Congratulations on your growing family! Planning for a new addition to the family is an exciting time, and one of the considerations that often comes up is determining how much house you can afford. This is an important question to address as it will have a significant impact on your financial well-being and the overall stability of your family.
There are several factors that you need to take into consideration when figuring out the answer to this question. These factors range from your income and financial obligations to the current housing market and interest rates.
1. Determine your budget:
Before diving into house hunting, it’s crucial to establish a budget. This involves assessing your current financial situation, including your monthly income, savings, expenses, and debts. Understanding your financial standing will help you determine a comfortable range for your housing costs, including mortgage payments, property taxes, insurance, and potential maintenance expenses.
To get a clear picture of your budget, consider creating a detailed monthly budget that outlines all your income and expenses. Be sure to factor in your anticipated increase or decrease in income once your child arrives. This information will provide a solid foundation for calculating how much you can afford to spend on housing.
2. Calculate your debt-to-income ratio:
Your debt-to-income ratio (DTI) plays a crucial role in determining your affordability. This ratio compares your monthly debt obligations to your monthly income. Lenders typically use the DTI to assess your ability to manage additional debt, such as a mortgage payment.
To calculate your DTI, add up all your monthly debt payments (including credit cards, student loans, car loans, etc.) and divide that by your gross monthly income. Ideally, your DTI should be below 43%, as a higher DTI may limit your ability to secure a mortgage or indicate financial strain.
3. Consider your down payment options:
The amount you can afford for a house is also influenced by your down payment. A larger down payment means less need for financing and can help you qualify for a more significant mortgage. Conventional wisdom suggests aiming for a down payment of at least 20% of the home’s purchase price to avoid private mortgage insurance (PMI).
However, it’s essential to weigh different down payment options, depending on your financial circumstances. There are various mortgage programs available that offer lower down payment requirements, such as Federal Housing Administration (FHA) loans or loans backed by the U.S. Department of Veterans Affairs (VA loans). Understanding these options will help you make an informed decision regarding your down payment amount.
4. Calculate your maximum home price:
Once you have determined your budget, evaluated your DTI, and considered your down payment options, you can begin to calculate the maximum home price that you can afford. While online mortgage calculators provide rough estimates, it’s better to consult with a mortgage lender or a financial advisor who can give you more accurate results tailored to your specific situation.
Lenders typically evaluate three crucial factors to determine your maximum home price – your income, your debt obligations, and the prevailing interest rate. They use these factors to calculate your debt-to-income (DTI) ratio, which helps to determine the maximum loan amount you qualify for.
5. Consider additional costs:
When determining how much house you can afford, don’t forget to account for other costs associated with homeownership. These include property taxes, homeowners association (HOA) fees if applicable, insurance premiums, and potential maintenance and repair expenses.
Property taxes vary from state to state, and even within different neighborhoods within the same city. It is important to research and calculate an estimate for property taxes in the areas you are considering. Similarly, HOA fees can range significantly, depending on the services and amenities offered by the homeowners association.
6. Prepare for unforeseen expenses:
When planning for a new home, it is always wise to prepare for unforeseen expenses. These can include unexpected repairs, appliance replacements, or a financial emergency. Building an emergency fund can provide a safety net during challenging times, giving you peace of mind and preventing potential financial strain in the future.
7. Seek professional advice:
While it’s essential to conduct your research and calculations, don’t hesitate to seek professional advice when determining how much house you can afford. Mortgage lenders, financial advisors, and real estate agents have the expertise to guide you through this process, considering your unique circumstances.
Working with a mortgage lender will help you understand the various loan options available and provide you with real-time mortgage rate information. They will work with you to ensure that the loan you choose aligns with your financial goals and resources.
A financial advisor can provide an objective perspective on your overall financial situation and assist in creating a comprehensive plan. They can review your budget, financial goals, and help determine whether buying a new home fits into your long-term financial plan.
A real estate agent, particularly one experienced in the local housing market, can provide valuable guidance on property values, market conditions, and potential neighborhoods that align with your affordability range.
8. Understand the housing market:
The housing market is constantly fluctuating, and prices can vary significantly depending on location and demand. It’s crucial to keep a close eye on housing market trends in your desired area and consult with a real estate agent who can provide insights into the current market conditions.
Understanding the housing market will help you make informed decisions about when and where to buy. It’s also worth exploring different neighborhoods to find areas that may offer more affordable options without compromising on your lifestyle preferences.
9. Consider long-term financial goals:
When thinking about how much house you can afford, it’s important to consider your long-term financial goals. Remember that homeownership comes with ongoing financial responsibilities, including mortgage payments, maintenance costs, and property taxes. Consider whether buying a more expensive home will limit your ability to save for other financial goals such as retirement, education, or a growing family.
10. Be realistic:
Lastly, it’s crucial to be realistic when considering how much house you can afford. It may be tempting to stretch your budget to get your dream home, but doing so can put significant strain on your finances and overall well-being. Consider your lifestyle, priorities, and other financial obligations when determining a comfortable range for your housing costs.
