Should you factor in two incomes when buying a house?

[project15]

Currently, my wife and I are DINKs (Dual Income No Kids) and are looking for a house. We're in the suburbs of chicago and all the single family houses seem so expensive. I want a single family, not a condo or townhouse. When thinking about what we can afford, should we factor both incomes into the equation or try to go off just one?

This question seems easy to answer and I would normally want to go off just one income (or closest to it as possible), but here's the catch...the houses we can afford on my salary are all tiny houses that need work in a poor scoring school district (bad resale value) and lower income neighbors. The houses we can afford on both our salaries are in a good school district and have more space and overall have a better neighborhood and neighbors. We would buy the cheapest house in either neighborhood. My wife does not plan to stop working when we have kids someday (except for maternity leave).

Here's a break down:
Income: $90k ($50k + $40k)

Houses in bad school district: $190k (houses in this neighborhood normally sell for $210k-$250k - we are looking at foreclosures that need work)

Houses in good school district: $250k (houses in this neighborhood normally sell for $300k+ - we have our eye on a short sale house)



Any advice? I'm particularly hoping disneysteve comes in to give insight since he seems quite wise. But I know all of the rest of you have some good thoughts too!

[Snoopy2645]

Well having alot of experience in things dont always go as planned I wouldnt count on 2 incomes what if wife becomes pg with twins & has to stay home daycare cost too much for 2 babies or say you become disabled or very ill & cant work or what if wife finds out she likes being alone & moves out I would really hate to see anyone loose thier home

[safari]

If the difference between houses is only $60K, I would advise to buy a house in a good neighborhood. Any real estate agent would tell you that location is the major factor that determines the property value. A house in a good location will better hold its value in case of economic downturn, and it will be much easier to resell in the future. There is also a psychological factor. You don't want to regret your house purchase, while living in a bad neighborhood surrounded by low income neighbors.

[MonkeyMama]

It depends. What is your earning potential? How young are you?

I would say in general I would never buy a house with 2 incomes. But thinking back to our very first home purchase we really did. We both were only making in the range of $30k and we took on a $200k mortgage ( a condo for $250k with 20% down. Talk about expensive). But we knew our wages would grow (& they did grow faster than expected). We were only a year out of college.

We bought our second home for about the same price. We knew we would go to one income very soon and for the long-term would never buy too much house because of this. We figure we could afford the $1300 mortgage on about $40k-$50k income realistically. Which helped us settle on a house price. I am sure it was against all the "rules" but we did have the second income for a while, I have since had a 25% raise, and we lowered our cost of living by about 50% moving here. So we were used to stretching pretty far for rent and stuff.

My point of this story is if you are young and you both have some measure of job security and larger earning potential you have a little wiggle room. If you are older or worried about recession, I would tread carefully.

Then again, you also have time. You should really wait and scrounge up as much down as you can. So you can get a mortgage that you can more easily afford on one income. Trust me, take advantage of the time. When we bought in 1999 we jumped because the bidding wars and prices were insane. IT was a good time to jump. Today I would wait and save.

& I wouldn't turn my nose up at starting small. It makes more financial sense. I mean it's just temporary. I can't say I was a big fan of buying a condo but houses were $500k+ at the time where we lived. We actually ended up LOVING it and plan to move back to a condo when the kids are grown. So funny how things work out. While most of our peers whine they would never buy a condo, every peer in our family did just that and all moved up to houses rather quickly. Of course this market today changes the rules a bit. You are probably just better off to wait and save more. If I bought small I would buy nice small. Skip the bad neighborhoods.

[disneysteve]

Good morning. Thanks for the compliment. As always, there is no easy answer.

Normally, I do agree that you should buy based on one income, but as with all rules of thumb, there are exceptions. I agree with safari that you shouldn't buy a house in a bad neighborhood where values may not hold up, you could have problems with neighbors, feel unsafe in your home, etc.

I also, however, agree with Snoopy2645. Lots of women say they will keep working after having a child and then change their minds or, for medical reasons (with the mother or child), are forced to change their minds after the baby is born. Even during the pregnancy, there can be issues that require the woman to stop working weeks or months before her due date. In those situations, you'll have enough stress and anxiety that you don't want the added headache of how you will make the mortgage payments.

