We are going to buy a house. It is not the most financially wise decision, but life isn’t about always being financially wise–sometimes you have to splurge (within reason) and take risks. I accept that buying a house will reduce our total networth in the future, and I’m ok with that. After all, what is the point of making money if you can’t enjoy it, and what would I enjoy more than having a home of my own to raise my kids in? Sure I’d love to take lots of international trips and such, but with a toddler and one on the way (and maybe one more in 2-3 years), that’s not happening for a while. My house will be my Paris and Prague and Tokyo.
But one thing has been very difficult to figure out — how much we can afford. All home buying calculators assume you have a fairly consistent income that goes up by a consistent percentage every year. That isn’t reality for us. There are many ways to figure out how much you can afford, but one model that I’ve decided I like is 28% of pre-tax income (I’d prefer to do post-tax but if I do that I’ll never afford a home here.)
I worked out the chart below, which shows potential annual income (pre tax) with the amount of mortgage (PITI total) we can afford per month (on the right) and then on the let, I have the house price and the total amount of PITI with a 3.5% 30 year fixed loan. Our goal would be to afford a $1.7M home with an in-law, where my father-in-law would pay some rent. This means based on the chart below we need to make $320,000 per year, consistently, to afford a home at this price point. (*my insurance estimates are probably way off but I tried to figure out what home insurance would cost in California with earthquake insurance tacked on — if these numbers look wrong please let me know in a comment.)
| Total Year | Total Month | Mortgage Max (28%) | Total Monthly | House Price | Mortgage (3.5) | Taxes | Insurance | Earthquake | |
| $210,000 | $17,500 | $4,900 | $4,872 | $1,000,000 | $3,412 | $933 | $167 | $360 | |
| $255,000 | $21,250 | $5,950 | $5,957 | $1,200,000 | $4,310 | $1,120 | $167 | $360 | |
| $300,000 | $25,000 | $7,000 | $6,862 | $1,400,000 | $5,029 | $1,307 | $167 | $360 | |
| $320,000 | $26,667 | $7,467 | $7,767 | $1,600,000 | $5,747 | $1,493 | $167 | $360 | |
| $400,000 | $33,333 | $9,333 | $9,936 | $2,000,000 | $7,543 | $1,867 | $167 | $360 | |
| $500,000 | $41,667 | $11,667 | $11,381 | $2,200,000 | $8,801 | $2,053 | $167 | $360 |
Right now, I’m earning $170,000 in base income, and my husband makes $85,000. Based on our minimum income, that gets us to $1.2M of house… which isn’t enough here. To get to that $1.6M target (which is still a small house and a fixer upper), we need $320k in annual income. So either I need to consistently make $235k, or my husband needs to increase his income, or some combination of both.
What the above does not account for is that my annual bonus is $34,000. I have no idea if I will get a bonus this year or how much of it I will get. I have received my full bonus every year for the past 3 years BUT there is no guarantee I will receive a bonus in the future, or that future jobs will pay such a sizable amount in bonus. I’m not sure if I should include my bonus in my calculations or not. I’d rather not, because a bonus is nice to have for an extra vacation or gift for the kids vs worked into our planned home expenses. It would be nice if my base was $200k, so I could actually include that in the calculations. If I could get my base to $200k and my husband could figure out how to make $120k, we’d be in pretty good shape.
In addition to the base and bonus, I also receive a large amount of my income in RSUs. My refreshes have not been great, though. And if I lose my job, then I will not be able to obtain the same amount in RSU.
When I joined my company, my total compensation was as follows:
- $165k (base)
- $33 (bonus)
- $56k (RSU/yr for 4 years) (*currently worth ~$350k+/yr)
- TOTAL = ~$254k
My current compensation once I fully vest my first grant is:
- $170k (base)
- $34k (bonus)
- $12k (RSU/yr)
- TOTAL = $216k
So, that’s good, with bonus and RSU I’m still getting close to the $235k I need to make to afford a $1.6M home, but not quite, and that’s including bonus and RSU which are all variable.
