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How much should we spend on our house?

Just last week I released our "balance sheet" and budget.  ( You can see that here.)  If you haven't sat down and looked at your finances that way, you yesterday!  One of the biggest things we had decide before we even started looking at homes was how much we could afford to spend.  While we rented, we were spending $650 per month in rent, so we knew we could comfortably afford that much per month.  We also had $5,000 for a down payment and closing costs.  I have heard that you should never spend more than 3x your annual salary on a house, so for us, that would be $75,000 x 3 = $225,000.

However, I then used's Mortgage Calculator to find out the payment - $1,042.01 per month.  That is just the principle and interest and does not include taxes, insurance, PMI, or other miscellaneous fees!

Also, on that $225K house, the down payment required (at 3.5%) would be $7,875.00 - more than our $5,000 budget for down payment AND closing costs!

So a $225,000 house was out.
"The Experts" say that your monthly debt obligations (mortgage, credit card payments, car payments, and other loan payments) should not exceed 35% of your monthly take-home pay.  Our take-home pay per month is approximately $4,500.00, giving us $1,575.00 for all debt obligations.  Minus car payments, we have about $800.00 for a house payment.

An $800.00 per month house payment will buy us a $170,000 house.  That same house would also put our 3.5% down payment at $5,950.00, which is more than budgeted.  Frankly though, we could swing it and make it happen pretty easily.


The Big Guy and I had no desire to purchase a home that was at the top of our budget unless it was absolutely necessary.  We were willing to buy a house that needed some (if not quite a bit) of TLC :-), which puts the price of the houses we decided to look at much lower than our maximum budget.

Here is what you need to consider when deciding how much to spend:

1) How much money to do we have available for a down payment and closing costs?
2) Using the 35% rule, how much house payment per month can we afford?
3) MOST IMPORTANT - how much do you feel comfortable spending?  If any of the above amounts seem too high, it is ok to go lower :-)

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