Buying a House: How Much Can You Afford?

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In 2008, MaKenna Grae* and her husband prequalified for a $2 million mortgage. The couple was stunned. They had never expected to buy a home with a seven-figure price tag.

So, rather than heed the bank’s advice, the Graes sat down and figured out how much they could comfortably pay every month. Before they looked at their first house, they had settled on a budget that had nothing to do with the bank’s recommendation. Instead of shopping for $2 million sprawling mansions, the couple set out to find a home for about $500,000 in northern New Jersey.

“I cannot imagine what our stress level would be or how crazy our lives would be if we had listened to the banks about what we were approved for and bought a $2 million home,” says Grae, who ultimately bought a four-bedroom house for about $425,000 in Elmwood Park, New Jersey.

A Real Estate Rule of Thumb

When the housing bubble burst and it became clear that lenders were handing out mortgages with their eyes closed, many banks tightened their lending practices. Buyers suddenly were being asked to show stellar credit ratings and lay out 20% of the price of the home as a down payment. But, five years later, as the housing market heats back up again, some banks are loosening the reins and once again offering buyers sweeter deals. For buyers who were shut out of the mortgage business for the past five years, the ability to buy is suddenly real again. But, just because a bank thinks you can afford a multimillion-dollar house doesn’t mean it’s a wise financial choice.

“Remember, the bank is in the business of making loans, and they want you to borrow as much as they are comfortable risking on you—and not a penny less,” says Ellen Derrick, a Certified Financial Planner™ with LearnVest Planning Services.

RELATED: 8 Questions to Ask Yourself Before Buying a Second Home

  • Anon

    My husband and I were approved for a ridiculous mortgage as well–something like $600,000. We opted instead for a $230,000 home with a $175,000 mortgage. Going well below our “approved price” has helped us in a ton of ways. First, we can afford the house on one salary (just in case the worst happens, or I take time off to raise our future children). Second, we had a lot leftover to pay for washer/dryer and A/C units in cash. I’d tell anyone to find a great house WELL below the ridiculous quotes the bank throws out!!

    • Dianne

      Trouble is in many areas you can’t even buy a small condo for $230.000. And yes the wages might be a higher in pricey areas but not enough to make up the difference. My daughter & her husband had a cute little farmhouse on 5 acres of land very close to town in Kansas. It sold for $118,000 which won’t buy a chicken coop in the DC area. They moved there for better jobs and make 4 times as much but houses cost 4 times as much and everything else is higher too so they really aren’t any better off. Taxes are higher too because they have to pay county taxes in Maryland which you don’t have to pay in DC but it’s worth it because the schools are better and private school is extremely expensive. I think they can afford to buy a house when the kids no longer need child care but the prices are going back up and houses will be at least 20% higher by then. They don’t have a lot of debt other than student loans and they don’t need two cars because they take the metro to work. They are really not complaining, but it does seem like people who live in high priced areas are hamsters on a wheel.

      • MarcoMars

        Exactly. I know once I graduate from college my starting salary will be about 40-50k. According to their rule I won’t be able to afford a house ANYWHERE in the Bay Area. I’m not interested in living in some far off city just so I can afford a house not in the hood.

  • emmegebe

    My husband and I bought a house that was ‘below our means,’ and it has turned out to be one of the best financial decisions we’ve made. When layoffs knocked out one income (three different times in 5 years) we were still able to pay the mortgage. With three active and growing kids, there are so many expenses that come up. I’m very glad to have the cash flow to cover those things and other kinds of discretionary spending without worry. And we are perfectly happy with our house!

  • Tony

    In Boston area you cannot buy a decent house even for $500000. I think this article is realistic in affording but not realistic when it comes to the house prices now days.

    • nkdeck07

      Incredibly true, we bought a 2bdrm condo for around that price out in Somerville.

  • Obamamerica

    I have no clue how people can save 20% for a home down payment.

    • http://www.brubakers.us Chingay

      It is possible. Just have to prioritize. :-)

    • flaker

      It takes time, patience, and prioritizing your savings.

      … all of which many people are not willing to do. But if you value your fiancial stability and don’t want to leave beyond your means, it’s important. I’ve been saving for my down-payment for 6 years – 1k/month – by giving up lots of things I see my peers doing (extravagant cars, clothes and lifestyles). I hope to build a modest house this summer and not be stuck with crushing debt.