What’s scarier is that if I lose this job, I have no idea if I will be able to do better than $150k salary with no bonus or RSU (I feel fairly confident I can find a job with $150k salary since before I started this job I had a few offers for that amount at startups that I turned down as they were way too low.) So do I base my home purchase off of $150k (me) + $85k (husband) = $235k/yr of income? Then we a afford a $1M house… so we can’t afford any house here and we’ll just continue renting. However, with my RSU growth, my income this year and next year are very high, and it “feels” like I should be able to afford more house. But can I?
It seems like you’re not really painting the full picture. What about your father-in-law’s contribution? You are planning to buy a house that he can live in and are expecting him to pay monthly rent. But you neglected to include that in your calculations above. Every $100/month he’d contribute equates to $4300 less in salary you’d need. So if he were paying $500/month, you’d need $21.4k less in salary. If he were paying $1000/month (which still is very cheap for the Bay Area), that’s $43k less you need. That gets you to $300k in base salary. If he can’t reliably pay rent, then I wouldn’t buy a house with an in-law unit. You either count on his money and include it in your budget, or you don’t and don’t buy such a big place. You can’t have it both ways.
Furthermore, what about your down payment? Home price itself doesn’t matter as much as the mortgage amount. If you put down $500k, a $1.2M mortgage at 3.125% (doable today) would only be a mortgage of $5100. I don’t know about earthquake insurance, but regular insurance should be half of what you listed. $360 for earthquake seems way too high and something you should consider foregoing. If an actual earthquake hits, you likely aren’t rebuilding that house and even if you wanted to and everyone else were rebuilding, it’d take years before your turn in line came.
Regardless, any which way you look at it, I don’t think $1.7M is that much of a stretch for you.
That is a very good point. He plans to contribute $2000 per month. But that lasts for 15 years, not the length of the mortgage. If he needs to go into an assisted living facility or passes away sooner than that, we do not have that rent either. So I am going into this not expecting to have any money from my FIL even though in an ideal world he lives a long time and he lives with us for 15 years paying $2000 a month.
Is he still working or will he paying from his nest egg? If it’s from his nest egg, then I would assume that it would come to you by way of an inheritance if he were to pass. Does he have long-term care insurance to cover assisted living (if he doesn’t have enough to self-insure)? These are things you need to know before agreeing to buy a house with him. I understand what you’re saying about not wanting to rely on his money, but at some point I think you can be both realistic and conservative.
And with regards to earthquake insurance, although I have little knowledge about it, I don’t think you’re correct. I’m pretty sure if your house was destroyed, in CA you could just foreclose and walk away. No way the bank will be able to keep you on the hook for $1.5M in a destroyed house. They can take that destroyed house back, but can’t come after you. CA is a non-recourse state so again, I’d skip the earthquake insurance:
https://www.financialsamurai.com/non-recourse-states-walk-away-from-mortgage/
He is on fixed inclement, retired, a very small amount of social security and then 15 years of a loan being repaid to him. He can do $2000 a month until he goes into assisted living or passes away. We are going to see if we can get the loan repayment passed to my husband as a gift (it’s basically a mortgage and he is the back) otherwise it will disappear when he can no longer live with us. If he dies behind the end of the loan it will be passed to my husband and it is about $1500 a month. Obviously the SS would end. The reason I don’t want to rely on any of it is because he is 76 and does not have LTC insurance. We have to be able to afford the full mortgage without him. My husband doesn’t get that and it’s super sensitive to talk to him about his father becoming ill or dying. I think we’d end up keeping him in the house longer than we should if he gets sick which would not be a good situation for any of us. If we can get loan passed to us now this would be best situation, California has 2 year lookback for Medicare eligibility and other than the small loan he is owed he has nothing.
Earthquake insurance you may be right! I was worried they could take everything beyond the house.
Also with the earthquake insurance my understanding it is to protect you because if you owe $1.5M on a mortgage and your house is destroyed in an earthquake you still owe $1.5M on it even if it is unlivable.
omg, please refer to more reliable source
http://www.insurance.ca.gov/01-consumers/105-type/95-guides/03-res/eq-ins.cfm
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