Can I afford? Here is my plan

[gekkoplus]

Thank you everyone who shared their thoughts in this thread. I completely agree with you all that a 400K home will be out of my range here based on my salary.

$1600 rent is pretty much average in the areas I live (Cupertino, Santa Clara, Sunnyvale). I can relocate to more remote areas but that will increase my daily commute to work which is something I do not want to do.

Also a $400K home (2BR condo not even a single family home) is a "steal" here. I don't know whether I can get anything below that. I can consider a 1BR condo that will be around $300K (again a steal). But I am concerned that 1BR will not be sold as quickly as a 2BR down the years. But we can manage to live in a 1BR easily as we do not have any kids and won't have any in next couple of years.

Do you guys think $300K might be manageable?

[atomicrc11]

Silicon Valley is one of the most expensive places to live, so $400k for a condo is actually pretty good. What I would do is wait, save up cash and make a large down payment. A house for me in Boston is years out because the least expensive condo I can buy in an area you would want to live is going to be $350-400K. My plan is to just save up a good down payment and then see what I can afford. My household salary is about $110k, but I'm currently saving 15% of gross toward the house. By the time I go to buy a house my student load debt will be significantly less and my CC debt gone. The only way I would reduce the savings for a house is if I needed to replenish my EF.

[disneysteve]

Originally Posted by gekkoplus

Also a $400K home (2BR condo not even a single family home) is a "steal" here. I don't know whether I can get anything below that. I can consider a 1BR condo that will be around $300K (again a steal). But I am concerned that 1BR will not be sold as quickly as a 2BR down the years. But we can manage to live in a 1BR easily as we do not have any kids and won't have any in next couple of years.

Do you guys think $300K might be manageable?

I would forget the concern about selling the 1BR. I'm sure there are plenty of people like yourself - couples with no kids - or single people living alone - who would happily buy a 1BR condo. If not, they'd all be sitting vacant and I doubt that's the case.

Yes, I think 300K would probably be appropriate on your income. But you still can't charge your down payment to your credit cards. You need to save it in cash the old-fashioned way.

[tripods68]

Originally Posted by JinCO

I disagree that a $400K house is ridiculous for someone earning $100K per year. It depends on a number of factors including debt load, savings and how much of a down payment they can make. If the OP could put down 20% and finance $320K and had no other debt, I think this would be feasible. Also, housing prices differ dramatically in different parts of the country. Where I live you cannot buy anything for $100 - $150K.

I totally disagree. He already laid his expenses. He can't afford a $400K house.

3778 Remainder [1889 * 2]
-1600 Rent
-600 Car payments
-70 Estimated Credit card payments* (for BT offers I mentioned above)
1508 Remainder
-100 Electricity
-50 Cellphone
-100 Car Insurance
-50 Cable / Internet
-100 Gas
-300 Food

808 Remainder


Assuming his new mortgage will be $370K based on MRPESEO's number (i'm not sure this include PITI)
Your payment: $2,218.34 (Per month for 30 years) @ 3778 net income

Your DEBT/INCOME RATIO: 76%
based on net income

You remainder/disposable income is less $200 a month

NO! You cannot afford this house.

It's better for you to rent for now.

[jIM_Ohio]

I would not listen to the people which state you cannot afford a 400k house. If you go for the 400k house, you just need to be smart about how you do it.

I have bought 2 houses in my life and stretched the limits of most guidelines when I bought each of them. The key to making the stretch work is to make sure you have money available for problems in month to month cash flow and also have a way to increase your income stream to make the cash flow work even better. If you spend 100% of what you take home, don't get the house. If you can manage to live on 80% of what you earn, making a 400k house is much easier.

In your case you need to clear up the debt (Car, credit cards) before making any decision on a house. Let's make an assumption the debt is paid off and you can consider owning a house on $3778 take home.

1) Make sure the 401k is funded to 15% of gross salary. If that reduces the net below $3778, please reply to that effect.

2) Be able to set aside 5% of gross salary in a taxable account. Do the 15% and 5% once the debt is paid off- the house down payment and closing costs will come from the 5% and after you move in the 5% can fund furniture expenses, house repairs and similar mid term expenses.

3) $400k mortgage at 6.5% interest is a P&I payment of $2530.

4) the tax implications of the mortgage should be factored in. You will pay $25k in mortgage interest year 1. Assuming your taxable income is less than 78,850, you will get 25% of the interest back. You will get $6250 back at tax time, which is $500/month added back into take home income after taxes. If property taxes are another $7500, you would get 25% of that back ($1875 which is another $100/month).

4a) take home pay is now $4300 and a mortgage payment is $2600- that is 60% of take home. Not the best situation, but doable if you can keep other living expenses low.

You then need to determine if you can live on the remaining part of your income.

5) keep 6 months expenses in cash and continue to set aside 20% of gross pay every month. In a worst case cash crunch you can get some of this 20% back as long as you are employed and earning a paycheck- losing your job is your biggest risk.

