4 Couples, 4 Home Purchases: How Much Can They Afford?

Christine Ryan Jyoti

real estateFor many of us, buying real estate is one of life’s biggest milestones.

Whether it’s purchasing your first home, a bigger home or an investment property, it’s critical to have your financial ducks in a row before you dive in. Or as someone who handles real estate for a living puts it:

“Buyers should carefully assess their finances before beginning their home search,” says Steve Brown, president of the National Association of Realtors. “By looking into their income, savings and credit reports, and collecting documentation of income and cash available, they can help avoid future problems when they’re trying to qualify for a mortgage.”

Want to know how much house you can potentially afford—and what pitfalls to avoid when you begin looking?

LearnVest spoke with four couples from across the U.S. who are looking to purchase real estate in the near future, as well as David Blaylock, a CFP® with LearnVest Planning Services, who weighed in on how each couple can better prepare for this important next step.

Steve&SallyThe First-Time Homeowners

Who: Steve Thomas*, 28, a software salesman and his wife, Sally, 29, who is looking for work as a Korean translator.
Location: San Jose, Calif.

What They Want to Buy: We’re looking to buy our first home together sometime in 2016. Ideally, the house will have two bedrooms, two baths and be located in a safe, quiet neighborhood within ten miles of work (preferably five so we can ride our bikes, save on gas and get some exercise).

The home doesn’t have to be turnkey, but we don’t want to have to do many repairs either. We have no children and aren’t planning on having any—but things could change, who knows.

Because of the high cost of real estate in San Jose, we’re considering moving to an area with similar weather and a lower cost of living. Sacramento, Houston, Austin or somewhere in Florida are all in the running.

We’re looking at spending $200,000 or less on a house. If we do get a mortgage, we’d like to pay it off in no more than 15 years. We don’t buy anything unless it’s on sale, and our house won’t be different. I actually blog about my frugal ways at Steveonomics.

Where They Stand: We should have $100,000 liquid at the end of next year. Our rent is reasonable—we have a great deal on a one-bedroom through a friend—so I don’t feel there’s a huge rush to jump into a big mortgage. If we save aggressively, we should have enough cash if we spot a great deal.

RELATED: How I Paid $100,000 Off My Mortgage in Under 2 Years

I should make about $70,000 this year (close to half of my salary is based on commission). When my wife starts working, most of her salary will go toward savings. We’re aiming to spend around $20,000 this year on living expenses. We currently have $50,000 saved for a down payment.

Outside of retirement accounts we only hold cash. We don’t want to risk a market crash a few years before we’re planning to buy a house. After we own a house, I can see us taking more risks with stocks.

We have no debt whatsoever. Our modest student loans were quickly paid off and we bought our car with cash. I use credit cards for almost every purchase to earn miles and fly for free throughout the year.

RELATED: How I Pay For My Life With Credit Card Points

I plan to max out my 401(k) and have already maxed out my traditional IRA with my tax refund. This lowers our available cash, but makes it so I pay very little tax. My wife maxed out her traditional IRA with Vanguard last year even though she didn’t work. She will probably max it out this year and put at least some money in a 401(k) if it’s available to her. We currently have $20,000 in retirement accounts.

If I were to lose my job tomorrow, we could support our current lifestyle for close to three years without any assistance. Our emergency fund would be our bank accounts (which is also our housing savings).

What the CFP® Says: What an exciting time; plans to buy a first home and a possible move to a new city. I think it’s a great idea to consider buying in a location that may provide more bang for this couple’s buck. I do recommend they consider purchasing a home that has at least three bedrooms, especially if they’re considering possibly starting a family. It could also help increase the home’s desirability when it comes time to sell.

RELATED: Is It the Right Time to Buy a Home? A Look at the Real Estate Market

The couple’s desire to have around $100,000 in liquid savings is a great goal. They currently have about $50,000, which should give them at least a 20% down payment and six months worth of living expenses for their emergency fund. With mortgage rates being very reasonable at this time, I recommend they consider a 15-year fixed mortgage for the remaining part of the purchase price instead of paying cash (while a 30-year fixed mortgage is OK, a 15-year is typically ideal).

