The amount you spend on your house is possibly the most important factor in achieving financial independence and happiness in life. Overspending on the house will leave you with such a big housing bill that you will not have enough money to do all the other things you want to do. This mistake can take decades to overcome, if ever. Underspending on a house will leave you feeling like you need more or are missing out. So where is the happy medium?
I hear a lot of irrelevant statements about buying houses as justification for overspending:
-The house prices are very high where we live.
-This is our forever home.
-The bank approved us for the loan, so we can afford it.
-It’s not the most expensive house in the neighborhood.
-This house is a great investment.
-Grandma would have been proud that we put our inheritance into a beautiful house instead of just spending it.
-This is our dream home.
-This neighborhood is where all the doctors live.
-I’ve waited a long time for this house.
-Because we’re house hacking, we can afford it.
-It was a steal at that price.
-It’s a stretch, but our income will grow into this house.
-We wanted to take advantage of the low interest rates to get a more expensive house.
None of these statements are reasons to buy a house, but they make very good excuses to justify why you can overspend to get something you really, really, really want. This justification can lead to disaster. Let’s talk about how much house you should buy.
The main problem with buying too much house is the cost limitations it imposes on you in every other area you need to spend money. When you are “house poor” (bought a house that is too much for your budget) you don’t have enough money left to pay down your debts, fill your retirement plan, save for college, go on nice vacations, take adequate time off, or buy the right amount of life and disability insurance. All these things are important in your life and should not be traded to have a more expensive house.
I always wanted a sports car. So after we became debt free, I bought one. It was so cool. I would go out in the garage and just sit in the car and bask in the glory of a fulfilled dream. I would let the top down and drive through the winding mountain roads with the wind in my hair. I loved that car.
After about six months, I didn’t do any of that admiration stuff anymore. It became “just” a car. That new and special feeling wore off after a while. Then my thoughts changed to; how hard it was on my knees getting out of a car that was so low to the ground, I can only carry two bags of groceries, my wife didn’t like driving with the top down because it messes up her hair, and I stopped putting the top down because it took too long.
The point is the wow factor wore off, and then I just had a tiny car. The same thing happens with a big and fancy house. The wow factor eventually wears off.
It felt great when I bought my ‘doctor’ home. I loved the great koi pond in the front and the goldfish pond in the back, all the beautiful fruit trees, the extra storage, and double the garage space we needed.
After a while, it was just a big house. The two ponds took too much time to care for. The four pond pumps running the waterfalls used a lot of electricity. Those beautiful trees produce a lot of leaves and left rotten fruit on the ground. The garages filled up and I didn’t have room for the cars.
The novelty of your grand house will wear off in short order, then what will you have? Will it still be your dream home? More likely it will just be a house. When it becomes just a house, will you still be happy with the high price you paid, all the other expenses the house incurs, and the lack of money you have for other things?
If you use the following rule of thumb, you should never feel house poor:
Never have a mortgage that exceeds 2.5 times the primary bread winner’s income.
I remember saying that in a lecture and one guy raised his hand and said, “If I followed that rule than I could not even buy a house right now.”
My answer was, “Exactly. Right now, you can’t afford to buy a house. Wait until you have saved a large enough down payment to follow the rule, then you can buy a house you can afford. Why are you in such a hurry to buy a house?”
For some reason we are all in a hurry, after all, owning a house is the American Dream. You haven’t made it until you buy a house. But if you buy it before you can afford it, or simply buy more than you can afford, your American Dream may become an American Nightmare.
I recently saw a post a young doctor made asking the opinion of the readers about buying a $3M dream house. His gross income was $300k. Buying a house at 10x his gross income is a colossal disaster about to happen. There is a predictable outcome to this move, if he can even get the bank to loan him the money.
Before you buy your first house, or any house for that matter, make a budget. Put all the required elements into the budget before considering the house. When everything else you need is present in the budget, then you can see how much house you can afford. But remember, the cost of a house isn’t just the mortgage payment. Bigger houses come with bigger electric bills, gas bills, water bills, insurance bills, property tax bills and also the need for more furniture and greater repair costs.
DO NOT put the dream house into the budget first and see if you can squeeze everything else in. When you do this, you tend to leave something important out of the budget that you think you can do without, or put a smaller amount into the budget in several areas than what you will actually spend. You start cutting corners in order to make it look like you can afford the house. If you do that, you will struggle financially for years.
You will be so much happier accounting for all your extraneous expenses in your budget first. Then you can shop for and purchase a house you can afford. No one wants to become house poor.
Often when I tell a financial makeover coaching client that they are house poor, they make a lot of excuses as to why they needed to buy the house in the first place and why they have to keep their house now. After I work with them to get all the things into their budget that are needed, within a few months they are usually talking about selling their house.
They usually come to the conclusion that the house is holding them back from the peace of mind and happiness they have been longing for. They also conclude that it is just a house, and any house they choose can be made into a wonderful home.
Several clients have said they have a big house for the benefit of their children, and the children would suffer if they got a smaller house or changed neighborhoods. Then after a few months of looking at the numbers and considering selling, they ask the kids what they would think about living in a smaller house if it meant we could have more money for other things.
NOT ONCE, and I repeat NOT ONCE, have the kids said they wanted to keep the big house. The kids are rarely attached to the size of the house you live in, as long as it meets your needs. (They don’t want to share a bedroom with three siblings). The importance of the big house was a delusion on the parents’ part. If a smaller house means you can come home from work a little earlier, the kids want the smaller house. If it means they can go on more vacations, the kids want a smaller house.
Don’t get caught up in the “American Dream” or “Keeping up with the Joneses.” The Joneses are broke and you don’t want to follow them into bankruptcy.
Buy a house when the time is right and when it fits into your budget. Those are the most important criteria you should consider in choosing when to buy a house and how much to spend. Everything else is a smoke screen or a delusion. It’s just a house, and any house that will safely hold your family will do.
If you want more information on the damage too much mortgage can cause then read my best-selling book, The Doctors Guide to Eliminating Debt. It will change your life.
3 thoughts on “How Much House Can I Afford?”
I am in the process of buying a house. Very timely article. Fortunately I’m well within the rules you have established.
It’s amazing how we try justify these things. I attempted to cram an expensive house into my budget spreadsheet and cut off all the corners you speak of. I said all those justifications to myself trying to let it make sense. Ultimately I don’t want to be strapped for cash all the time. Its the people that make the home, not the house.
This is so true and such good advice. When I was fresh out of training and full of pent up delayed gratification, I was seriously trying to figure out how to finance the dream home that was 5x my starting salary. Ended up coming to my senses with the help of blogs like yours, and bought a very nice 2x salary home. That was one of the very best decisions I’ve made in my financial life. My wife and kids and I all love the 2x house that we still live in, and we may never move. Being chained to the 5x home would have negatively influenced so many major financial and career decisions over the last several years. Always hold your wants in check a little more than you want to—the FOMO fades quickly when you resist it.
This is one of those topics where you risk alienating people because the dream of owning a beautiful home is just so seductive. I love that you started the post with that long list of justifications – I think we can all relate. Our family has experienced life in a giant house on several acres, a fixer-upper in suburbia, and now a modest house in a small town. I love houses – renovating, designing, building – but no matter what HGTV says, a house is just a house.
I know from experience how hard it is to see that when you are house shopping – especially when prices have been going up-up-up, but I totally agree that overspending on a house will hold doctors back from the financial security and happiness they are longing for. Great post!