A Money Crasher reader and personal friend of mine asked me a question about how her and her husband should plan to start a family while trying to save for a house. She wants to be a full-time mom once they start having kids, and he’ll be making about $60k in the next 3 to 5 years. Here is her question:
I was wondering how should a couple incorporate planning a family and planning a budget to purchase a home. We would like to be in a house in 6 months, but we want to make sure that we can get a home that we could afford if I was to stay home when we had kids. We do not plan on having kids immediately but maybe in 3 to 5 years. Do you have any suggestions?
This is a great question, and that is why I asked for permission to answer her question in a post on Money Crashers, because I believe my insight to approaching this financial decision will benefit many of you.
The key here is being able to afford a house based solely on your husband’s income. If you go to buy a house right now, the mortgage lender will tell you that you can afford a very large mortgage, because they are assuming that you’ll have both incomes forever. You know that’s not true, so we need to figure out how much house you can afford on $60k. I know that you said your husband makes a little less, but I am assuming that he’ll get at least a 4% raise over the next couple of years. Before I start talking about the house situation, there are a couple of steps that you should take before thinking about saving up a down payment for a house.
- Get out of debt. If you have any debts lingering around, pay them off yesterday. The reason to pay off your debt first is because you’ll greatly reduce the risk in your life by not allowing monthly debt payments to drain your take home pay.
- Save up a fat emergency fund. Save about 3 to 6 months worth of expenses. If you pay all of your bills, eat, pay utilities, and pay for gas with $2,500 a month, then save about $10k to 15k. This is an unbelievably important step. You may be extremely careful with picking the perfect house and you’ll get a 1 year home warranty, but the day that your home warranty is up, the water heater will bust, or your A/C will go on the fritz. Bad things happen to homes, and the repairs are never cheap. The last thing that you want is a costly repair with no cash and a screaming baby in the background to make things better.
Living in the Atlanta area can be challenging to find affordable housing, but if you go about 30 minutes outside of Atlanta, you should be able to find a nice starter home for about $225k. So, let’s start crunching the numbers. A very conservative approach to buying a home is buying a home with a mortgage payment that is 25% of your household income based on a 15 year fixed mortgage. Now, a 15 year fixed-rate mortgage does not allow for much of a house if you do not have a good down payment. Both of you make a great salary right now. If you had a three year goal to have your first child, then I would challenge you to set up your budget to live on one of your incomes and save the ALL of the other income for a down payment once you have completed the two steps above. I encourage you to save up enough of a down payment to stay within the 25 to 30% range based on a 15 year mortgage. You will thank yourself later when you’re paying off the mortgage twice as fast as a 30 year mortgage and saving literally hundreds of thousands of dollars on interest.
A $60,000 a year income yields about $3,500 to $3,700 a month take home pay if you assume taxes and health insurance are automatically deducted. A conservative mortgage payment based on this monthly income would be about $1,000 to $1,200 a month. You have a few options depending on how much house you want to buy.
- If you buy a $200,000 house, you’ll need to save $50k to $75k to get in the range of $1,000 to $1,200 per month.
- If you buy a $225,000 house, you’ll need to save $75k to $100k to get in the range of $1,000 to $1,200 per month
- If you buy a $175,000 townhome, you’ll need to save $25k to $50k to get in the range of $1,000 to $1,200 per month
You said that you’d like to be in a house in the next 6 months. I did not ask you how much you already have saved, so I can’t really answer the question about whether you can make that happen. Realistically, I think you’re looking at about a year before you can start house shopping for a house that you can afford based on one income. If it were me, I’d start shopping for a bargain at $200k somewhere outside of Atlanta, and get on a crazy budget. Start saving like it’s your job, and you’ll be in a house come next September. The most important thing here is NOT listening to the mortgage lenders. They are going to try to get you to borrow more money than you can chew. They don’t know your situation. Only YOU know your situation. Before you meet with a lender, know exactly what you want. Don’t let them dictate the meeting. Think of it like ordering at your favorite restaurant. You know what you want and no one is going to change your mind.
If you want any more advice, you know how to reach me! If there are any other readers out there with personalized questions and don’t mind me answering them anonymously on Money Crashers, click here