Buying Less House Than You Can Afford

Housing seems to be on everyone’s mind. Those who don’t have a house want one. Those who have a house are either worried that they can’t afford it, or are looking at buying a bigger house. Of course I exaggerate; plenty of people are perfectly happy in their current house, but you don’t hear much from them.

Besides, those people don’t make for a very interesting blog post.

Our Experience

My wife and I built a house (or, to be more accurate, had a house built) about 8 years ago when we were in our early 20s. In hindsight that was probably pretty aggressive, though it has turned out fine. At the request of a reader, I thought I’d write a little about our experience.Housing

I graduated from college with a fair amount of debt; I had student loans, credit cards, and a car payment. I entered the workforce in a reasonable job, and moved into a nice, but not extravagant apartment. Soon thereafter my wife joined me.

We quickly decided that we wanted a house. And we did not want one of the new style of zero-lot-line houses. We also did not want to have to use any exotic financing to afford the house. So we started saving.

The first thing we did was move into a smaller apartment. I don’t remember the exact details, but I believe our rent dropped from around $900 to around $600. Then we started paying off all of our bills. This was a fairly painful time for us financially.

Combined, our income was in the low 6-figures but we lived very frugally and concentrated on debt repayment. This, by the way, has paid dividends ever since as we’ve managed to maintain a modest standard of living as our income has increased.

Once our debts were repaid we plowed that same money into house savings and started looking. Initially we looked in older, but nice, neighborhoods around the Hillsboro area.

There were a lot of houses, but ultimately I decided that I really wanted more space than a typical neighborhood lot could provide. So somewhat on a whim we looked at acreage.

We found a few lots west of Hillsboro that were suitable for building and that we could afford. We ended up spending $90,000 for 5 acres about a 15 minute drive from our work. Buying property and building is a double-edged sword.

On the one hand your initial outlay is significantly less. On the other hand, you have to worry about things that one wouldn’t normally worry about: construction loans, septic systems, wells, house plans, permits, finding a contractor, etc… This is tough to do when you’ve never even owned a house before!

Because we were not “flush” with cash, we kept our house simple. In the 8 years since, we’ve spent a lot of money making changes that would have cost a lot less and been less hassle if we’d done things right up front. But of course our situation now is different than it was then.Housing

The choices regarding our house was driven by how much debt we wanted to be in. The mortgage brokers will tell you that you can afford to spend 35% of your gross income on your mortgage payment.

Many people use that figure to determine how much house they can afford. We decided instead to decide what we thought we could afford, then base our house price on that.

I wanted to keep our payment at less than 15% of our gross income. For us, at the time, that meant keeping the total house price below around $200,000. Having spent $90,000 on the property, we had $110,000 left for the house.

So rather than hire an architect to design plans, we bought some of those “house plan” magazines, and found a basic style that we liked, then just hired an architect to draw up the blueprints. This cost around $1500 versus several times that to have the architect “design” the house. An ancillary benefit was that an architect’s design would likely have been more complex, and thus more expensive to build.

At the end of the day, our house is modest in design and size, but it meets our needs perfectly. The finished space was 1500 sq. ft. We did not build a garage when we built the house, but we did have one built a few years later.


The house is on a fairly steep slope, so both the garage and the house have daylight basements which provide a lot of extra usable space. In fact, we’re finishing the house basement now, which will add another 900 sq. ft. of livable area.

Because we kept the construction price of our house low, as our incomes have increased the mortgage has become increasingly inconsequential.

The minimum payment on our mortgage is now somewhere around 5% of our gross income, so if either my wife or I were to lose our jobs we would not be concerned about how to pay the bills. This also allows us to significantly accelerate payment of our mortgage. We make large extra payments twice annually as we track our progress toward our yearly savings goals.

For Those Who Want A House

I don’t claim any expertise in anything, but if someone were to ask me for advice in buying a home, I’d encourage him to buy a house that he felt he could afford, not a house that a real estate agent or mortgage broker tells him he could afford. Real-estate agents benefit from you buying an expensive house, so they’ll try to push you as upmarket as they can (even if they don’t mean to).

