Can we afford a starter home on a $220K annual income?

Hello everyone, we live in Southern California with a combined yearly income of $220K. We’ve managed to save $200K for a down payment and have no other debts. In our area, starter homes begin at $750K in decent neighborhoods and $800K in more desirable ones. Is this a feasible plan with our current financial situation or are we stretching ourselves too thin? Thanks for any insights.

Up to 800k is definitely doable.

Yes that’s doable, you’re netting around $12-13k/month? If your payment is $7-8k or less you should be fine with what you’ve outlined. However, consider your lifestyle, whether you have children, and the stability of your job. Consulting a mortgage professional is advisable as each situation is unique and it really depends on your disposable income needs.

@Finley
I’m concerned about this advice. We make about $280k/year, which nets a bit over $13k/month after deductions, including retirement contributions, in a state with no income tax. So, it’s hard to see how $220k could net $12k+ in California, unless you’re suggesting not saving for retirement. At about $13k monthly, a $7-8k mortgage would be too much. We pay $2700/month in rent, and buying doesn’t make financial sense due to the high price:rent ratios here. It’s better to rent at these levels, especially in Southern California where property costs are extremely high.

@Marin
The mortgage for $800k with $200k down at 7.5% is around $4200 per month. Rent in the area is likely $2500-$3500, which will increase over the next 10 years. The cost difference is not huge, and the financial dynamics of living in a very high cost of living area are complex. It may mean not maximizing retirement savings in favor of homeownership.

@Sky
When considering realistic taxes and home insurance, it’s around $5k/month. Add 1% annual maintenance, and you’re looking at $5.7k/month. Don’t forget closing costs, which could reduce your down payment by about $40k, raising your monthly costs to around $6k. Prices and rents both rise, but rent increases can be more dependent on local conditions, which means they might not rise as quickly as other costs.

@Marin
You make valid points. Housing as an investment might not always be the wisest financial choice, but for some, owning a home fulfills other personal and psychological needs that aren’t financial. Each decision is highly individualized.

@Marin
At that income level, you should also be maximizing your 401k and HSA contributions.

Kiran said:
@Marin
At that income level, you should also be maximizing your 401k and HSA contributions.

Yes, we’re maxing out retirement accounts and educational savings for our children. I don’t qualify for an HSA.

@Marin
Are you putting away over $60k for retirement annually? That net seems low for a state without income tax.

Yani said:
@Marin
Are you putting away over $60k for retirement annually? That net seems low for a state without income tax.

The maximum for a married couple before employer match is around $47k, plus $8k for two children’s education, and about $3k for health savings. Dividends are reinvested and aren’t included in our monthly net, which affects our overall financial calculations.

@Finley
A $7k mortgage on a $200k salary is unthinkable and irresponsible.

Perry said:
@Finley
A $7k mortgage on a $200k salary is unthinkable and irresponsible.

In Southern California, housing options are limited, but with no other significant debts, it’s manageable as long as there aren’t other large expenses.

@Finley
We don’t know their exact take-home pay. They listed gross income. What are the retirement contributions? What is monthly spending? Too many variables.

Akira said:
@Finley
We don’t know their exact take-home pay. They listed gross income. What are the retirement contributions? What is monthly spending? Too many variables.

I estimated 65% of their gross as take-home, which is about what I experience at that income level - if they have no other bills, managing with $5k disposable each month isn’t too difficult.

@Finley
That’s over 60% of income going to housing, how is that okay?

Maverick said:
@Finley
That’s over 60% of income going to housing, how is that okay?

Because what they’ll have left is more than what most people have for all their expenses, including mortgage.

@Sky
$800k in Southern California might only get you a townhouse 2 hours from downtown LA during rush hour. High six figures are just starter homes in LA/OC, assuming the same in San Diego.

@Sky
Most people don’t live in very high cost of living areas where money doesn’t stretch very far.

@Sky
I think a percentage of income is a much better metric for fiscal health, and 40%+ is too high, let alone 60%. Ideally, they should be saving 15-20% for retirement, which isn’t doable if so much is going toward a mortgage.