Home purchase with a minimal down payment

[disneysteve]

I just put together a relatively strict budget that cuts my expenses down to bare bone and has me saving $1785 a month, plus the 15% that I currently contribute to my 401k. I don't know if this is realistic or not, but I can start here and make adjustments as needed.

I'm also not going to put pressure on myself here, I think it is a much more realistic goal to look at this as 5 year plan, and really think about what it is that I want. This is a decision that I want to make sure I am 100% ready for. If it comes sooner great, but I'm not going to jeopardize myself financially to make that happen.

I think this is a great plan. If you find it is too restrictive, you can loosen up a bit until you find the comfort point. Even if you end up saving $1,500/month, over 5 years that will be $90,000 plus interest.

[littleroc02us]

I know the standard advise is 20% down. What I don't really understand is for someone with no debt and enough money to cover expenses, the reasonng why.

I'm not saying 3.5% is ideal, or that I have enough money in the bank at the moment to be comfortable with moving forward, because I do not. Just trying to better understand the reasoning.

My answer to you would be "interest." You will end up paying a ton of interest, number 1 because of a 30 year mortgage and 2 because your only putting 3.5% down. How long would it take you to put 20% down on a house payment that is no more than 35% of your take home pay on a 15 year mortgage. If you go 30 you will be in your 70's before it is paid off. If I could do it over again I would have waited 4 years myself and be 39 when I could have saved for a bigger downpayment of 20% and a shorter term...

[disneysteve]

Keep in mind that just because you take a 30-year loan doesn't mean you need to take 30 years to repay it. Most people don't. Right now, we have a 15-year loan and I expect to repay it in no more than 7 years.

[snafu]

I suggest you re-visit your plan every six months while staying aware of interest rates as those severely impact mortgage amortization, a fact most consumers ignore. There are rumours that Americans may lose their mortgage interest tax deduction and be stung with VAT [value added tax].

[sigamy]

Have you included MIP in your calculations for monthly costs and closing costs?

I have an FHA loan, put 10% down as I thought that's all I could swing. Every month I pay that MIP it kills me. In addition to the large up front payment.

[skruggie]

Have you included MIP in your calculations for monthly costs and closing costs?

I have an FHA loan, put 10% down as I thought that's all I could swing. Every month I pay that MIP it kills me. In addition to the large up front payment.

Based on the advise in this thread, I am no longer pursuing FHA - when I am ready, I am going to go with a conventional loan. The only reason I was looking at FHA was the lower down payment. If that is not an issue, I should be able to shop around for the best deal that I can find loan wise. Starting with my credit union.

[docstudent]

I live in SOCAL, and I was in your position in '09. The housing market is reasonable, and if you find a great deal, you should make a move. Prior to '09, the market was out of my reach and I played the renting game. In LA, the renting game is almost the equivalent to a mortgage if you want to live in a safe area. I found an affordable condo, in an amazing neighborhood (90069), borders Beverly Hills, and the Hollywood Hills. I went the FHA route, and for the most part, I'm breaking even because of the write offs. However, I did have approximately 6 months of income in reserve, plus I was able to clear all of my credit card debt. I don't think I would have purchaed in any other area, and prior, the unit I purchased sold for almost 100G more at the height of the market. If you can find a 2BR 2BTH for $250,000 to $330,000 in West LA, you should make a move. A 2BR 2BT in my area went for $320,000, which is unheard of. Ideally, I think 20% down is a great rule, but if the price is right, you know what you can handle, and what's over your head. Case in point, I was approved for up to $400,000.....that's not my reality.

[skruggie]

I live in SOCAL, and I was in your position in '09. The housing market is reasonable, and if you find a great deal, you should make a move. Prior to '09, the market was out of my reach and I played the renting game. In LA, the renting game is almost the equivalent to a mortgage if you want to live in a safe area. I found an affordable condo, in an amazing neighborhood (90069), borders Beverly Hills, and the Hollywood Hills. I went the FHA route, and for the most part, I'm breaking even because of the write offs. However, I did have approximately 6 months of income in reserve, plus I was able to clear all of my credit card debt. I don't think I would have purchaed in any other area, and prior, the unit I purchased sold for almost 100G more at the height of the market. If you can find a 2BR 2BTH for $250,000 to $330,000 in West LA, you should make a move. A 2BR 2BT in my area went for $320,000, which is unheard of. Ideally, I think 20% down is a great rule, but if the price is right, you know what you can handle, and what's over your head. Case in point, I was approved for up to $400,000.....that's not my reality.

Thank you for this - it actually completely correlates to my situation.

I have an update, and I'm sure most people here won't agree with the path I am choosing, however -

after doing some number crunching and talking to a loan officer with a major bank, if I put down 10% on 250,000 I can most likely get a conventional loan. The costs including PMO and taxes and principal are equal to what I am currently paying for rent. To me - that is ultimately the deal breaker here.

I have a good amount of emergency savings that is outside of this scope, and that I have put aside for a true emergency. I so far have half of the money needed for the 10% so I am going to focus on saving up the rest, plus closing costs. I am going to move forward with the purchase once I have 30k saved for my down payment.

I agree about the L.A. market. The timing is right, and there are amazing deals out there right now thanks to short sales and foreclosures. I am looking at Sherman Oaks, Studio City, Toluca Lake and Burbank. My mind is a bit blown away by how much real estate has come down since the last time I checked.

