What ratio of HousePrice:TC is comfortable?
For first time home buyers, what is considered a comfortable ratio in the US? What about in Bay Area? What ratio do most people go with? Eg. If House price = $1m. TC = $250k, then the ratio would be 4:1. -- Perhaps this ratio is not so useful; what metric do you generally use to decide comfort level? - * House price / annual TC * House price / annual base salary * House price / annual TC after tax * House price / annual base salary after tax * (Mortgage+tax+insurance) / monthly TC after tax * (Mortgage+tax+insurance) / monthly base salary after tax What would be a good ratio in these metrics to target? -- TC: 150k #mortgage #housing #sanfrancisco #personalfinance
Net Worth and TC both indicators are important. Price/NW and Price/TC
Thats a good point; esp considering that being able to make a big downpayment depends on NW. What's a good number for Price/NW?
If you are young, like less than 30, 2x should be fine. 30s i think 1x and 40s, 0.5x and so on.
5x is decent
Your savings matter too. Generally you want enough money to live on for 6 mo. liquid. Subtract that from your savings and that's your max down payment. Then you can use a mortgage calculator (most real estate sites have one) to estimate your monthly expenses for a house in a certain neighborhood. This should take into account mortgage, property tax, home insurance, HOA (if applicable). For monthly costs, there's 2 common schools of thought to figure out your max: -1/3 monthly earnings after taxes -1/4 monthly earnings before taxes These obviously aren't the same number. You can look up the reasoning behind each and decide which one your comfortable with. You'll want to use the mortgage calculator to figure out how much house you can afford and stay under your monthly max. Property tax and insurance prices differ by neighborhood/city, so there's no straight answer.
That is a great explanation! For "monthly earnings after taxes", do people generally consider just the income from base, or do they also count on value of RSUs expected to be vested per yr to cash them out? i.e. should one use RSU vestings to pay for house?
Philosophical standard point: RSUs that are liquid should be treated as getting cash income of its equivalent value. Ex: if your company gave you $1000 cash instead of $1000 worth of shares in your company, what would you do with it? Would you buy your company stock with it? Also, the RSU value could go up or down in the future, so you shouldn't stretch to the limit when buying a home if including this as income. I.e. if the RSU price drops, you still need to pay your housing costs (after covering everything else). However, with the ratios above, and RSUs only making a portion of your total comp, this risk seems manageable. (I'm assuming ~1/3 of comp is RSUs, but this changes if it's a much bigger portion) Mortgage requirements standpoint: Mortgage companies will use RSUs as income to calculate your loan eligibility and as a factor determining the rates they will give if: - It is liquid (i.e. can be sold on public markets) - it has 2 or more years left in the vesting schedule
In my opinion, you should first make sure you can fully fund all the tax advantaged accounts available to (ex: 401K, backdoor Roth IRA, HSA, and/or mega backdoor Roth IRA). Calculate how much after tax savings you'll have after that, Then you can look at how much you can afford comfortably, factoring in risks like how there could be layoffs, or you could get sick, resulting in temporary loss of income. (Ex: 6 months to find a new job after something happens) Once you have an idea based on income and savings rate, this is where the NW portion also comes into play. You'll need to decide how much of that savings you are comfortable putting into real estate. (Remember: if you plan to sell the property and not live in it for the full duration of the mortgage, then a mortgage is leverage. Leverage amplifies gains in an up market but also amplifies losses in a down market.) Personally, I am not super bullish on bay area real estate in the long term. (Opinion: Very few people (something like 15% of households last time I checked) can afford a median priced home in the area, so at some point prices can't keep going up unless rates drop further, incomes rise much faster, government gives more subsidies, or, institutional investors come in to buy up properties). Therefore, I limited to a cheaper property than the max I was able to pay comfortably after maxing the tax advantaged accounts, because I wanted to keep my portfolio allocation in real estate below a threshold that made sense to me. (20% in my case)
Hi, in case you are actually looking at how much home you can afford, in addition to other life goals, such as retirement, kids college, etc, I have a super personalized home affordability tool that I am looking to get feedback on. If interested, I can share it in return for some feedback on its usefulness.
Interested, I'll DM you.
Ok sounds good.
3:1 super comfortable, 4:1 not too bad, 5:1 somewhat risky. Talking about Price to TC ratio
What about 2:1?
Use your own adjective that’s better than super comfortable