  • Jack Daniels

    The problem is, nobody without rich parents can afford a house these days.. If you had to pay for your own education, and are under 35.. chances are you can’t afford a house. Most “successful” people aren’t self made. Their parents paid for their private education, their college, their cars, their food.. everything. This, in my opinion has artificially raised the cost of living for the entire country (for the ones who aren’t so fortunate). A house should cost 1 or at most 2 times the income, like it has up until the early 2000′s. These days that won’t even get you a place in Detroit.

    • Emmes

      Sounds like someone who’s never been successful. Both of my sons had to pay for their own education and are under 35 and I’m happy they don’t have the “I’m jealous of successful people syndrome”. Successful people started at the bottom just like we all do. The difference between success and failure is that successful people are willing to sacrifice NOW (living like no one else will), in order to have more THEN (living like no one else does). Haters gonna hate regardless. Why not become successful instead of thinking you know what it means to be a success.

      • Jack Daniels

        Riiight, because so many successful people started out in the ghetto. Spoken like a true boomer who footed the bill for their precious suburban white kids upper middle class lifestype.

        • Emmes

          I’m “old school” boomer which means I don’t coddle my kids, nor did I allow them to blame someone else for their misfortune. Far too many of those around, as you well know.
          I do encourage them to work hard and save money NOW, so people with a narrow mindset can stereotype them. Thanks for doing exactly what “successful people” knew you would do.

          Starting in the ghetto doesn’t mean you can’t be successful – and that’s easy to understand – if you aren’t too busy bashing everyone who’s stopped that cycle and gone on to be successful.

          • Mike

            Emmes good for you for raising successful kids. Clearly by Jack Daniels screen name he sits at home drinking and complaining about how other people are successful and he isnt. My parents didnt pay a dime for my schooling. Im 34, with a home and family and make 100,000 a year. All by myself. Of course I also went to school full time and worked a full time job at the same time. Often sacrificing sleep, eating, and time with my friends to finish school and make something of myself. Good luck Jack, success in life is there for anyone who wants to go get it. But the world needs toilet cleaners too so you can still help out.

        • 30SomethingMillionaire

          I applaud Melissa and Emmes. I too, paid my way through school via scholarships and Grants, I’m a product of the University of California not of a special minority so I didn’t mark the box, I earned my way fair and square. My parents are immigrants, as well as myself. I grew up in an impoverished neighborhood better known as the “hood” so Jack Daniels, I’m not buying what your selling. You make choices despite your surroundings. The difference is you have to go against the grain. I lived at home during college, not on campus to save, I purchased used books, not new. I ate in and not out, I drove a beat up car not a new one. I worked my tail in high school to get good grades and save money and used that money to pay my way for Grad school where I also earned scholarships based on MERIT. I purchased a Sea Side home 4 years ago at the bottom of the market when everyone was paying the same during the peak (People need to hold out), I bought my home for 50% of what it’s worth today and I put down the 20% and I was under the age of 35 when I bought it and my interest rate is 3.5% on Jumbo conforming loan. I max out my 401K and I have several hundred thousand dollars in investments outside of my 401k. You can do it Jack Daniels, you just need to do things different and you have to want it. Go out and apply yourself and stop blaming the world, we are all born with a different deck of cards, you have to know how to play the best hand possible with what your dealt with. Besides, may of those so called privileged children do not necessarily know the value of a dollar and more often than not lose their good fortune due to poor money management, drugs, etc. Its better to start your way up. I have a nephew who is also hood who owns a million dollar business and is in his early 20s starting from the ground up. He uses his money from his business to buy real estate free and cleare and to rent those houses not to drive in fancy cars or drink Luis 13 Scotch..get the drift he roles in 100 a month Honda civic leased which deducts as part of his business so it’s practically free. Jack Daniels, if you don’t have a degree, go get one, if you can’t afford it pick a trade, I.e, real estate, insurance, generate an income stream , build a business, etc. Just set milestone goals and drive to them.. cheers!

          • 30SomethingMillionaire

            PS. Jack Daniels – If your drinking blue label, you should switch to red or black, that’s one way to save. Better yet, stop drinking and invest your money….you handle says a lot about your life style :) Since I’m hood – I got Jokes!

