7 Questions to Ask Instead of How Much House Can I Afford?
BY BRANDON VAGNER, CPA, Ph.D., & WALLET WIT FOUNDER
My wife and I bought our first house in St. Louis MO when I was 24 and she was 22. The first thing the real estate agent asked us was how much house can you afford? Lucky for us, we knew not to fall into that trap, but so many people do and it’s out of control.
Fast forward 8 years, and we are looking to buy another house. The only reason is because we moved to Nashville TN and are starting a new adventure in this amazing city. We actually still own that first home we bought in our early 20’s and we now have renters occupying it. We’re very close to having $100,000 of equity in that house, but we’re not going to sell it to fund the downpayment on our next house. We want that property to be an income producing property for our family for decades to come.
That said, we’re in the process of budgeting for this new house, but we are not starting with the question of how much house can I afford.
The Top 7 Questions to Ask Yourself When Determining How Much House You Can Afford
- Question #1: Do I Truly Understand How Easy it is to Become House Poor?
- Question #2: How Much Square Footage Do I Need?
- Question #3: Have I Established a Monthly Budget Yet?
- Question #4: Do I Have Other Debts?
- Question #5: Will All Housing Related Costs Be Less Than 25% of My Take Home Pay?
- Question #6: Can I Afford the Property Taxes and Utility Bills?
- Question #7: Can I Afford to Buy Furniture and Decorate the House I Want?
A Massive Part of the House Buying Problem
Here in just a minute I’ll get to the 7 questions you should be asking yourself, but I first want to discuss a problem that has hit too close to home (no pun intended). When you live in the south, you learn quickly that people like BIG houses. Truth-be-told, this fascination with large houses is everywhere. The problem we are facing though is that the dumb choices of others is beginning to directly impact us smart buyers.
Where we live, people are perfectly happy buying large houses. For me personally, a large house would be 2,500+ square feet, but, in many cities, people purchase 3,500+ square foot homes without even a flinch.
Because of this, home builders have an endless demand for building these extremely large houses. From a business perspective, why wouldn’t they build them? If they earn more profit building houses that size, and the demand is there, then why the heck wouldn’t they keep building them?
The system doesn’t look out for you. It’s that plain and simple. The banks will loan you an amount that is likely triple what you should be paying and the home builders are going to continue profiting for as long as they can. Nobody in the system of home buying is going to tell you to slow down a minute and rethink how much you’re getting ready to pay. Not to mention, you’re watching all your friends buy large houses and it’s natural to try and keep up with them. The entire system is telling you to buy big, but you really need to take a step back and consider what that truly means for you financially and whether it’s even going to make you happy.
Because of this urge people have to keep up with the Joneses, the housing market is flooded with overly large houses past generations have built while chasing those elusive Joneses. It’s not stopped though, and home builders have a fresh generation of Joneses chasers who are chomping at the bit to give them their business.
So, we see development after development of houses starting in the $300,000’s or $400,000’s. It’s tough to even write it, but that is on the cheap end in many cities. There are loads more that go far beyond the $400,000’s, and these are all typically 3,500+ square foot houses.
That said, my wife and I called a couple home builders to inquire about them building us a home. I was shocked with what I was told.
My wife and I want a small house (i.e. less than 2,000 square feet). We’ve even been kicking around the idea of building a “tiny house.” I knew I’d likely have trouble getting a quality home builder to commit to building a tiny house, but I did not expect to be denied a 2,000 square foot house.
That’s exactly what happened though. I simply called a couple home builders and asked if they would build us a house around 2,000 square feet. I was very quickly told that they would not build anything under 3,000 square feet. 😳
They didn’t even care that we wanted a high quality build just on a smaller scale. Nope, it was a hard no for anything under 3,000 square feet.
I tell you this to give you an idea of what you’re up against. It’s naive to think this is going to change, but you must understand this to ensure you don’t fall into the trap of getting in over your head.
Instead of asking yourself how much house I can afford, you must ask a series of questions.
Question #1: Do I truly understand how easy it is to become house poor?
More times than not, if you go spend the entire amount of money the bank is willing to loan you, then you will experience what it’s like to be house poor. Meaning, you’ll be spending so much on your mortgage, property taxes, and other housing expenses that you won’t have enough money to do hardly anything.
People become house poor every single day with a single stroke of a pen, and I don’t want it to happen to you.
I was getting my hair cut a few weeks back, and the barber was telling me about how her wealthier clientele always talk about “the closed curtain houses” in their neighborhoods. I was naturally curious what she meant by this. She proceeded to tell me that they tell her story after story about people in the their neighborhoods who move in, close the curtains, and won’t invite anybody over. Her clients say that even after a year of living there, these people often times just have lawn chairs in their living rooms, and this is why they don’t want anybody seeing in their homes. Essentially, they bought the big expensive house, but can’t afford to fill it.
Now think about that for a minute. These people go buy a $600,000 house, but can’t afford actual living room furniture. That makes no sense! Why not just go buy a $200,000 house and then comfortably pay cash for some actual living room furniture. This sounds like common sense, right, but people stretch their housing budget to the max all the time.
The Opposite of House Poor
The opposite of house poor is life rich, which is being able to go experience life with family and friends as you please. Living with a small mortgage is very powerful, and allows you freedom to pick up and go experience things. It’s one of the most amazing feelings out there, and you will feel as if the world is lifted off your shoulders.