I also suggest that any extra money they’re able to save should be added to their retirement account balances to help make sure they’re on track in that area as well. At their income level I would also recommend that they use Roth IRAs instead of Traditional IRAs to create tax-free dollars at retirement.

  • a

    Why would they suggest that the first couple buy a three bedroom house when they are not even sure that they want children and are currently living on a single income? A mini mansion is not the solution for everyone– especially for a couple that seem accomplished at frugal living and thinking outside the box in terms of lifestyle and saving. I think the old advice that everyone should buy more house than they need or want is outdated and only benefits realtors.

    • Monica

      I agree. Home prices in San Jose are very high. It would have been a much more helpful article, if they actually gave some estimates of what homes cost in the different areas…

  • Hillary

    I’m more than a little disappointed with this article. I started reading it expecting to be able to apply something to my own life, and after reading I feel like the only couple I might possibly relate to is the 4th one. How many people buying a home seriously wait until they have over 20% cash as a down payment? As a prospective first time home buyer, I would have appreciated them talking about other options rather than waiting until I’m in my 30′s to purchase because I should have at least a 20% down payment. This article completely ignores the fact that by owning a home, you are investing into the home’s equity by paying the mortgage, whereas in paying rent each month you are basically throwing that money away.

    • Reality

      I’d almost agree with you here, but after hanging out with another forum group in personal finance (reddit.com/r/personalfinance), I’ve changed my view on buying/renting.
      Renting is NOT throwing your money away. Buying a home is not the best type of investment you want to make either. Buying a home is investing into a huge illiquid asset. As quoted by another article about renting vs buying, “Housing returned 0.4% per year from from 1890 to 2004.” You make a downpayment, pay off that house, well you better hope that your house has appreciated in value over that time, which the past few years kinda makes that shaky. And on top of that, all that money you “invested” into the house, are you getting all that cash back? No, you’re probably going to sell that house (hopefully at some gain) and drop that as another down payment into another home. You’re not really getting that money back. Also consider you’re still “throwing money away” when you buy a home. Consider the fees you have to pay, PMI if you don’t have full down payment, HOA fees, taxes, hidden costs at purchase, etc. Is that money invested?

      As for renting, I also felt that it was throwing money away. But other than not owning a home, the value of payment is no different than buying a home. You’ve got advantages with renting. If something breaks, I usually call maintenance and they fix it. No costs for me to spend on. Major home maintenances aren’t something I have to worry about. Location? I can move wherever I want to, I’m not stuck with a house that can’t move with me. This is especially advantageous if you’re in a constantly moving industry where your job could change in three to five years. Houses pay off at least around 10 years, that doesn’t work if you had to suddenly move after working at a job for five years. And that’s another advantage, I don’t have to worry about whether I can or can’t sell the house, and whether I’ll make profit or lose on the value of the house. Housing preferences change, as a friend of mine discovered recently when trying to sell her house. She’s got a great home for a growing family, but guess what, not enough of a yard which is a big thing now. House is still on the market for a year now.

      I currently rent, and I’ve been raised in that mindset that a house is better and renting is throwing money away. Really looking at the numbers though, you’ll see it’s not like that. I’m looking to buy a house this year simply because with my lifestyle I prefer a larger home as well as having the freedom to customize and do things I want to the home.