In conclusion, determining how much house you can afford is a multifaceted process that requires a thorough analysis of your financial situation, careful evaluation of your debt-to-income ratio, and research on the housing market and other associated costs. Balancing your current and future financial goals while allowing room for unexpected expenses is essential. Seek professional advice when needed and be realistic about your affordability range. By taking these steps, you can ensure a comfortable and stable financial foundation for your growing family.
28% DTI is rule of thumb, so a max of ~$4000/mo. Obviously the lower the better. And I don’t know about your region but in my area the housing market is finally starting to cool down (homes for sale longer and more price cuts, even on rentals).
I’d suggest that you look at this from the perspective of using only your salary to qualify for a mortgage. Relatives providing daycare may fall through. In that case, anything your wife makes will go to paying for daycare, diapers and other baby expenses.
A $500k house would be about your max for a house. It’s recommended that the mortgage be 3 times your annual income plus whatever amount you have for a down payment. This makes even more sense given today’s interest rates.
Let’s say you buy a $500k house, putting $80k down. A $420k mortgage at 7% for 30 years is a monthly P&I of @ $2800. Add in property taxes and insurance and you could be at $4k or more. That’s right at 33% of your annual income.
Wow, I did this about 9 months again almost exactly. Baby & similar income. We have high property tax and interest rate was 6.1% so we got a $500k house and pay for a nanny still. I would not plan on what you could make but what you are now. If you make more then pay extra against principal and get equity faster by paying less interest. If you don’t want surprise expenses then don’t buy an old house. We bought new. School districts can change every school board election as well, may not but they can.
Just want to say it’s nice to see someone posting in here that has their head screwed on the right way in thinking very carefully and thoughtfully about a large financial decision.
We have a 2yo and one on the way.
I would recommend including daycare in your budget. If family can help, great! If not, best to be prepared. For one infant, we were paying 1600/Mo. Prices have gone up since – I would budget at least 2k or more depending on area (and get on some waitlists!).
Edit:
Also include other ways new baby hits the budget – health insurance costs went up by 500+ per month for me to carry coverage for spouse and kid.
You already mentioned potentially needing one new car. It’s easy to say “oh, we need an SUV”.
Babies need very little space when they’re newborns so don’t feel rushed. You have parents nearby that can help so it’s useful for moving. We actually didn’t buy our house until our first was around 3ish month. We flew in our in laws to watch our baby while we moved. Get an agent and start going to open houses to get the lay of the land. It took us a while before we got our house.
I also would caution against expecting the parents watching your baby thing to 100% work out. There are tons of posts on the parent sub about things blowing up. I would research daycares and get on a few waitlists as backups and figure out what the price range it. It’s a huge commitment to watch a baby and even if the parents are willing and able, you guys can have misalignments on how to care for the baby. At the very least, talk it out with your parents on expectations.
Good luck!
Really make certain that family is willing to provide childcare. Caring 20-40 hours a week for a kid is a lot to ask of others. Infant daycare is $$$$& and it doesn’t get much cheaper until kiddo is in school and only doing before/after care.
Not factoring in potential 2k a month for childcare would be a major oversight
What you are proposing for your wife’s work and childcare schedule is a ticket to burnout. The first year is rough, especially if your baby is a bad sleeper. So waking up after 6 hours of sleep, getting ready for the day, sneaking away from work every 2 hours to nurse or breastfeed, listening to your baby cry in the next room while the grandparent who is 30 years behind on childrearing and safe sleep fails to comfort them, and then handing her over to you so she can finish her workday at 7, nurse the baby go sleep, and then rush to do chores to get to bed just to wake up at midnight to feed the baby, then wake up at 6 to do it all over again.
I would get on childcare waitlists now, and only account for your wife’s income for hours that you have dedicated care minus commute and pumping time.
Babies don’t need much for the first year. You can wait until they here to see how much your income and expenses change. But I would use the income described above, minus our childcare, diapers, and formula costs, and add in $200 of extra baby stuff a month.
Keep renting and saving. Buy house when kid is 3 or 4 in neighborhood with good schools and after the economy normalizes a bit.
It’s going to be tight in that income once the baby comes. I would rent for a little while longer until you know what the baby costs and you’re in a better position to buy something
If there is a builder in your area consider checking it out. In my area, builders are buying down rates to get rid of their inventory. Given the potential funds available for down payment, your budget might allow for a more expensive home if the builder buys down your rate to 5.3ish, or lower. Especially in about a month when not too many people are buying homes. I know someone that just got 5.6 from a builder (3.5% down) and i got 5.8 in May (20% form, timing is everything). Just manage your budget and don’t go over board if you go with a new build and you should be fine. Inventory home is probably the best bet.
> We live in an area that decent homes in a good school district start around $500k+ but a lot of them are older homes that need work done to them.