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They won’t tell you about many of the “hidden expenses” of home ownership.

These include:

  • Additional purchases for home maintenance. Lawn mowers, hand tools, gardening tools, etc… Don’t underestimate these expenses. Ask any friend who owns a home how much money he spends at Home Depot.
  • Unexpected expenses. Fortunately since our home is new, we’ve had fairly few of these. But if your home is not new, you need to worry about “minor” expenses like appliances breaking as well as “major” expenses like electrical or plumbing work, or worse, structural repairs such as the roof.
  • If you are moving from an apartment to a house, the house will seem empty. The furniture that made your 800 sq. ft. apartment seem crowded might only fill half of a 200 sq. ft. house. Buying furniture is expensive.

For the first couple years of home ownership I would guess our “house related expenses” were easily at least as large as the mortgage payment, and sometimes larger. Granted, we were spending money on landscaping that an older house would not have needed, but each house has its own set of problems.

Besides, that 35% guideline should be considered an absolute maximum, not a goal to strive for. We have a local yearly activity here called the “Street Of Dreams” where local builders build expensive spec houses, which all of us poor folks then spend a week or so touring. Don’t do this. You can’t afford, can’t justify, and just plain don’t need houses of this caliber.

For People Looking To Trade Up

I know many people who are trading up their houses. I don’t understand the desire to buy bigger and bigger homes, but I see it all around me. Home builders in my area are building 3500 sq. ft. houses on .2 acre lots, and people spend half a million dollars on them. That is insanity.

If you’re thinking of trading up, I think you need to ask yourself why. Is there something else wrong with life that you hope a newer bigger house will solve? A friend of mine recently bought a bigger house, and a friend of his signed a contract for a bigger house a few weeks later. keeping-up-with-the-joneses-image1

While the latter won’t admit it, it is clear to any objective observer that he is trying to “Keep Up With The Joneses”. It matters not to him that his income is less than half of the former couple. He is one of those who is hitting the 35% housing expense despite having a healthy income.

However, if you are certain that you need a different house, make sure to use accurate figures when you figure out how much house you can afford. Read the article I referenced above. Far too many people subtract their current house’s value from the new house’s price to try to figure out if they can afford a different house.

That ignores a lot of extra costs that add up to a significant amount of money. And remember that when buying a new house you’re usually resetting your mortgage period back to 30 years.

So if you’ve made great strides in paying off your current house, be ready to commit yourself to another long-term payment.
And yet a lot of people knowingly put themselves in financial hardship for a great big house when their current residence is already far larger than they need. I wish people would learn to look at great big houses as the great big piles of money that they cost.

If you move every few years, is your house ever really a home? Do you have fond memories of it? Will your children feel a connection to a structure that you don’t plan to keep? Every time I move, my cat pees in the middle of the floor at the new house to register his irritation. I imagine that’s a metaphor for how all of us feel subconsciously.
Robert Duvall had a memorable line in the classic miniseries “Lonesome Dove“: “The only healthy way to live as I see it is to learn to like all the everyday little things.” He was talking to Diane Lane who wanted desperately to move to San Francisco, because she was convinced that things would be better there. I believe he also said “Living in San Francisco is still just living“.

The same applies to a new house. Living in a new house is still just living. You have the same problems, and you pay a lot more for the privilege.

Anyway

Anyway, I’m not sure there’s a point to all that writing, aside from “Be Smart”. Don’t overextend yourself. Don’t get caught up in new house envy. Rather, envy those who are happy with what they have. If you do buy a house, make sure to consider all the costs, including the ones your real estate agent won’t tell you about.

**Nothing on this website should be confused with financial or legal advice. If you need this, or any other type of advice, please seek the help of a competent professional. In addition, because real estate laws change all the time and differ from state to state, and even city to city in the same state, everything in these pages should be considered general marketing advice and ideas. Please see link to full Disclaimer at the bottom of this page.

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