Home For Sale Sign in Front of Beautiful New Home

How Much Should I Spend on a House?

Wednesday, March 23rd, 2011

Housing is most people’s biggest expense.  That’s why, of all of the expenses we each have, it’s essential to get our housing costs right.  It’s one of the most important keys to being able to be generous, save and invest adequately, and live with financial margin and peace of mind.

How Much of a Down Payment Should I Make?

It used to be normal for people to make a down payment of at least 20 percent.  That became anything but normal during the run-up to the housing bubble.  Now, it’s coming back into vogue, and I think that’s a good thing.

Putting 20 percent down demonstrates the discipline to save.  Plus, it prevents you from having to pay private mortgage insurance.

How Much Can I Afford to Pay Each Month?

Lenders typically tell people they can afford to devote 28 percent of their monthly gross income to the combination of their mortgage, property taxes, and homeowner’s insurance.  When you include other debts, such as credit card balances, student loans, and vehicles loans, they want all of those monthly payments plus housing to total no more than 36 to 40 percent of your monthly gross income, depending on the lender.

I believe it’s best to spend less.  As I developed Recommended Spending Guidelines and Recommended Housing Guidelines for households across nine different incomes and four different household sizes, I found that the ideal is to spend no more than 25 percent of your monthly gross income on housing, and have no other debt.

In some especially high-cost parts of the country, you may need to stretch that to 30 percent, but, of course, that means other expenses will have to be lower than my recommended amounts.

And here’s the kicker.  It’s best to be able to afford a home on one income.

What?  That’s impossible, right?  Well, as I like to say in workshops, the common approach to money in our culture is to save too little, carry too much debt, live with too much financial stress, and fight about money too often with the people we love.  Do what’s uncommon and you’ll be able to enjoy uncommon financial success and peace of mind.

Basing housing costs on one income is especially important for young two-income couples that want to have kids one day and also want the freedom to have one person step out of the paid workforce while raising those kids.  But it’s important for others as well.  Buying a house that requires two incomes is risky. What happens if one person loses their job?

What If I’m Spending Too Much on Housing?

Please don’t shoot the messenger, but if you’re spending much more than my recommended amounts on housing, your finances are probably going to be a challenge.  It’s going to seem impossible to be generous or to find the money to save or invest.  In that case, you should consider something radical, like moving to a more affordable house.

I know – it sounds crazy, completely unrealistic.  Selling a house, especially in this economy, can be tough.  The whole process of moving is time consuming and disruptive.  But I’ve met people who have done exactly that.  They were living in houses they realized they could not afford and they moved.

One couple put their house up for sale at a time when other homes in their community were sitting on the market for over a year, and yet theirs sold within 30 days and for nearly the full asking price.  The other, after selling their home, decided to live in the basement apartment in the home of some friends.  They stayed there for three years as they saved up enough money for a healthy down payment on a house they could truly afford.

Both couples took tough, counter-cultural action, and they got to a better place financially, emotionally, relationally, and in other ways.

For most people, housing is the expense category that can make you or break you.  Getting it right is essential for those who want to experience uncommon financial success.

What are your thoughts on my housing recommendations?  Please leave a comment below.

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Categories: Smart Spending

9 Responses to “How Much Should I Spend on a House?”

  1. Greg says:

    I pretty much agree with everything you say. It is tough and you based on these guidelines, you may not be able to get the house you “want”..but you’ll have a life with less stress.

    The culture keeps telling us, buy new, buy big, stretch yourself. But as you say, do what is uncommon and you will live an uncommonly stress free life.

    My wife and I chose this path, affording what we could on a single income. It allowed us to be more flexible in our choices. She could (and chose to) stay home with our kids while they were young. Now she substitute teaches (when she wants to) and has the flexibility to serve the family and community in ways she would not be able to if she had to work to pay the mortgage.

    We celebrated paying off our mortgage 15 months ago..it is is awesome.

  2. martha says:

    Thanks, for this posting!!!! Thank you, thank you!! I was very close to buying a house a few months ago, without having any idea on how to do it. After reviewing the payments I was going to make for 30 years of my life, it was impossible for me to make them and being able put food on my table at the same time. Now I know to have a bigger down payment and pay some of my debts will make my payments lower and easier.

    Thanks, again.

  3. Matt Bell says:

    Greg, thanks for sharing your encouraging story. I hope you’re sharing your story with others as well. People need real, living examples that this actually IS possible. Congrats on getting the housing thing right!

    Martha, good for you for having the wisdom to not go forward, even though it sounds like the folks you were working with would have been happy to put the deal through.

  4. Mike Fowler says:

    In order for my wife and I to get out of crushing debt and be able to eventually retire with dignity the first thing we HAD to do was sell the house on the lake in the gated community and move in to a small modest home. We did everything else of course (Ramsey’s baby steps) but if we had not taken that leap of faith and get out of that house in 2004 we would not have been successful. The hardest part was making the decision; once the “for sale” went up it was just a process from then on and God was faithful. It even become joyous. We also found our modest home afforded us a better class of neighbors more interested in us rather than the length of my boat and our adherence to HOA rules.

    We are now retired with a paid off mortgage. Yesterday we were asked to head up our church’s bible based money management ministry. That would never have happened unless we sold that house we couldn’t afford.

  5. Matt Bell says:

    Mike – Thank you for sharing your amazing, powerful, encouraging story! It’s inspiring to hear how taking such a radical step has played out in your life and how it is now being used to be a blessing to others.

  6. Amy Rothrock says:

    When we were looking to buy our very first house @ 14 years ago, the first realtor we called had this to say . . . “You don’t have any other debt? Your husband has a steady job? You can buy ANY house you want!!! How much would you like to spend?!” I knew immediately that that had to be the worst advice I had ever heard from anybody in my life! What an irresponsible guy to be telling people that! We did not use him (actually, we did not buy a house at that time, after all). But nobody can buy ANY house, no matter what their finances are . . .

  7. Matt Bell says:

    That’s hilarious, Amy. Just goes to show that no debt and a steady income constitutes truly odd behavior in our culture. Financially, being odd is the way to go.

  8. David Burnett says:

    Just a couple comments:
    1) Another advantage of making the 20% down payment is you have instant equity in the house. It takes away some of the pressure and increases your flexibility if all sudden you find you need to sell your home.

    2)Do not let the lender tell you how much home you can afford. When we applied for our mortgage in 2005 the amount we were told we qualified for was 50% more than what we thought we could afford. We knew our expenses better than the lender and they don’t offer you a room in their home when you find yourself being foreclosed.

    Thanks for your newsletter and keep up the good work.

  9. Lindy says:

    As a banker I was interested in reading your recommended spending guidelines and am in total agreement that 25% of gross income should be the limit for all monthly debt payments. Currently secondary market (Freddie Mac/FHLB) allows upward of 43% of gross income to go towards debt payments. People need to remember that just because you are able to get approved doesn’t mean it’s the right thing to do. Limit total debt payments to 25% of gross income and you will avoid financial stress.

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