Help me decide if I should go through with this or not...

[dairyfarmer27]

Ok. I appreciate you taking the time to read this. My wife and I recently put in an offer on a $269,000 home. I make $72,000 a year as a software developer, and she, working part time, makes roughly $20,000 as a nurse. We only have about 20k in the bank right now in savings. We have 2 children, and 0 debt. We are stuck paying a large part of the closing costs. If we really stretch and pay $19k on the down payment, we can get the house with a conventional loan for $1570 a month until the PMI is finished in about 7 years, bringing the payment down to about $1450. Alternatively, if we pay $14k down, we would get the FHA loan and would pay $1740 a month for the first 7 years, until the PMI drops off and the payment will go down to about $1450. We are getting a %3.25 interest rate on the FHA loan.

What do you think as a community? Should I skip this home all together? Go with FHA, or Conventional? The home was recently appraised for $290,000, so I know we are not overpaying for it.

[MonkeyMama]

I'd skip it. I think the house purchase is reasonable based on income. But, that is *a lot* to take on without more cash reserves AND a bigger down payment. So if it were me, I would pass until I saved 20% down.

[dairyfarmer27]

I'd skip it. I think the house purchase is reasonable based on income. But, that is *a lot* to take on without more cash reserves AND a bigger down payment. So if it were me, I would pass until I saved 20% down.

Thanks for responding. I know that interest rates don't appear to be going anywhere, but if I wait until I get 50-60k for a down payment, interest rates could be back up and I would be paying close to the same anyway, plus I would lose a couple of years to rent (about 30k). I already pay $1300 a month for rent, so the extra $400 a month to start paying on a brand new home almost seems worth it. I just like to talk these things out. Thanks for your time.

[riverwed070707]

I'm not saying you should do it, because obviously a bigger dp is better, but if you *were* to do it, I'd put less down. Wiping your savings completely for a new home is never a good idea.

[disneysteve]

My wife and I recently put in an offer on a $269,000 home. I make $72,000 a year as a software developer, and she, working part time, makes roughly $20,000 as a nurse. We only have about 20k in the bank right now in savings.

Should I skip this home all together?

$269,000 is within range for your income since the rule of thumb is 2.5-3 times income. That would be 2.9 times, pushing the edge but okay. The problem is you don't have a down payment. That should be 20% or almost $54,000. And you also need to have a 6-month emergency fund in place. If $20,000 represents your entire liquid savings, there's no way you should be buying this house.

It wouldn't be an extra $400/month. It would be a lot more than that. You aren't counting taxes, insurance, utilties, maintenance, repairs, furniture, window treatments, etc. There are a lot more expenses as an owner beyond the mortgage payment. And if you wipe out your savings to get the house, what happens 6 months later when the heater breaks or the roof leaks or your car's transmission dies or one of you gets sick and can't work for a couple of months.

If I were you, I would walk away and either shop for a home we could afford or continue to rent until we have enough saved for the home we want.

[MonkeyMama]

Thanks for responding. I know that interest rates don't appear to be going anywhere, but if I wait until I get 50-60k for a down payment, interest rates could be back up and I would be paying close to the same anyway, plus I would lose a couple of years to rent (about 30k). I already pay $1300 a month for rent, so the extra $400 a month to start paying on a brand new home almost seems worth it. I just like to talk these things out. Thanks for your time.

Yes, interest rates rise and fall, but that doesn't erase the risk of buying without enough down payment and not nearly enough cash reserves.

For reference, we waited until we saved $60k+ down when we bought our first home though housing prices were skyrocketing about $100k per year (for modest condos). We at least had the sense to wait to have the down payment. I have watched literally everyone I know lose their homes because they did not buy what they could afford, or because borrowed all the equity against home. A solid down payment seems to be a pretty solid predictor of home ownership success. (It's not the only predictor, but it seems to be a biggie). Anyway, in the 11 years since, the market has gone up and down, but *everyone* seems to have an excuse why they can't wait until they can actually afford a home. The same excuse just morphs with the economy. The real estate frenzy never ends whatever happens in the market. Anyway, there is no doubt that housing prices right now are heavily tied to interest rates (as most buyers are still buying with little down and only looking at payments). So, if interest rates rise, home values fall. Having relatives who bought homes in the 1980s with double-digit interest rates, that seems to be the best deal to be had. (Interest rates are temporary, but purchase price is "forever" - or until you sell).

