12 Financial Rules Made to be Broken, Rule 12

Here's part 12 of our series on the 12 financial rules that should (or shouldn't) be broken:

Rule No. 12: Don’t buy a house that costs more than 2.5 times your annual income.

Verdict: Thumbs down. Good luck even finding such a house in many major cities. Instead of the price, what counts is your monthly payment. And that’s affected by your down payment and the terms of your loan. "If you’ve saved a substantial amount of money, or benefited from a windfall, or taken a lot of equity out of your previous house, you may be able to live with the payments on a more expensive house," says financial planner Barbara Steinmetz of Burlingame, Calif.

Pete Bonnikson, senior vice president of mortgage operations for E-Loan, says a better rule of thumb is to make sure your monthly mortgage obligation -- including principal, interest, taxes and hazard insurance -- doesn’t exceed 30% of your monthly gross income.

My thought is to buy a house where you can: 1) make a downpayment of at least 20% and 2) take care of the mortgage payments with little worry of not making the payments and even with enough cushion to make extra payments every so often.

Comments

[Ostrauder]

We bought our house three years ago. It is roughly double our combined annual incomes. It’s a modest ranch. We could have gone higher if our financial situation was better. Our debt to income ratio was (still is) terrible.

Anyway the rules are good guidelines but the personal situation of the home buyer is important.

Ostrauder
http://www.fightingdebtblog.com/