Building My Housing Budget

I started my hunt for a new home because, here in Los Angeles…

I’m paying a whopping $2400+ for a one bedroom every month. Back when I was scrambling to find an apartment over the holidays (thanks, ex boyfriend), I made the conscious decision to stay close to my office and continue avoiding the hell that is Los Angeles rush hour. But even then, I knew it wouldn’t be my long-term solution.

I got the apartment because technically that $2400 is less than a third of my gross monthly income. But it just scraped through. I’m sitting pretty at 32%, which is too damn high for a fixed expense that has to happen every single month.

So I walked in eyes-wide-open, signed a lease, and started looking for a mortgage to pour my hard-earned money into instead.

Which kicked off the question: what’s actually affordable when it comes to buying a home?

Conventional wisdom quotes much higher than what a reasonable person should consider. Most online calculators all showed much higher home values than what I felt comfortable agreeing to.

Here’s one example:

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Nice try, Nerd Wallet

Why, if conventional wisdom says never pay more than 33% of your gross income towards housing, would this be quoting me at 39%? Even considering tax breaks, their suggestion would put me in a bind, and delay my FIRE goals significantly. But I digress.

Another, more reasonable example:

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Much more reasonable. Thanks, Redfin!

And finally, in my opinion the best calculator I got to try:

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Perfect. Thanks, Zillow.

Zillow won the day because I could input actual details of the purchase, including my preapproved interest rate, expected HOA fees, and preferred Debt-to-Income ratio (ahem, less than 1/3, although you’ll notice not by much – more on that in a moment).

So, with this in mind, despite my mom’s, erm, suggestion that I can afford more, I’m targeting something affordable considering three things:

1. My downpayment

I don’t have enough saved and accessible for 20% down on a home anywhere relatively safe in Los Angeles. While I’ve been saving aggressively over the past few years, there are limits to what I can pull from my IRAs (10K), and I need to keep a neat little emergency fund in case all hell breaks loose. This means that, on top of my monthly mortgage, HOA dues, and property taxes, I’m looking at monthly PMI (private mortgage insurance) until my stake in the house hits 20%.

2. Moving + closing costs

I also will have expenses when I move, including the cost of breaking my lease, hiring movers, spackling and repainting my apartment before handing my keys back the managers… you know, normal things.

On top of that and the downpayment, I’ll need to pay closing costs, which run anywhere from 2-5% of the house purchase price. The seller will pay most of these, but I’ll still be on the hook for a couple grand before escrow closes.

3. The renter dilemma

So this is why I’m willing to go for that 30% cost this time. I’ll be renting to a roommate, which means my actual costs will be lower than 30% on average. That said, I don’t want to put myself in a position where I’m reliant on a renter, and can’t afford the mortgage without one. There will inevitably be gaps in renting, but there can’t be gaps in mortgage payments.

That’s where that 30% comes in – I technically can afford to spend 30% towards housing if a renter isn’t there, but I’ll be hustling to get another renter in ASAP and bring that housing cost down to, say, 16.5% of my monthly gross income. That just sounds way mo’ betta.

***

So, while conventional wisdom, the internet, my overeager lenders, and my mom seem to think I can afford a great condo in Culver City for $450,000-$500,000, I’m aiming lower. That leaves me with an impossible hunt a challenge: find a renter-friendly 2+ BR in Los Angeles for less than $400,000 in a hot market.

Game on.

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