      If you really want to look into your finances and figure what’s the best option for buying a house, check out reddit.com/r/personalfinances. LearnVest is great, but their articles tend to be positive, and that’s what this one is about. If you want an article where you can relate to, this article would end up pretty depressing. Who wants to read an article about a family who makes 60k-100k (if dual income), realize they don’t have that six month savings for emergencies, have about 30k-100k debt in student loans, have several credit cards with balances still being paid off, and have maybe 3k for a down payment? It’s just gonna be a standard buckle down, get frugal, save for emergencies first, prioritize and create a budget, and have a plan of attack a couple years down the line to be able to afford a home. This is an article about and for people that have the money and the freedom to advance their life at the moment they’re able to buy a home because they’ve been aware and budgeted their finances, without worrying about crippling student debt, that large medical bill that might be hanging over your head, the credit cards that you might have missed a payment on, or those other large loans you might still be paying off, like that 20k+ car you bought in the past few years.

    • Steve

      Hi Hillary,

      This is Steve from the first article. I understand your concern and in many parts of the country it is better to buy than to rent. In Silicon Valley I don’t believe this is the case. For example there is nothing “nice” on the market for under $500k currently. Even if I could put 20% down my mortgage payments would be $2500-3000/month for 30 years. That is significantly more than my rent and too big of a commitment to make right now. In other parts of the country I would dive in much earlier. Thanks for your comment!

      • Nonya Bizness

        I live in Solano County,which is no where near as expensive as San Jose, but you can’t get anything here under $200k, but up the freeway in Sacramento you can get a lot for that price. Good luck on wherever you decide to go.

        • Steve

          Thanks for the support! I really like Sacramento and think it is seriously underrated. However, finding a “good job” appears to be a difficult task.

    • clout82

      As a real estate professional, the advice for the 4th couple is frustrating because lenders require 20-25% down for investment properties. A better strategy for someone looking to buy an investment property (IMO) is to buy and live in it as a primary residence first. This way you take advantage of lower down payment options. Then when you are ready to move to the next property, you rent out your current home.
      A couple notes about doing this: make sure there is no penalty in your loan product for turning it into a rental (most of the time you have to use it as a primary residence for at least one year to qualify as a non-investment property or there is a big fine if you get busted). The lender will also want to see that you have enough savings to cover all mortgages for at least 6 months, so make sure to consider this in your planning–they will usually count retirement savings.

    • clout82

      Hillary, while I think it’s prudent advice to have 20% down, when interest rates are under 4 and 5% it made no sense to me to put down a large down payment when I could earn more money in the stock market with those funds. I did low down payment options on my first two homes–just make sure your credit is in good shape to qualify for the low down programs and that you can afford the monthly payments.

  • Not Convinced

    This is depressing. I’m 33 and my wife is 29. We have 5,000 in the bank, collectively make 70,000 a year and have no foreseeable way to save the type of money these “examples” have. 100,000 in liquid assets? 1,800$ lease/rent? I guess it’s apartment life for us!

  • Julie

    I also would have appreciated seeing more examples of folks who have less in liquid assets. I live in DC, and if I only bought where I have 20% down, I’d live in a studio for the rest of my life.

    • clout82

      Julie, I didn’t put 20% down on my homes. Interest rates are so low it didn’t make sense to use it as a down payment when I could invest it and make more. I did the minimum 3-5% down, just make sure you have good credit to qualify for these programs and can comfortably afford the monthly payment. If you can, go conventional as you only have to pay mortgage insurance until you build enough equity into the property. FHA will require mortgage insurance for the life of the loan now. Yuck!

  • Michelle

    Would love to see this same article for single home buyers!

    • Anon101

      Me too!

    • clout82

      Michelle–I am a single woman in my early 30s and own a primary residence and 2 rental properties. I’d be happy to answer your questions or share how I got here.

  • Spinner

    Maybe the title of the article “How much can they afford?” should be reflected somewhere in the content. There is absolutely zero answers to that question here. I suppose legal made you take any actual information out because that would constitute useful advice.
    What a waste of an article.

    • clout82

      Agreed. There is nothing in this article about how much these couples can afford based on their incomes, savings, and debt.

  • Jess

    I was hoping to see a move up buyer with an expanding young family. Particularly illustrating the housing crash and the impact of little to no equity if purchased in the last 7-10 years….

  • b

    All of these people are rich. Screw this article.