          • westphillygirl

            I was raised poor. Fourth child of a single mom that worked at a linen factory and Walmart at night. Never own a house…rented a row house. Two out of four decided to work hard and went to college..we paid for our loans but proud to do so. Both of us are successful and have our own single houses. All with hard work so people like “Jack Daniel” don’t want to do want it takes to make it out of the ghetto..I did it..why could he? Be smart..

          • Hyptiotes

            As a child of the 70s and early 80s, I collected aluminum tabs along the side of the road to save money for college. After my parent’s generation made each aluminum can worth 10 cents to recycle (Michigan law), abandoned cans were no longer avaliable–only the tabs. My parent’s lived at the top of a hill where they paid 16% interest on their mortgage. It was always snowing. This forced me to trudge in the snow uphill (both ways) every day in regular boots because I couldn’t afford “moon boots” like the rich kids. We didn’t have gas for the car because of the oil embargo. My parents drove a Vega and Pinto. Lay-offs from the the auto plant were everywhere. My Dad got pink-slipped and he didn’t even work for the UAW but he was fired anyway–just in case. Life was hard. He finally patched together odd jobs selling World Book encyclopedias door to door and joined the Amway cult. Based on my crooning abilities as a part-time yodeler and overtone singer (we were much less common in the early 80′s), I managed to snag a coveted full scholarship from the American Chiropractic Association. As a college student, I hammered stakes into the ground to make the worms think that it was raining and come to the surface. This was my dinner. I longed for the ramen noodles the rich kids ate. Now I’m a hedge fund manager that repackages dubious “investments” that even I don’t understand and sell them to an unsuspecting public. I also do nanosecond stock trading to distort the stock market beyond all recognition. Now that I’m a productive member of society, I bought a yacht that I have buffed daily by undocumented workers using only all natural products because I care about our environment.

          • bob1233

            My God — I know you! I own the yacht next to yours. So you’re the yodeler. Come aboard and I’ll get you laid.

        • bob1233

          Didn’t Obama start out in the ghetto? He says he did. Are you calling the President a liar?

        • westphillygirl

          I grown up poor than poor and lived in a crowded rented row house with a single mom that was a linen factory worker and worked at night at Walmart…no car…public transportation.. With four daughters.. Guess what we all worked hard and now have our own single houses…and professionals plus we paid our own loans for college..I have friends that still live on the same block I grown up at making excuses..and its plain and simple…you didn’t have the drive to do better so your repeating the cycle. Don’t blame everyone else.. You have the power since a child to change your situation but you didn’t. FYI…I didn’t get new clothes…and had to work a hour to get to middle and high school.

    • Melissa

      I paid for my own education with student loans at the University of Texas, worked my butt off the first two years out of college to pay back those loans, and then saved money to buy my home. I am 28 & I am where I am because I sacrificed by not going on trips to other countries & nights out at clubs/bars. Instead I saved & now I’m still saving so that I can go on all those trips that my friends went on right out of college, except now I’m in a better position to do so :) Delay Gratification.

      • 30SomthingMillionare

        I applaud Melissa and Emmes. I too, paid my way through school via scholarships and Grants, I’m a product of the University of California not of a special minority so I didn’t mark the box, I earned my way fair and square. My parents are immigrants, as well as myself. I grew up in an impoverished neighborhood better known as the “hood” so Jack Daniels, I’m not buying what your selling. You make choices despite your surroundings. The difference is you have to go against the grain. I lived at home during college, not on campus to save, I purchased used books, not new. I ate in and not out, I drove a beat up car not a new one. I worked my tail in high school to get good grades and save money and used that money to pay my way for Grad school where I also earned scholarships based on MERIT. I purchased a Sea Side home 4 years ago at the bottom of the market when everyone was paying the same during the peak (People need to hold out), I bought my home for 50% of what it’s worth today and I put down the 20% and I was under the age of 35 when I bought it and my interest rate is 3.5% on Jumbo conforming loan. I max out my 401K and I have several hundred thousand dollars in investments outside of my 401k. You can do it Jack Daniels, you just need to do things different and you have to want it. Go out and apply yourself and stop blaming the world, we are all born with a different deck of cards, you have to know how to play the best hand possible with what your dealt with. Besides, may of those so called privileged children do not necessarily know the value of a dollar and more often than not lose their good fortune due to poor money management, drugs, etc. Its better to start your way up. I have a nephew who is also hood who owns a million dollar business and is in his early 20s starting from the ground up. He uses his money from his business to buy real estate free and cleare and to rent those houses not to drive in fancy cars or drink Luis 13 Scotch..get the drift he roles in 100 a month Honda civic leased which deducts as part of his business so it’s practically free. Jack Daniels, if you don’t have a degree, go get one, if you can’t afford it pick a trade, I.e, real estate, insurance, generate an income stream , build a business, etc. Just set milestone goals and drive to them.. cheers!

