time homeowner, and is usually more like 10 or 20% for second-time homeowners; remember that the more you can put down, the better your chances that the sellers will choose your bid), lawyer’s fees (upwards of $1k in NY State), and closing costs (which are typically between 2-5% of the purchase price of a home, but are full of lovely little surprises; click here for more info on this);

Moving costs: These can be anywhere from a few hundred for a self-move across town to many thousands for a cross-country move by professionals (I have found the most wonderful solution for this – and I’ll be documenting it here in the next few weeks, so stay tuned);

Insurance: This cost is often included in the total mortgage amount, but you may need to purchase additional insurance; talk to an insurance agent about this one;

 Inspection: In some states (CA, for example), potential buyers receive disclosure forms about the house they’re looking at, but in other states its on you to suss out any potential problems. You must must must do an inspection, because the last thing you want is to buy a house and discover, say, an underground oil tank that’s leaked $100K worth of damage into your property. Inspections run about a grand, but that’s a drop in the bucket compared to what it could cost you if you get surprised by a defect in the property.

Furnishings: You don’t want to clear out your savings to purchase a home and then find you can’t afford to buy a bed to put in it;

– Utilities: You will likely end up paying more for utilities on a home than on your apartment. Remember that if you’re living in a cold area you’ll have to heat your place (and oil is expensive these days; we paid an average of $600/month for oil in the winter months), and if you’re living in a hot area you’ll need to cool it.

Home improvements: These can be voluntary (new paint, refinished floors, etc) or required by the bank in order for the house to appraise. Issues that interfere with appraisal or title transfer are traditionally the seller’s responsibility, but in a strong housing market buyers searching for a home may find themselves accepting homes “as is” in order to win a bid.

And here’s yet another issue to consider (so many issues!): you need to know what “comp” homes in the area you’re looking at sell for (your broker can help you with this). Why? Because if the house you buy doesn’t appraise (meaning the bank decides it’s worth less than you’ve agreed to pay for it), you either have to negotiate the price down with the seller – which they might not be willing to do – or come up with the difference in cash. Talk to the person advising you on the loan at your bank; they’ll help you figure out what you can afford based on a given property’s expected appraisal.

In short: even if the bank declares you eligible for a certain dollar amount, try to confine your search to properties that you feel certain that you’ll be comfortable making the payments on based on the above factors.

I know, this sounds like a lot; it’s not that bad. Once you wrap your mind around those initial numbers – and your broker and bank advisor will help you do this – you’ll be able to proceed accordingly. You can do it! I promise.

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