Your mortgage vs. your yearly gross (talk me off the ledge)

In My Humble Opinion
1

I’m fortunate in that I’m relatively well paid (90th percentile for my MSA) in an area where the median home value is relatively low.

I’m also fortunate in that both my wife and I have somewhat idiosyncratic tastes in houses - we like urban neighborhoods that both racially and economically diverse, and we accept that the occasional busted car window is just part of living in the city.

We currently live in a nice-ish, 1,400 sq ft starter house in such a neighborhood. The mortgage is about 80% of our (well, my) income - she’s staying at home right now. I could get laid off and probably go find an IT job for about 55% of my current salary and not even think about having to give up the house. We’d cut HBO and Showtime, maybe switch to a prepaid plan, but we’d otherwise be just fine. Plenty of people that I know do more with less.

On the other hand, since we had our blessed event a couple of years ago, the house has started to feel smaller and smaller. There’s no hood in the kitchen, so everything smells like grease when I decide to make steaks. There’s no first floor powder room, so somebody has to help my semi-disabled mother up the stairs whenever she comes over. I work from home two days a week, and my “office” is a desk in the semi-finished basement, so I have to turn on space heaters and wear a jacket so I don’t freeze to death while I’m down there. The garage can’t fit a Toyota Corolla and a lawnmower at the same time.

There’s a house on the market a couple of neighborhoods over that hits all the marks - two car lower level garage; recently remodeled kitchen with a real hood; first floor study; first floor half bath; backs up to the woods; 2,700 sq ft; close to a daycare we like for when my wife eventually goes back to work…

Problem is, it’s listed at just over 2x my current gross salary. I’m nervous. My mortgage payment right now is less than what I paid in rent before I bought the house. I would be paying more for the place than I virtually everybody I know and regularly hang out with. Between the mortgage and other debts (mostly student loans) I’m looking at about 20% of my gross monthly income. I know the calculators tell me that I should be able to afford a 36% monthly debt/gross income ratio, but that seems fucking insane to me. Around here, that kind of money buys a pristine Hannaford house or a penthouse condo in a high rise in one of the nicest neighborhoods in the city.

I realize this probably sounds crazy to those of you living on the coasts. Based on what I see on HGTV, my current house would probably be 750 Connecticut and the property we’re considering is probably 2 mil.

Sooo… help me either take the plunge or back away. What’s your mortgage as a percentage of your yearly gross income? Or what’s your monthly payment as a percentage of your monthly gross? What are you getting for it? Are you happy with what you have?

2

What is the possibility of reworking what you have?

Redoing the basement, insulating and heating it can be a DIY afair.

If you want to add bathrooms, that you need some plumbing help on of course.

Kitchen range hood? Those are easy to add

Maybe have a professional come look at your existing house to give you some ideas and figures

I would not enjoy the idea of doubling my debt either

3

2 to 2.5 of annual gross salary is what most people can get financed for with decent credit and for most people it’s workable debt burden ratio. You sound extraordinarily risk averse with respect to taking on more mortgage debt than your current baseline and possibly you have very good reasons for this position.

This is really a personal call by you. If your wife will be at home for the foreseeable future (which is great for the kid’s development IMO) and you don’t want to take on any more than a 50% worst case replacement salary might generate you’re going to have to hang out until she goes back to work.

On the other hand if you are a golden boy at work and up an upscale fast track it might make sense to take the plunge. If I was in your position it would (for me) come down to how marketable my skills are and how strong the next 5-10 years of my company or industry were projected to be.

Also bear this in mind. It’s not a life or death issue but it does matter with respect to how people regard you for advancement in many corporate scenarios. If you are coming up the ladder and you live in a house or neighborhood well below the standard of your industry peers it’s going to effect how people regard and socialize with you. A house is more than just a place to live. It says something about you and gives you the ability to entertain without making apologies. How important this is varies hugely and it may be of no import at all in your specific situation.

It’s not fair but if you are being evaluated for management advancement living in a relative crackerbox will reflect on you.

4

Is 80% a typo?

5

Back of the envelope, I’m looking at:

Kitchen: $10-15k - The way the layout is, it needs a complete renovation to get it up to screaming hot cast iron skillet standards. After that it will still be a 120 square foot kitchen.

Basement: $5k + time - I could DIY this, but that’s a lot of weekends when I could be doing something else.

Powder room: $15k - Requires another gut in the first floor. My MIL is probably going to be in a wheelchair in the next five years, so this one is kinda important.

Second floor: $20k - Lose most of a bedroom, gain a (small) master bath.

After all that, I’m still in a 1,400 square foot house with 500 square feet of finished basement (and a tiny garage.)

It’s called being raised in a well loved but tiny house by two social workers in a working class neighborhood.

