As your family grows you may find yourself feeling a bit cramped in your living quarters. After all, your one bedroom apartment is going to get a bit uncomfortable as your kid gets older. Because at some point you’re either going to have to stop having sex in bed, or the kid is going to learn about the birds and the bees way sooner than you intended. Especially because bird and bee style are two your favorite sexual positions.
So if you ever want to get buzzy and flock again, it’s time to trade up and buy a house. But the first step in buying a house is understanding how much house you can afford. Here are the basic rules in knowing what kind of house will work for you and your budget.
How Much Space Do You Really Need?
Consider this: in the 1950s a family of 4 occupied an average home size of 1,500 square feet. Today, that same family of 4 would live in a home with a square footage of about 2,300 square feet. Which is basically Melania’s walk-in closet.
There are many theories as to why home sizes have been creeping up (only a few of which are related to the fact that our asses have gotten bigger). But mostly it comes down to a feeling that bigger equals better. That’s not necessarily the case.
A bigger home brings with it a bigger price tag and higher property taxes. There’s also an increase in utility and maintenance costs. After all, that’s a lot of wall for your kid to destroy with a sharpie.
Finally, consider that Jim Gaffigan has managed to live in a 2-bedroom apartment with 5 kids forever. And considering how big that due is? Well, surely you can figure it out.
How Much House Can You Afford?
The general rule is that you should be able to afford a house that cost somewhere between 2.5 to 4 times your gross income, largely depending on the amount of additional debt you carry. So the more debt you have on credit cards and student loans, the less home you’ll be able to buy. Those four years of keg stands at Arizona State? Still worth it.
The Complicated Answer
The general rule above is the end result of a more complicated equation that include ratios banks use to determine their underwriting. The one ratio you may be most concerned with is called the back-end debt-to-income ratio.
This ratio is calculated by adding all your household costs to your monthly recurring debt and dividing that total by your gross income. The outcome is your debt to income ratio, or DTI. Banks have their own DTI limits, which hopefully ensure that what you’re spending on housing isn’t eating your entire budget. You can use DTI to run the numbers on how much you should be able to spend, if you happen to enjoy jamming hot needles in your eyeballs. Or, you can get simpler.
The Slightly Less Complicated Answer
One way to determine how much you can afford to borrow is based on the 28/36 rule. What this means is that your total monthly housing costs (including mortgage, property taxes, homeowners insurance and any homeowner association dues) should not exceed 28 percent of your gross income. And the debts you hold for cars, education and credit cards should not exceed 36 percent of your income. This is less eye-pokey, but still a pain in the ass.
The Super Easy Answer
Forget running the numbers yourself and go to one of the very many home price calculators on the internet. Consider the one from Nerd Wallet that simply asks what your income is, what your debts are and where you plan to live.
This will tell you if you happen to be earning the U.S. median income of $55,775 and carry $400 of monthly debt, you can afford a $263,336 house in Los Angeles. Or essentially one third of the average $610,400 home listed there. So, in other words, you can’t afford Los Angeles. Unless you split it with 2 other families.
However, you can also afford a $220,186 house in Detroit Michigan. And considering the median home price there is $37,600 you could by 4 houses. One for you. One for your kid. Another for your partner. And a fourth that you can all hang out in together sometimes. Sometimes.
Some Things To Consider
If you plan on playing “Let’s poke the personal bankruptcy bear” with your next home purchase, remember a few key things: if you’re going to tap retirement savings, try to keep it to a Roth IRA, where you can withdraw $10,000 for a first home down payment without a penalty. Taking money from any other retirement accountand you’ll likely incur an onerous tax penalty.
Don’t buy more house than you need, and don’t forget to factor in any renovations you expect to do and furniture your expect to buy. Including that new bed in your partner’s new Detroit house. Where you will expand on your animal style sexy-times to your hearts content.