I am debt free, and there is no hardship here in making the monthly payment. I will, of course, need to rework my budget to be livable for the expenses that come with being a homeowner, which essentially means cutting back on a lot of the frivolous ways I currently spend my disposable income. But I feel like this is the right decision for me and where I am in my life right now.

I was also happy to discover that I forgot to account for my annual bonus in my salary. So I am looking at a six figure income when I am doing my loan assessment, making the deal even sweeter.

Everything about this feels right to me, the fact that the costs are equal to what I pay in rent were ultimately the dealbreaker in my decision. I am aware that I need to be very aware of what HOA costs could be, and will account for that in my purchasing decision.

[disneysteve]

I think a 10% down payment on a home that costs 2.5-3 times your income when you are otherwise debt-free and have an adequate EF in place is not unreasonable. Yes, I think 20% is ideal but what you are describing isn't bad. It is a lot better than a 3.5% down payment.

One question. You mention a bonus at work. Is that bonus guaranteed? Do you absolutely receive it no matter what and is it for a set amount? Or is it based on company performance or personal performance or market conditions or the whim of the CEO?

Keep in mind that HOA fees can change any time and special assessments can crop up anytime. The HOA can decide to put a new roof on the building or repave the parking lot or resurface the swimming pool and you get a bill for it so your EF and cash reserves need to be beefed up when you live under those conditions.

[skruggie]

Thanks DisneySteve - I really value your opinion

Although my bonus is not 100% guaranteed, it is a yearly recurring benefit of being in middle management and above at my company. It is based on a percentage of my salary, and my overall performance review. It goes up as my salary goes up.

Quite frankly, if for some reason they did away with the annual bonus program there would be a lot bigger problems than losing a couple thousand in salary. It is an ingrained part of the structure/culture of where I work.

The one think I am being super mindful here is of HOA, fees and what kind of restrictions they impose. That is my biggest concern about condo living, but a SFH is not realistic in my salary range in L.A. - so it is what it is, I just need to make sure i am prepared for it.

Going under this plan, It looks like I will start doing serious looking at condos with my realtor in the 3rd quarter of this year. Meanwhile I am aggressively saving more than I need, and investigating my loan options. I was thrilled to discover that my debt to income ratio and credit score can qualify me for conventional with 10% down, so now I just need to find the most attractive package.

I am very, very excited that I can actually do this - I never in a million years thought I could own property in L.A. My life has changed so much over the past couple of years it is unreal.

[disneysteve]

The one think I am being super mindful here is of HOA, fees and what kind of restrictions they impose.

This is the reason I will never own in a place with an HOA. The rules are insane. My cousin just bought a house in Florida. The HOA rule book is an inch think and covers every possible aspect of your life from what color roof shingles you must have to whether you can do any of your own auto repairs to when you are allowed to have your garage door open. Why anyone would ever move into these places is beyond me. We purposely bought a house in a development that did not have an HOA.

[greenskeeper]

I vote no.

1. Nobody should ever buy a house with only 3.5% down.
I disagree, the bank is taking most of the leverage. As long as you are comfortable with the mortgage cost and can live with the PMI surcharge, then go for it.

2. The most you should consider spending for a house is 3 times income, so $285,000 for you, but that also assumes you are putting down 20%. That works out to a monthly payment of about 28% of income, which is also the recommended limit.
This is a good idea, but not practical for everyone. Our current house was about 5 times our income. We have no other debt at all (NO CC, car, student loans, etc) so the mortgage is easily paid and we are on track to pay it off in half the time (additional principal every month)

3. As an owner, your expenses will be higher than as a renter, so you need to account for that in your budget and in your emergency savings.

yes your emergency fund definitely has to be higher when owning a house compared to renting

[skruggie]

yes your emergency fund definitely has to be higher when owning a house compared to renting

Just to ensure I am prepared, when looking at a condo versus a regular house, what kind of expenses might I need a larger emergency fund for?

there is no question that I am saving money to account for a home ownership emergency fund, I'm just trying to get a sense of what an emergency may be without needing it for structural reasons.

I know there could be plumbing costs, anything else I should be mindful of?

[MonkeyMama]

Why anyone would ever move into these places is beyond me. We purposely bought a house in a development that did not have an HOA.

Agreed - but we have owned 2 homes with HOAs because there was little other choice. I hate the HOAs and since they have no teeth anyway they have been little more than nuisance. (Which over the years is annoying since their seems to be no reason to have them).

A lot of people seem to really like them as there are few neighborhoods around without them.

[MonkeyMama]

Just to ensure I am prepared, when looking at a condo versus a regular house, what kind of expenses might I need a larger emergency fund for?

there is no question that I am saving money to account for a home ownership emergency fund, I'm just trying to get a sense of what an emergency may be without needing it for structural reasons.

I know there could be plumbing costs, anything else I should be mindful of?

Read Disney Steve's last reply. A HOA can have a special assessment at any time (to cover structural repairs - they are responsible for structures, but the owners are the ones that pay for them, through dues and special assessments).

As such, it is really important to choose a HOA that is financially sound.

A condo also has everything a house does (appliances, plumbing as you mentioned, etc., etc. Furnace? Hot water heater? Plenty to repair in a condo).

I owned a condo before and it was far less maintenance than a house, but there was still plenty to maintain all the same.

We've been careful in choosing HOAs - ones that were not due for large repairs and/or had adequate cash reserves.