How big of a downpayment will you be able to make? That can make a tremendous difference in the equation. And how long do you anticipate it being before you start a family?

If you can put down a substantial downpayment, at least 20% and even more if possible, that makes the more costly home much more manageable going forward.

I know you "want" a single home right now, but do you actually "need" it now? If you don't plan to have kids for a while, what about buying a condo for now which would allow you to keep saving toward a bigger house later, then moving once you start that family.

Finally, of course, it depends on your overall financial picture. If you buy the better house, will you still be able to keep funding your retirement accounts? Will you still be able to maintain an adequate EF? Do you have any other debts? And, most importantly, IF your wife stops working, would you still be able to comfortably afford the better house?

ETA: MonkeyMama makes a good point about earning potential. You earn 50K now. What do you anticipate happening to that income over time? If it will most likely be rising, that makes the more costly house less of a stretch. Your mortgage payments stay the same over time.

[InDebtInDC]

Traditionally these guys know I am somewhat against home ownership simply because the risk is not matched with the potential for returns. I'd rather have my money in a retirement account, but that's me. Here's why.


I'm going to recommend something that most people here won't: put down as little as you possibly can to get the loan. Save the rest of your money. Don't spend it. Save it.

Use the money to pay the mortgage when you have trouble with your job or health.

If anything happens to the house, you move your money into someone else's name and you default on the amount between what you owe and what the insurance company pays.

You will have horrible credit but you will be able to preserve your cash. Make the lender bear the risk. If you try to do the right thing and pay off a house that's a total loss you will lose your retirement.

That's the one thing I don't think most people understand. If you have equity in a house you shoulder the risk. If you have no equity, the lender assumes the risk. Lenders have much much more money than you, and they can deal with a foreclosure. If you lose the equity in your house you will be out of your life's savings.

What's worse is that people will rent out a house that's completely paid off. That's the biggest no-no. If something happens to the house you're out of luck. Same concept.


I think a lot of people are very conservative and do not think about their finances aggressively. What I said isn't completely kosher but think about it.

What happens when you lose your job? What happens when you get sick? What happens when your house burns down?

I know we refuse to believe it but these things are all very real. I'm not saying be paranoid, but here's the bottom line:

what can you do to mitigate these risks?

[disneysteve]

Traditionally these guys know I am somewhat against home ownership simply because the risk is not matched with the potential for returns. I'd rather have my money in a retirement account, but that's me.

From a strictly dollars and cents standpoint, this is generally true. Long term, home appreciation runs 5-6%/year whereas stocks run 10-12%/year. So from an investment point of view, homes aren't such a great deal. That's why I don't consider my house to be an investment and I don't count it's value as part of my portfolio or include it in my retirement planning.

I'm going to recommend something that most people here won't: put down as little as you possibly can to get the loan. Save the rest of your money. Don't spend it. Save it.

Use the money to pay the mortgage when you have trouble with your job or health.

I'm not so sure about this advice, though. If you put down a smaller downpayment, that gives you a larger debt, a larger monthly payment and, if you're under 20%, PMI to pay as well. So you are greatly increasing your monthly costs.

You can't invest the difference too aggressively because you need to have it available in an emergency. That means keeping it someplace safe, like a high yield MMA earning about 5%. So you aren't getting a better return by keeping the money outside of home equity. And it is costing you hundreds more per month in higher payments and a larger amount going to interest, rather than building equity.

[InDebtInDC]

I'm not so sure about this advice, though. If you put down a smaller downpayment, that gives you a larger debt, a larger monthly payment and, if you're under 20%, PMI to pay as well. So you are greatly increasing your monthly costs.

You can't invest the difference too aggressively because you need to have it available in an emergency. That means keeping it someplace safe, like a high yield MMA earning about 5%. So you aren't getting a better return by keeping the money outside of home equity. And it is costing you hundreds more per month in higher payments and a larger amount going to interest, rather than building equity.

I agree with you, and these are all things that have to be considered.

PMI will cost definitely cost you, but PMI in and of itself is not bad. No financial instrument really is. It's how you use it.

Lenders require PMI for loans with down payments under 20% to protect the lender against default, but for people with no cash this is the only way they can afford a home. People with high yield alternate investments will also not mind the PMI since they can earn higher interest elsewhere.

it is costing you hundreds more per month in higher payments and a larger amount going to interest, rather than building equity.