6) I would not immediately pay down the mortgage until you have 6 months expenses in cash, and another 3-6 months of mortgage payments set aside in a taxable account. Again the 5% you have budgeted to set aside can supply this, just be patient and realize it might take 3-5 years to reach 12 months of mortgage payments sitting in a taxable investment account (3-6 months in cash, remainder invested at about a 40/60 risk profile is my advice).

[tripods68]

Jim,

Why go through all that "hassle" when there are plenty of houses they could find to fit "within" budget at a affordable price. They may have to move to a different town or city. The point is why bury yourself in so much debt that you gonna cause yourself a heart a attack. What happens if he gets sick for a few months, or on long term disability? Do they have enough savings today to support and pay their mortgage? They should be building their EF and retirement instead of biting more than they can chew on.

[jIM_Ohio]

Originally Posted by tripods68

Jim,

Why go through all that "hassle" when there are plenty of houses they could find to fit "within" budget at a affordable price. They may have to move to a different town or city. The point is why bury yourself in so much debt that you gonna cause yourself a heart a attack. What happens if he gets sick for a few months, or on long term disability? Do they have enough savings today to support and pay their mortgage? They should be building their EF and retirement instead of biting more than they can chew on.

Look where he lives (santa clara). I have worked there before. Moving further away could mean a 2 hour one way commute (have you see traffic there??). No way (for me). You cannot look at income to house price ratios and make a simple decision about affording a mortgage or not. His area is HCOL and even moving further away is HCOL- the difference is the costs of the commute and time. I could not spend 4 hours a day in car moving at 5 mph with todays gas prices.

He needs to go with a plan to get a house, then start trading up every 5-10 years until he gets the house he wants. The starting condo will probably go for 400k. He is not ready for that now (too much debt), but once the debt is removed, he could consider a 400k condo.

[disneysteve]

Originally Posted by jIM_Ohio

He needs to go with a plan to get a house, then start trading up every 5-10 years until he gets the house he wants. The starting condo will probably go for 400k. He is not ready for that now (too much debt), but once the debt is removed, he could consider a 400k condo.

What happened to folks who followed that type of plan a few years ago and bought the 400K condo with plans to trade up in 5 years? They wound up with a 320K condo that they are trapped in.

[jIM_Ohio]

Originally Posted by disneysteve

What happened to folks who followed that type of plan a few years ago and bought the 400K condo with plans to trade up in 5 years? They wound up with a 320K condo that they are trapped in.

If a person did not want to live somewhere, they shouldn't have purchased property there.

Just because a person plans to trade up in 5 years does not mean the market will cooperate.

I plan to retire in 18 years, but I can only do so if the markets, my job and a few other issues cooperate.

Just planning to do something is not good enough.

My point was OP can get a 400k condo and plan to trade up, but there are numerous parts of the plan which could break down that the OP has little control over.

That lack of control is "risk" and only OP can decide if the risk is worth it.

[tripods68]

I live in Sacramento area where thousands of Bay Area commuters go home and commute on daily basis. That's nothing new living around here. In my block alone i have 3 or 4 neighbors who takes AMTRAK at 4 AM in Oakland. You also don't know what the market going to do in every 5 years so you can take that risk. The safest way is to pay off all the debt his car and slowly built the savings until they are ready to put at least 20%.

[maat55]

Too much house with other debt is a recipe for stress. The price to live in CA is extremely high. It's a shame that you have to give up so many things to live in a decent house there.

Your best plan is to live in less house. I have to assume that there are quality people living in neighborhoods where there are smaller homes. I don't know what makes housing so high there, but most people are decent and hard working and have to live in houses smaller than they could live in in most anywhere else in the country.

[rooskers]

Just a side note about using credit cards with low intro rates or very low "permanent rates". You can't trust the credit card companies or the low rates and what I mean by this is say you put the $30,000+ for your down payment and you think it is free money because it has such a low interest rate (maybe even 0%). You buy the house and everything is fine for a couple months and then all of a sudden your interest rate is 30%. You call the company thinking it must be a mistake and they politely inform you of their Universal Default Clause. Under the universal default clause, your interest rates can be increased for several reasons, including late payment, exceeding your credit limit, bouncing a check, having too much debt, having too much credit, getting a new credit card, applying for a car loan, and applying for a mortgage loan. So much for that lifetime of free money.

Personally I love these offers and cards and use them all the time to purchase large things such as washers, dryers, TV's, vacations and such things. The thing is though I have the money in my high yield savings account to pay for it but as long as the money in the savings is earning more in interest than I am paying on the credit card I keep it on the credit card. If I was ever hit with the Universal Default Clause or any other such problems I would have the ability to immediately pay off the card and close the account. I do not see this as a possibility for you so I would highly recommend you do not consider this as an option.

Good Luck