I currently have a new house under contract and am scheduled to close 7/30. My wife and I make $85,000 pre-tax. The house we are buying is $335,000, we are putting $85,000 as a down payment because we had good equity in the house we're selling. That leaves us with a $250,000 mortgage. We couldn't afford a conventional loan because we have 2 kids - 3 years old and 4 months old in daycare. The cost of daycare doesn't allow us to go conventional. We are actually going interest-only so that we are not required to make a big payment every month so we can maximize our cash flow while the kids are in daycare. That being said, I have still come up with a plan to pay off every penny of the principal that would be owed each year. I just won't be paying it every month. I would have preferred to go conventional but it just wasn't affordable when the astronomical cost of daycare is factored into the monthly budget. I don't know what is affordable or not but this plan will work for us. I do know that I was not willing to borrow a penny more than $250,000.

Thanks for sharing your experience, Ben.

My wife and I make around $85k and recently purchased a house in the city for $260,000 with an FHA (3.5% down) at 5% with buyers paying 100% of closing. The mortgage and interest wasn't the issue at all for us, it was the city taxes of almost $500 per month and the FHA mortgage insurance of $115 a month. Even so, the total out of pocket is still under 30% of our gross income. We could have afforded more in the county, but we chose to look at the city taxes as more of a "convenience tax" that allows us to walk to restaurants and bars, be close to cultural events and not have to drive half an hour every time we want to do something downtown.

The max amount I want to borrow for a home is about $250k (I'm putting 20% down). But that's my max value. I'd like to borrow less, but it's reasonable considering my salary/budget. I would define "comfortably afford" as "not worrying one little bit about making the payments." For that level, I would probably want to borrow $200k or less.

Paid just south of 600k on 417k note and earn 230-250k.

I very was scared paying this much money. With a 15% D/I ratio, I feel like we barely have enough money to max out retirement accounts and pay taxes. Once kids come... we should have enough saved for retirement and can live on hamburger helper.

Fortunately, we have job security and student loans.

Two falls ago, I was going to purchase a $259,000 little rowhouse in Canton. It had 2 Bedrooms and 1 bathroom. I didn't have any money to put down (or that I wanted to put down) and was going to ask the seller to pay the closing costs considering they were poised to make a pretty decent profit on the house (they bought the house 3 years earlier for $125,000). I got my paperwork on an 80/20 piggybank loan when rates were around 6.5% or so. My mortgage payment was going to be around $2300 a month with taxes, etc. I made, at the time, about $70,000 a year. I contribute to a retirement account, have a car payment ($400 a month) and no credit card debt. How could I "comfortably" have made that payment? Are you including utilities? gas for your car? Maintenance? Are you including eating? Savings?When I worked it out - after the cable and all- I would have been in deep trouble.(I am sure people like me ARE today in serious trouble) Not to mention - I recently saw the same house listed for $201,000!!!!!! Luckily - the greedy seller refused to pay the closing costs and I didn't get the house (even with a full offer).......

Interesting conversation, folks. Keep it coming!

Milly, that $2,300 monthly payment would have been about 40 percent of your before-tax pay. So yeah, definitely not comfortably affordable -- not at all affordable by most standards. You're including taxes et al (but probably not an estimate for maintenance, right?), so 28 percent would be a more reasonable threshold. (At least according to economists.)

Your situation is similar to my hypothetical calculation above, but the way the two differ does mean lower monthly costs for Hypothetical Buyer: You would have put no money down as opposed to a 3.5 percent down payment, and your interest rate would have been 6.5 percent rather than 5.5 percent.

To see how problematic city taxes were in your situation, I just calculated the principal and interest cost and came up with $1,637, or 28 percent of your pre-tax pay. Still too high, according to the threshold I was using.

Anyway, interesting example, Milly. I'm glad you didn't buy a house you decided you couldn't comfortably afford.

I agree with you Milly. I dont know what planet these people are living on. A 'real' individual making 70K cannot 'comfortably' afford a 250k home. How would you afford to own a car, taxes, insurance, gas, clothing, utilities, daycare, maintenance, student loans, food, etc. This type of thinking is exactly how we got ourselves into this financial mess!

Reading the above posts I was wondering, are there any house payment recommendations related to take home income? I think that's what really matters. How much money do I have at the end of the month and how much do I have to pay out.