This is a good point. My wife is eagerly awaiting the end of SAHM-hood. We’re thinking about another 12-18 months at most.

I’m not exactly a golden boy, but I’m a silver boy, I guess. I recently made a lateral move to a position that’s more strategic/visible to the organization and more conducive to work work life balance, and they already gave me a raise. So I’m pretty safe.

I guess I’m just trying to wrap my head around the fact that I might need to get a fucking riding mower.

6

Nope. My current gross salary is 125% of the original principal of my mortgage.

7

When I first read that line, I assumed you meant mortgage payment (I’m guessing elfkin477 did the same). There are people crazy enough to spend 80% of their net income on a mortgage. Maybe more of these than people whose principal is 80% of their income.

8

No you won’t need a riding mower with a SAHM, My wife took over a large chunk of the lawn with the push mower and flower beds when she stayed home. Kept her from needing to work out on those days. Gave the tots time alone in the sandbox where she could watch them.

Shucks, I’d almost not even bother with the mortgage in that case. My current mortgage started at 3 1/2X my annual gross and is down to about 2X after ten years. Raises helped change the ratio a bit.

9

There aren’t even any houses for sale in my town for 2x my salary.

10

The only mortgage I have currently is on a rental property that I’ve owned for 15 years there my mortgage is 2/3 of my gross salary. I’m currently trying to figure out where I want to buy my next home but my last mortgage was 3x my annual income. I just checked and there are 3 vacant lots and a 3/2 mobile home for sale in my current town at 80 of my household income. I can’t imagine buying a property that cheaply.

I grew up in california so my home value mental calculator is all screwed up but I generally look for houses at 4x the household gross so with the downpayment it ends up about 3 - 3.5 x the household income.

11

Which is not atypical for high cost markets

12

I can’t imagine. I couldn’t buy a parking spot for 2x my annual income. You’ll be fine.

But if you want something to worry about, worry about additional costs of heating, etc. all that space. And make sure you both are fine with how much more cleaning it will involve. I’d also look hard at how the layout will work with your family life-- when we moved to a larger space, it affected our family dynamics, and not in a 100% positive way.

13

My mortgage payments, going to the maximum deductible every year, total about 10% of my income (actual monthly payments amount to peanuts, but I put in a large chunk every December to cap the deductible). Now that I’m going to get a second home with a loan from my mother, total payments will be about 20% of my income. Total mortgaged value counting the initial value of the mortgage (which is now down to less than half that) and initial value of the motherly loan, about 6x my yearly income. That’s 3x for each house.

Both of my houses would fit inside yours, but that’s a matter of cultural values and what’s considered good in different locations. What passes for a shoebox in Idaho is an apartment in Manhattan :slight_smile:

14

What can your wife reasonably expect for employment? Is she going to walk straight into a high-paying job? Or is she going to have a hard time finding employment that gives much of a net bump in income, after paying for child care?

15

1400 is a starter house? My 2 bedroom house was only a little over half that, as is my current flat.

16

Because you didn’t mention it, do your numbers include expected the increase in Insurance and property taxes?

17

But you live on that cramped little island, and we’ve got this sea-to-shining-sea shit over here.

18

You call 1400 sq ft a starter house. My house is 1300 sq ft and we raised two kids here and are now looking to move to some place smaller. When I bought it, the price was just about twice my gross salary and taxes are a good bit higher than in the US and the mortgage interest is not deductible. I would guess that with today’s extraordinarily low interest rates, anything up to 3 times income should be perfectly safe.

Are you sure you cannot find a way to add a ground floor toilet? My house did not apparently have any way to do it, until I realized that we could, just barely, modify the entryway coat closet to just fit a toilet and a tiny sink. Then we got a wardrobe that fit in the vestibule. Works fine. We also considered adding an entry hall outside the current front door and then converting a large part of the old entry hall into a washroom. That would have worked but would have been much more expensive.

19

Where do you live that 20% isn’t normal? I live in NYC and 20% or higher seems like the standard here.

I think the most important question to ask is what are your future goals? What do you want to do with money and how badly do you want to do it? Do you have kids you need to send to college? Will this house prevent you from doing that? Are you thinking of taking on more risk (i.e. starting a business)?

If you do not have any major plans that require money, and this debt will be your only risk in life, then I would go for it. If you plan taking on more risk in the future, like starting a business, I would consider holding off on the new house.

20

You can buy a decent 2-bed 1.5-bath 1920’s brick bungalow here for $45,000.

We took a look at the place this morning. It needs a very small amount of work and a new AC, but I like it. The actual grassy area of the place looks smaller than my current lawn. The asking price is probably about 10% too high, so there’s a bit of additional savings to be had.