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Question for the Money Doctors

Question submitted on Mar 31, 2012.

Question

We''re a debt-free young professional couple with a baby on the way, and this upcoming year we anticipate $210000 combined gross income. We expect this number to increase two-fold the year after...if we are thinking about buying our first home, what price range is reasonable? Is it still 2.5X annual income?

Answer

Hi - When I purchased my first house, a CPA mentor told me to purchase a little more home than you think you can afford right now.  You may be stretched but your income should eventually grow into the home.

That being said, you should also plan to save enough to put 20% down on the house.  After the down payment, your "home expenses" including mortgage payment, property taxes, insurance and utilities should not be more than 30% of your take home pay.  

So, your general formula of 2.5x your annual earnings is a good, conservative benchmark for a home price.  At 2.5x of your annual take-home income of $300K (after 30% in taxes), you should easily be able to afford a a $750,000 house (the mortgage payment at 4.5% interest would be $3800 before taxes and insurance).  

Good luck!


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