I would seriously weigh your appetite for buying a home that needs substantial work. Even if you don’t plan to do the work yourself (a safe bet when you’ll have a baby at home), living in a construction zone while contractors do the work isn’t great either. If you are mostly talking about cosmetic updates that can be done quickly, like painting or replacing carpet, then sure, buy the dated house. I would advise against buying a home where you hate the kitchen and/ or bathrooms and would want to do some more serious renovations.
If you genuinely don’t expect your living costs or income to change with a child, it sounds like you have $2,100 + $4,000 that could potentially go towards a housing payment.
If I were you I’d probably stick to a housing payment below $4,000, which still gives you $2,000 a month of savings every month. If we factor taxes/insurance in and say principal/interest is $3,200 of that, that would equate to borrowing about $480,000 on a 30 year loan at 7%.
Every $10,000 you borrow over that is roughly $70 a month. So borrowing an extra $30k costs you $210 a month.
I know the housing market is tough. That said, keeping your monthly housing costs to 25-35% of your take home pay makes life so much easier. You might have to make sacrifices, but I’m a big believer that disposable income makes life enjoyable. Being house poor is the worst, especially with a baby and all the costs associated with a child.
Think of it the exact opposite way. How much does the house need to cost to keep my current lifestyle the same. If the numbers aren’t even close to what is out there, don’t change your lifestyle for a house. The prices are not going to keep going to the moon no matter how much people try to make you believe on fear. The baby will complicate everything in your life and worrying about a house is not something you want at that moment. Furthermore, if it’s a house that needs to be fixed and you don’t do it right away it will be a nightmare when the kid is 2+ years old.
Whatever you budget for your child. Double it. They are insanely expensive and there’s no way to explain it properly. I have no idea how people that aren’t financially stable handle children. My two have been more of a financial burden than I ever imagined.
Childcare it incredibly expensive. One thing that people don’t tell you however, is that young children are really cheap to look after. The weekly spend for a small child is relatively small.
I cannot remember who said this but I tell every young person I know this one bit of financial advice.
Do not purchase a house or a car or anything that is long term debt that you cannot afford alone.
Always keep in mind that things change, one of you could lose a job, you could have an accident and become disabled or a death could occur. You could get a divorce. Nothing in the future is guaranteed, plan for worst case scenario.
Uhm why would you put your wife through that. I’d get on childcare waiting lists now.
Look, every animal instinct in your being is screaming buy a home with a baby on the way. Been there, did it, and I get it.
My advice? Don’t.
Stay in a cozy apartment, and spend your time bonding with your child … take time from work, don’t waste that time working on the gutters, stripping wallpaper, or sweating how you are going to scratch 20k to replace the sewer pipe.
The kid doesn’t know, doesn’t care, won’t remember, and save a bigger cash war-chest.
In 3-4 years, I think the housing market is going to look very different. I think your career plans and family situation might look very different. For us, one thing was the realization that it cost way more in daycare than my wife would ever bring home. (The flip side is socialization that might be worth the trade-off)
Then, if you still feel the same, do your research, Find that perfect neighborhood, and you will be in a much stronger position with a lot less stress.
We make about the same as you with no kids and our house is a little under $3k a month or about 30% of income and I would not recommend doing more than that if you have kids. We live super comfortably, but I don’t think we would if we had children we wanted to invest in ensuring they had all the advantages in life like paid for college, a used, safe car when they graduate, etc.
Unless you spend all your money without thought, you should absolutely be able to afford a 500+k house and be able to afford your child without issue. You say you drive a 98, so you sound frugal enough. Even if you’re ‘only’ saving 2k a mo/ you are way better off than the avg person.
The question is how much house do you need, not how much you can afford.
Spend the extra money to work less and spending more time with your child. (Unpaid Leave of absence or just fewer hours).
This is what will really matter in the end.
If you get a 2-1 buydown, maybe $400k tops with the intention to refinance later (that’s around a $2,800 mo payment). Childcare is expensive, so you should check out local prices for full time care. Add about $800/mo additional for other baby supplies depending on the area you live plus health care.
I had a house before my cold was born and in a similar financial situation as yours.
I would advice my younger self to buy a house before the child in born. Use money from hysa for down payment (go for fha 3.5% or conv 20% based on what works better for you). Budget 1.7-2k for day care starting when child is 3-4m and older. Budget extra 1k (plus the current rent amount) towards mortgage payments. Your cash savings go from 4k to 1k per month.
With a first child on the way (from experience) I would want to focus on my family and not want to think about buying a house atleast for the first year.
Get a house to meet your future wants and not your current needs. I’d recommend pushing your finances and going for a bigger house and avoiding a starter house. I’m in a starter house and finding it difficult to move to a bigger house (because I don’t want to sell my starter house). Factor in space to entertain friends family, host family for extended periods, work from home space for the both of you, any space requirements for fitness activities and personal space.