How to calculate when to buy a house
Dear Dr. Don,
My wife and I are close to buying a house but haven't started the process yet. I know how to calculate how much we can afford, but also know I'm not an expert.
My wife is unemployed, but I'll be starting work after I finish graduate school. I'll earn a base salary of $95,000 with some bonuses. I'll have a student loan payment of about $1,200 per month, but we have no other debt. We will probably look to put 5 percent to 10 percent down. We have good credit and are in our mid-20s.
I've ballparked that we can get a $300,000 house on my salary alone. If you want to talk insurance and taxes, use the Charlotte, N.C., area. Any insight you can share on the process or my calculations would be very helpful.
-- Philip Payment
There are a host of home affordability calculators on the Web, including Bankrate's How much house can you afford? calculator. I also like the Ginnie Mae "Loan Estimator" because with a few easy inputs it will return the home affordability for Federal Housing Administration, Department of Veterans Affairs and conventional financing. I'd suggest using both calculators, because the Ginnie Mae estimator doesn't explicitly consider your income.
Speaking of income, I think you're a little optimistic as to the amount of house you can afford. You may be counting on your expected bonus income, and a lender is unlikely to consider it in your first year on the job.
It's likely that you'll be looking at an FHA loan for that first home purchase. These loans have a lower down payment requirement than conventional financing. You can get conventional financing with 5 percent to 10 percent down, but lenders have tightened up their underwriting standards since the bubble burst in real estate prices and it may be an issue.
You're just starting out on your career. I don't know your hopes, plans, dreams or ambitions as a couple, but one of the things you want to consider is how long you plan to live in this first house. Does your wife plan to work? How do her plans influence where you will live? Take a look at Bankrate's buy or rent your next home tool. It's an interactive work sheet that will walk you through some of these factors.
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