        • 30SomethingMillionare

          PS Jack Daniels, I hope your not drinking Blue Label, its not worth it. Stick to red, or black…that’s one day to save :)

    • bob1233

      Only my Dad worked — in a middle class job that paid the bills. We kids were expected to do well in school and walk the straight and narrow. We all paid for our own college and graduate school, worked hard and lived below our means like our parents, and now are millionaires. It takes years to build a nest egg, but it can be done no matter who your parents were. You make your own luck.

    • flaker

      Yes you can… you just need to prioritize your spending. I’m under 35, paid for my education, don’t come from money (my parents make me pay for THEM when we go out to eat), etc, etc. … and I’m closing in the 80k (20%) I need to build my dream home.

      Did I have to forego having brand name clothes, going out to trendy clubs, and eating $50 meals during my late 20′s… yes. Did I go without cable (or even TV) and drive an older car in order to save… yes again. But long term, because I was willing to prioritize my income, I’ll be living a nice, financially stable life in a middle class home in a good neighborhood.

      You are right — you can’t have everything. Maybe that’s your problem?

      • Elphie Thropp

        I’m in my mid twenties and close to saving enough for a condo, but I’ve got to ask, where do you live where $400,000 buys you your dream home? Because where I live that buys you a one bedroom condo a little bigger than a shoe box in the city centre or maybe a town house in the outer suburbs (read 1.5 to 2 hour commute each way to downtown where I work).

        • flaker

          Did I say dream (as in, “biggest-and-bestest”) home? Read again.

          Hint: I said a middle class home in a good neighborhood close to the city business center.

          I’m in Minneapolis — not exactly a cheap real estate area — pretty middle of the road. I searched for 3 years and eventually found a lot with the home torn down in an area I want to live… I plan to build a 2000 square foot house there… more than plenty for our soon-to-be-family-of-4. New housing is roughly $200 a square foot. (yes, I know I could go out 25 minutes and live in a massive development and pay $90 per square foot… but that house is junk and no one wants to live in those nasty mass developments)

          One should note, however, that bigger and bigger homes might cost more money… but that doesn’t make them better.

          • Elphie Thropp

            I wasn’t even thinking you meant biggest and best. Seeing the kinds of prices in your area it makes more sense. Average price per square foot here is in the $550 range in the city and doesn’t drop below an average of $220 in the regions included in the metro area (an area that’s 2750 square miles). I’m just used to seeing the kinds of prices that exist in the bigger Canadian cities. Where I am a lot of younger professionals are coming to the realization that we may be the first generation where owning a house on a piece of land may just not be an option.

  • Emily

    Yeah something is wrong with your math here. I mean, this makes sense for people who are rich. But most of us? Seriously.. I am a professional therapist, with my MA and multiple other credentials. I make about $30,000 a year. And, most of my friends, and even my mom, make around $20,000 or less a year. By your logic of ” The house shouldn’t cost more than two and a half times your annual salary.” I am looking at no more than $70,000 for a house. Yeah right. Only houses that you can get for that little are falling apart meth labs.

  • nikkib143

    We live in an area that you’d be lucky if you could find a 3 bedroom SFH for under $550k, let alone a condo for under $450k. And everywhere has Mello Roos and/or high HOA’s. It’s unfortunate, when we look at different states where we could live and houses are half the price for twice the size.

    • nikkib143

      To add, my husband and I are late 20′s early 30′s, and making 6 figures annually. We lucked out and bought our first home (2br small condo) two years ago for $220k, and are flipping it for about $400k. We’re luck we were able to get in so low, because if we didn’t have the money from the sale, we would never be able to buy a new house. We scored a deal on our next place, but if it fell through we would be priced out of our entire county.