For the past two years, my goal has been to purchase a small-ish house in the near future. My “near future” has changed a bit over time from 18-months to more like 2-3 years mostly because I really would like to save an ample down payment on a house. But with all my research on the price of homes in my neighborhood or a neighborhood in which I’d like to purchase a home, it really comes down to “What can I afford realistically?”

During the housing boom, many people forgot to ask themselves this question. Historically, the financial sweet spot has been to purchase a home within 3-times your annual salary range. For example, if you gross $80,000 annually, you can comfortably afford a $240,000 home. Of course, in Southern California this limits me greatly with houses still averaging over $320,000. But all is not lost. There are places throughout California where I can still find a home for under $250,000 (but no where near where I currently live). Of course the questions comes down to “Do I want to live there?”

I digress. Guiding home affordability, besides the simple 3-times your salary financial rule, are mortgage calculators. There are some terrific calculators out there that factor in your down payment, home owners insurance, and property taxes, calculate your monthly payment and how much you will pay in interest over the span of the loan. The amortization charts are always scary to analyze, but paying off your mortgage early can alleviate some of that anguish by lowering your total interest payments. Just because you agreed to a 30-year mortgage doesn’t mean you can’t pay it off earlier.

Once you’ve worked the numbers out and have found a price you can comfortably afford, it’s time to get the rest of your ducks in a row. That means, making sure you have little or no consumer debt, your credit score is closer to stellar than subordinate, and you have saved a decent down payment (as close as possible to 20% or more.) Don’t forget that you’ll need some money for closing costs, so factor that into your savings as well. You might also want to factor in repairs and maintenance money as well.

As I prepare to purchase a house in the next two years, my goal is to save about $60,000. A lofty goal, but with dedication and determination, I should be able to make it!

Update 2016: Mr. LH and I were able to save half of my initial goal, or $30,000, in two years. And it took us a little while longer than we had planned to begin this goal. We’re now waiting for our manufactured home to be finished.

How did you prepare to purchase your first house? Any tips or guidelines you’d like to share?

9 Comments

  1. When we bought our house we did the 3x the salary calculation. It seemed to work for us. Our mortgage broker also gave some tips which was helpful. In the end we bought a house that was the right price for us- not too much which is good. We wouldn’t have wanted to get in over our head.

    • @Miss T – That was smart – making sure to purchase what you could afford. The 3-times rule is just easy to remember.

  2. Hunter - Financially Consumed Reply

    We saved for ten years before making our home purchase. This was partly due to our constant relacation with my wifes occupation. Our deposit was all we could afford, but only around 3%…yikes, I know, we were way over leveraged. Of course property values have plunged and we’re just holding on to an equity position now.

    Deciding when to save and when to buy are challenging questions. Let’s hope the market zooms back to life…just after you purchase your home.

    • @Hunter – Hey – I hear ya! My little house is so far away still. 🙁 Eventually I’ll have something saved for a deposit – and hopefully closer to the 20% than what I have now. And I don’t have the excuse that we move a lot. 😉

  3. AlthoughI bought my first home a long time (40 years) ago, my tips still work. I had a lot saved for a down payment. My first house was $36,500 (3 Bedroom 1 1/2 bath, pool home) in a suburb of Los Angeles. I looked for someone who needed to sell their house (divorce). The home was run down and needed work, but had great bones. The home was about $12K under market withe homes in the area. I assumed their loan because I had the savings. You cannot do that anymore. The prevailing interest rate was 7%, but I assumed a rate of 5.25. Rates are much lower now.

    • @krantcents – I know that I’ll eventually be able to buy something and hopefully before interest rates go back up. I just need to keep working toward my goal!

  4. In all honesty, I was pregnant and we decided to buy a house. Planning was minimum unfortunately. That was 18 years ago and at least we had the sense to buy a little house that we could easily afford.

    • @Kris – Like you said, at least you purchased something you could afford. I think more people are thinking this way now that the housing market has crashed.

  5. @Jon – That’s a good point. It’s perfectly fine to rent if the situation makes more sense. I’ve been a renter for years, however I’m getting to the point where I’d like to own something now. My biggest goal to live in something that’s paid for come retirement. 😉

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