Not being house poor also gives you the freedom to consider other jobs without the worry of not being able to pay your bills. This opens up an entirely new level of freedom, because you can pursue what you really want to do in life.
One of the most amazing things about not being house poor is that you can give so much more. Helping people in need is something we all should naturally aspire to do. That said, reducing your most expensive bill is the easiest way to free up your ability to give and help others during their difficult times. Life is so much more than living in an expensive house.
Question 2: How much square footage do I need?
This is such an important question, and you don’t realize how important it is until you’ve actually owned a house. I have a friend who owns a house that is close to 4,000 square feet and it’s just him and his significant other living there. It’s insane to think about how much space goes unused in that house.
Do you really need two giant living rooms, a massive dinning room that only gets used twice a year, or bedrooms so large you can fit a king sized bed and a full living room furniture set in each of them? For most people the answer is no, but people get too caught up in the way the outside of the house looks and what neighborhood it’s in, and they allow that to significantly influence their buying decision.
My wife and I are currently renting a house that is about 1,700 square feet. It’s just the two of us at the moment and if we do eventually have a child, this house is the perfect size. We have two extra bedrooms and plenty of space otherwise. Actually, I’d argue we have too much space. The dinning room never gets used and we have a bonus room that is a waste of space right now too.
So, why the heck do we even have this 1,700 square foot place? Well, like I said, we hope to have kids soon, and we were trying to plan for that.
Our previous house in St. Louis had 1,600 square feet of livable space with an additional 800 square foot basement. That house was perfect. We both loved it and were extremely happy there. That house was perfectly designed though. Everything about it was well thought out by the builder and space was maximized. The difference was that our place was built by a luxury home builder who decided he wanted to build smaller high quality townhomes. Compact high quality homes just like ours are out there. You just have to search them out.
I tell you all this to really get you thinking whether or not you need crazy amounts of square footage. Do your halls really need to be 5 feet wide? Do you need that extra 150 square feet of walking space in each room? Most of the time the answer is no. I encourage you to at least go look at smaller houses and think about how much character you can give the house.
Question 3: Have I established a monthly budget yet?
Buying a house without having a written monthly budget would be like going to war with no idea how many fighters you have. You must sit down and make an actual budget before you decide how much house you can afford.
Lucky for you, I wrote an incredibly detailed article on how to write a monthly budget. I’ll show you how to figure out exactly how much room you have in that budget.
On a related note, did you know many people utilize their savings account to develop budget reminders? There are many tricks and tips to managing your money, and some people really like the weekly, bi-weekly, and monthly reminders to help keep them on track.
Question 4: Do I Have Other Debts?
As you write your monthly budget, you must be honest with yourself and list out all of your debts. This will drastically change how much house you can afford at the present time.
Your goal should be to climb out of non-mortgage debt before you begin your house search. I know many of you don’t want to hear this, but delayed gratification is a beautiful thing and you’ll be very happy you did.
People don’t realize how much cash a house can eat up. As you’re paying off debt, the last thing you need are expensive house repairs or routine maintenance bills.
Question 6: Can I afford the property taxes and utility bills?
to answer question #5 above, you really have to find out exactly how much the property taxes and utility bills are that you’ll be paying in addition to the mortgage.
Many first time home buyers have no idea how much property taxes and utility bills can be, and it can get them into serious trouble. For example, I know somebody who lives in a 2,100 square foot house and their property taxes are close to $7,500/year. To put that in perspective, the property taxes on our 1,600 square foot townhouse is $2,200/year. You must know how expensive they are where you’re looking to buy a house, because the property tax bill can really hurt you.
The utility bills can be quite the shocker too. I have a friend who purchased a really large house right after the economic downturn. It was a 3,500+ square foot house that he got for $220,000. If I recall correctly, the house sold before the economic crash for around $375,000. All he saw was the massive opportunity to buy at a very low price. He didn’t even consider the monthly cost to heat and cool the house.
He later told me he was considering selling it because the utility bills were so high. It’s been about 5 years since we had those conversations, but I remember him throwing utility bill amounts of $400/mo out there. My wife and I average about $120/mo for utility bills. I couldn’t imagine getting a $400/mo bill.
Hopefully, you can see how important it is to get an idea of how much these costs are in your town for various size houses. They will significantly influence how much house you can afford.
Question 7: Can I afford to buy furniture and decorate the house I want?
Unfortunately, people typically buy too much house and don’t even give thought to having to fill it with furniture and decorations to make it feel like an actual home. So, they usually go straight for the credit card and start buying everything in sight. Many times, even putting renovation expenses on a credit card.
This puts people in an even worse financial position and really restricts their ability to live life. They’re too busy working their butts off to pay off all their debt associated with updating and decorating the house.
You need to really sit back and think about whether or not you can even afford to fill your desired house with furniture. If you decide you can’t afford to, then simply start looking at smaller houses you can actually decorate and fill with furniture.
Purchasing a house is one of the most important decisions you’ll make. It’s not one to take lightly, and everything should be considered. Hopefully these 7 questions will help you determine how much house you can afford. Let me know what you think in the comments below.
Brandon Vagner, CPA, Ph.D.