All this to say, we just don't want you to make a choice that you regret.

[dairyfarmer27]

Thanks...

Thank you guys for your sound advice. We have decided to back out of this house, and save up for at least a down payment of 10% and leaving 6 months EF in our bank. It is a sad day, but I am sure this was the right thing to do. Thanks again!

[Gailete]

I would encourage you to save for a 20% down payment along with your emergency fund. It is unbelievable the costs of moving into a home. Some untilities expect a deposit, you may need new furniture, new window treatments, new towel racks, new appliances (especially if you buy a house with them, they may be there because those that are leaving want ones that are newer, more energy efficient, etc. so leave the lousy ones for you. Disney Steve was very correct about the many various costs that come with house ownership, including lawn mowers, rakes, shovels, etc. if you haven't been doing yard work at your rental and then there is the snow blower possibly for the winter. I've bought houses with not enough leeway and it does take a long to time to recoup, assuming you ever do. There is also the extra that would have to come out of your budget that is the amount that your mortgage would be going up. Calculate that amount and save it each month in your down payment fund. Every time you have to tap that fund on the next couple years because of an 'emergency', you can tell yourself that would have been a month you would have had trouble making your mortgage. You could get real fancy and save any extra you would have to pay in utilities as well. But if you find that you can't save an extra $300-400 a month (the amount your mortgage vs rent would increase) you know you have saved yourself some big grief. After a few years of that, you will be in a better place financially because of the extra savings and you know just how much of a mortgage you can actually live with.........comfortably.

[~bs]

Is there a reason why you only have 20k in the bank? DO you not have debt?

If you didnt just get a huge boost in income in the last year or two, the low savings amount could signify you have other issues bigger than just affording monthly payments. If you make 90k/year, and your spending 85k, you're really not in a position to buy a house regardless of what your income may look like

[~bs]

Yes, interest rates rise and fall, but that doesn't erase the risk of buying without enough down payment and not nearly enough cash reserves.

For reference, we waited until we saved $60k+ down when we bought our first home though housing prices were skyrocketing about $100k per year (for modest condos). We at least had the sense to wait to have the down payment. I have watched literally everyone I know lose their homes because they did not buy what they could afford, or because borrowed all the equity against home. A solid down payment seems to be a pretty solid predictor of home ownership success. (It's not the only predictor, but it seems to be a biggie). Anyway, in the 11 years since, the market has gone up and down, but *everyone* seems to have an excuse why they can't wait until they can actually afford a home. The same excuse just morphs with the economy. The real estate frenzy never ends whatever happens in the market. Anyway, there is no doubt that housing prices right now are heavily tied to interest rates (as most buyers are still buying with little down and only looking at payments). So, if interest rates rise, home values fall. Having relatives who bought homes in the 1980s with double-digit interest rates, that seems to be the best deal to be had. (Interest rates are temporary, but purchase price is "forever" - or until you sell).

All this to say, we just don't want you to make a choice that you regret.

Good points. And housing prices tend to travel opposite of interest rates. High interest rates tend to depress housing prices and viceversa. To me, a high interest rate, low house price situation is more ideal because you can deduct the interest cost(if you're over the standard deduction) and have the option to refinance the interest rate down in the future. If you buy at a low interest rate, high price home, you don't have those options, and are pretty much stuck if you get into financial trouble. Hindsight of course, but I'd take high double digit interest rates with depressed housing prices any day.

[Frugalmommy :)]

My husband and I got a FHA loan as well. In the area that we are- we also qualified for "rural housing". The Rural housing was bc we live a certain distance away from any city. We were able to put 0% down, and keep our reserve for emergencies. We got a low low interest rate, and the 0% down didn't raise our monthly mortgage payment significantly. Does your area have anything like this?