This really comes into play with people who have 401k's like myself. If I made $75k/year and contributed $15k to my 401k, that's very different than someone without that option. My effective salary would go down to $60k/year. If I base my mortgage according to the $75k value, I might "feel" more strained since my take home pay is lower. I could always lower the 401k contributions to get a take home pay raise, but I wouldn't want to do that. So to be comfortable, I would want to contribute to my 401k, make the house payments, and still be able to save for a rainy day fund.

Ben,
You have got some guts. Best of luck. I recommend you keep it simple and enjoy the simple things in life (they are really the best ones anyway, in my opinion)

My wife and I just bought a house for 480K and we put 20% down. We make about 150K a yr combined so that puts at about 23-24% and if it wasn't for the 4.5% rate I wouldn't have spent that much. This allows us to contribute to our savings, 401K's and pay $1000 mo. for daycare. Fortunately we don't have any debt besides one car. I think my max would be 25%.

Ben - I agree Daycare is a killer

I've never understood the inclination to use gross income for these calculations -- presumably because the buyer gets the mortgage interest deduction?? Yea, right! Tax man cometh!
As a renter, buyer and landlord, I've always used as a rule of thumb the calculation of rent/PITI paynment (approx 30%) as a percentage of NET, after tax monthly income. After all, this is the cash on hand one has to live on on a monthly basis. I think you end up with a lot sounder calculation. It also leaves more wiggle room for common things like car payments, card payments, food, 401Ks and other attemps at putting away modest savings.

I've noticed something else to add into the mix here.

The higher earning homebuyers (150K?) will have a higher tax rate and consequently a higher level of deductions than the lower earner (70K?)... if the 25% number works for the lower earners that doesn't mean it should hold as the earnings rise.

just a heads up. it's very likely a wash depending on other deductions from pre tax earnings you may have but it may not be.

Hi, Lisa -- I don't know about other calculations, but the reason I went with pre-tax is because I've no way of knowing what the median or average after-tax income is in the area. That can range a lot, especially with 401(k) deductions, as jfg notes.

Thanks for sharing your rule of thumb!

At 70k, one shouldn't have to pay any taxes if they plan ahead and learn a little about possible deductions and credits.

Tax deductions for a household income of 100k are also irrelevant. They are barely hitting me at 250k.... after 33k in 401k, 16k in SS/MC; property taxes and mortgage interest make me eligible for 10k in IRA's-then you go with a geothermal and my taxes are nil. Next year solar... and then the year after that I'll milk the childcare deductions....

If you purchase a house for tax deductions and you make under 100k, chances are your tax rate is negligable.

If you purchase a house and your mortgage payments substitute tax deductible saving, then your tax deductions are irrelevant.

Stop the enron accounting.

As an aside, mortgage deductions make one more susceptable to AMT because they are not off the top. So banking on them could be dangerous.

At the end of the day, people have different standards of living and different risks. Some industries or small business owners shouldn't exceed 15% post tax income, while a surgeon or a teacher could probably leverage themselves more.

Well- call me confused. I have heard many people on TV (CNBC, etc) declare the recession is over - if that is the case - and housing prices are stable around the area. What has changed from years previous when people got into financial trouble? Will house prices go up and people will now be able to pay for their mortgages? If I had bought the house for $259,000 two years ago - even making $90,000 a year - I still would be scraping by if I was living a normal life (cable TV, vacations, going out, etc). Will this situation work itself out? I shudder to think about a recent college graduate these days...where will they be able to buy a starter home? do most of them make more than $70,000 a year? Don't people want to do things in life besides making minimum mortgage and interest payments to banks so that CEO's can get richer? Am I missing something? Perhaps I am just a poor girl making $90,000 who needs a rich man!!!

My wife and I bought for well under $250K just about two years ago, got a very nice fixed rate FHA loan, we put down about 5%. Sellers picked up closing, and we had to pay PMI. Our payment was affordable, identical to the rent we paid for a smaller place in a worse neighborhood. Our homeowners' insurance is negligible.

We got reassessed the same year we purchased, and had to wait a year and a half to get the homestead credit against our levy.

In the year and a half before the credit kicked in, the additional escrow on the first step in our assessment added fully 25% to our monthly payment, and we had to make additional lump sum payments to catch up the escrow account with almost no notice.

I also don't mind paying the City taxes, they are a relatively small part of my tax burden and the value of City life outweighs the cost, but the combination of the tax rate and assessment schedule made our "affordable" home and mortgage payment much less affordable very quickly.

Wow, Aaron, that's a big jump. I suppose the previous owner had the house for long enough that the homestead credit was making a significant difference.

I hope your total payment isn't eating up all your spare change.