I was trying to give an alternative perspective from what is typically given. At least the guy has choices to think about. I don't recommend one over the other, but at least think about it.

I really don't like the idea of having excess equity in a house. I know some people are really attached to their home, but I think of houses as disposable assets from my insurance background. While I dealt primarily with auto claims, but one big storm can knock out an entire area and we'll have to help triage all types of claims dispatched from the call center. Most people are underinsured for both their cars and homes.


Foreclosure sounds like a horrible thing, but if you're in your 50s or even 40s, and have the choice between foreclosure or use your nest egg to pay off a house that is a total loss, I would seriously reconsider the alternative.

Just think about it.

[disneysteve]

for people with no cash this is the only way they can afford a home.

Call me old-fashioned, but I'm of the opinion that if you have no cash, you can't afford to be buying a house. Just because you can get 100% financing doesn't mean you should.

Most people are underinsured for both their cars and homes.

I agree with you here, at least as far as homes. I'm not so sure that most folks are underinsured on their cars. It is much easier to set a value for insurance purposes on a vehicle. It is far more difficult with a home when you include personal belongings, upgrades, market conditions, rebuilding costs, etc. We've had 2 cars destroyed in the past 7 years and both times, the insurance settlement was just fine. It covered fair market value as far as I was concerned.

[buzz]

My advice for young DINKs is to live like refugees and build as much wealth as you can. You should be able to make up that $60k price differential in a couple of years.

[Tree0164]

I wouldn't buy in a bad area. How about a middle ground that includes increasing your salary over the years.

My husband and I bought our house 4 years before we had kids and were pretty sure one of us would be staying home. It was a smart decision. I would encourage you to save aggressively for a down payment and do a 30 year fixed loan rather than an arm

[InDebtInDC]

Call me old-fashioned, but I'm of the opinion that if you have no cash, you can't afford to be buying a house. Just because you can get 100% financing doesn't mean you should.

That may be true, but some people like me also don't want to put money down even if we could afford it. So PMI is a necessary evil for this demographic.

I agree with you here, at least as far as homes. I'm not so sure that most folks are underinsured on their cars. It is much easier to set a value for insurance purposes on a vehicle. It is far more difficult with a home when you include personal belongings, upgrades, market conditions, rebuilding costs, etc. We've had 2 cars destroyed in the past 7 years and both times, the insurance settlement was just fine. It covered fair market value as far as I was concerned.

Your comprehensive and collision coverage may be adequate, but I guarantee you that your liability coverage is inadequate if you get in a multi-car pileup. The state minimum here is 25/50/20. If you totaled a $100k Mercedes, that's nowhere near enough to cover your liability. Guess what? You've just exposed yourself to $80k of personal liability for the car alone. Add medical on top of that and you're toast.

Even $250k CSL is not adequate if you totaled a Mercedes and a dump truck. The damages add up quickly.

Sorry but that's beside the point of the thread. If you want to discuss adequate auto coverage then start another thread.

[disneysteve]

If you want to discuss adequate auto coverage then start another thread.

Good idea. I'm about to do that. Come on over.

[tripods68]

Here's my own personal rules I'd tried to stick by over the years.

-Buy only what you can afford it.

-If you buy debt, pay it off ASAP. There is no reason to pay more in interest when you can use that money somewhere else like savings.

-Buy a home that you and your family will be happy with for a long time. If you settle to buy a home on a bad neighborhood just to save money, you will eventually regret it. I'd experience with my friends and coworkers over the years. So don't it.

-When you are ready to buy a house, make sure you have at least 20% of down payment to avoid PMI.

Last one doesn't really apply to you, but it applies to DINKs.

-Make sure you have enough coverage for Term Insurance and Disability Insurance as a safety net for your family and in case you get hurt.

[disneysteve]

-If you buy debt, pay it off ASAP. There is no reason to pay more in interest when you can use that money somewhere else like savings.

This entirely depends on the terms of the debt. If you have a mortgage at 5% but your investments are earning 10%, keep the mortgage as long as you possibly can. On the other hand, if your debt is a 25% credit card, pay it off as soon as humanly possible.