Buying a new home (bay area) - how much can we afford?

[valleyengineer]

Hey all,

My first post here, so forgive me if I commit any faux pas - me and wife are looking to buy our first home here in the Bay Area (San Jose, California). We are both silicon valley software engineers who have been saving up since college. We both have 401k, dental + health, ESPP plans. We have no debt besides our cars (which we're almost done paying off) and our credit cards (which we rarely use).

Gross Income (combined, including salary, RSUs, stock options, bonuses for 2012): 270K

Savings:
Liquid cash = 230K
Stock (value calculated from today's prices, minus taxes for 35% tax bracket) = 95K

Total Expenses (food, car payments, electricity, gas, cable, gas, insurance):
$2180

We both have maxed out our 401k contributions (@ 10%), as well as ESPP. Our net income per month (minus RSUs + stock, minus 401k + ESPP + withheld tax) is equal to $8900.

We're currently projecting for a 750K house with 20% downpayment (which will result in us putting 150K + 10K (closing costs) = 160K). We got quoted a 3.75% 30-yr interest rate, and our total monthly payment (including prop. tax + insurance) is projected to be $3695.

However, we're wondering if we could go higher - we're both hesitant to take on too much risk, but would like a nice house as we've been living in apartments for quite some time. In addition, all the RSUs + stock options that we have are currently singularly from each of our companies (which are quite big companies in the area). Hence, we're afraid that we have a dependency on such a large volume of homogenous stock, which might cause problems in the future.

Any help from you guys will be much appreciated!

Thank you!

[thesimplemoneyblog]

I think you should look for less of a home than that instead of more. A good rule of thumb is to not spend more than 2.5 times your salary (but I would typically lean more toward 1.5 - 2 times your salary). Since your income figure includes RSUs, stock options, and bonuses that are highly variable, I would avoid purchasing a house this expensive since you could find yourself in a bind if none of those items happen to come to fruition (which isn't entirely unlikely).

While interest rates have made the cost of purchasing a home much cheaper than historically normal, you shouldn't take on too much of a home (since the insurance, taxes, and maintenance will all be proportional to the value of the house, and you could find yourself quickly using your excess cash flow for maintenance and repairs).

Just because you CAN likely go higher, doesn't mean you should or that it is prudent to do so.

[Bob B.]

You don't mention kids in your post. If you have kids, or are never planning to have kids, ignore my post.

If you have kids in the future, it is likely that one of you (more likely your wife) may quit your job, or reduce hours in some way.

Clearly, you have done a great job in saving money, and are already living off well less than your incomes. But, the reality of children tends to change that. Expenses go up, and leisure time diminishes.

If you do have kids in the future, plan on your budget changing in some way. I'd hate for you to bite off more house payment than you can afford in the future.

[riverwed070707]

You do a great job of keeping your expenses in check and its great you've been able to save 20% on such a large purchase. Since you have so much slack in your budget, instead of buying a bigger house you should really, really consider a shorter term mortgage. Switching to a 15 year instead of a 30 would save you more than $200,000 in interest payments. On such a huge loan the impact is staggaring, and i can say from experience its really disheartening to see how slowly the principal gets paid down on a 30 year loan.

[disneysteve]

While on first read, the numbers look okay, I agree that you need to be extremely careful because your income numbers include bonuses. Bonuses aren't fixed or guaranteed. They can increase, decrease, or go away entirely at any time. You should not base your home purchase on total compensation, only on the solid portion of your compensation.

How much do you earn before bonuses? That's the figure you should be working from. Your home purchase should not exceed 3 times annual income.

[MonkeyMama]

To OP - I am from San Jose. I totally understand you are probably looking at a 2-bedroom home that needs a lot of work. You can lay it out, but no one ever *gets* it. There is likely nothing more modest you can really buy without looking at apartments?

I think the home purchase is fine. I would NOT consider a shorter amortization. That is a heck of a lot of payment to tie yourself into if things go bad. While things are good, you can always just pay some extra.

I have mixed feelings on buying a bigger house. All of my friends and relatives have bought some insane homes I would *never* buy. But, generally the risk pays off. (Most of them tend to be fairly conservative). So, how big is this house and what price is your more ideal house at? I think you could certainly go a little higher. I would consider putting a bigger down payment, trying to cash flow the difference. Real estate is always so volatile though that you are probably better off just to buy what you feel comfortable with and to buy up later. I kind of cringe at this advice because at $750k you pay a hell of a lot of commissions to sell. BUT, I really do think you should start with something more modest, get used to those property taxes and see how you feel about it all before you start seriously about buying up. A $1 million house may be smaller than the average house in the U.S. BUT, it comes with serious commitments that most people don't have to make. You really want to start out with $10k annual property taxes?

Personally, I wouldn't do it. I'd just buy a condo so I didn't have to make that kind of financial commitment. BUT, I am not an engineer and so it never made any sense for me to buy a house there. I suppose I'd probably have bought a house with your income. You can't apply any regular rules of thumb to Bay Area real estate - even the most conservative will have to stretch a bit.

[sblatner]

Just to emphasize, property taxes are 1% of the purchase price plus whatever extra taxes come with it (school bonds, etc.). You are stuck with the 1% for the time you own the house and it goes up a small amount each year. Make sure you consider that before you buy and include the amount in your budget.

[valleyengineer]

Thanks for all the relevant feedback, has been very insightful! To answer a few of our questions, RSUs/stock options are a common form of compensation in the silicon valley (in fact, it sometimes takes the place of salary). We both work for very reputable tech giants and don't foresee our income reducing over the next few years (2011 total = 225K) as we're both quite good at what we do (not trying to toot our horn!). We're only 27 years of age, and have been working for about 3 years now, so the sky's really the limit here for us. We however do plan to have kids in about 3 years time, so that will change our budgeting quite a bit.

As for 15yr mortgages, while they are more attractive since you pay less interest over the life-time of the loan, its just unaffordable, since the quotes we got result in us paying ~5K a month, which we just can't manage.

In addition, we aren't looking to buy a much more expensive place - in fact, we were looking to bid at max 800K for a house and wanted to know if that would be too much risk. Based upon what most of you have said, it does look like even 750K might be risky for us. Unfortunately, in the Bay area, land is at a premium, making real-estate quite a pricey affair.

In addition, we're looking to buy a place that is maintenance free (i.e renovated) and does not have any real issues. This includes things like termites, dry rot, structural, etc.

[esb3357]

Honestly I am a strong believer in your ONE splurge item. If you guys are home bodies and you want to put your money into a mortgage. Than yes you can go to 800k. If you want a nice car and live in a cheap place. Also great. The key is to keep everything cheap so the one item you want to splurge on you can. That being said. Yes you could afford a more expensive house. Just remember its your splurge item.

[tripods68]

I read this a year ago, wondering how much home you end up buying?

[97guns]

I read this a year ago, wondering how much home you end up buying?

No matter how much house they've bought the equity gains in the past year gave been very good in the bay area

[jay_rogers]

Hello,

Did you check with FHA loan option?
FHA homeowners will save an average of $900 annually because of the savings, adding that it is also expected to spur 250,000 new homebuyers to purchase their first home over the next three years.

[jay_rogers]

FHA loan

Hello,

Did you check with FHA loan option?

FHA homeowners will save an average of $900 annually because of the savings, adding that it is also expected to spur 250,000 new homebuyers to purchase their first home over the next three years.

[jay_rogers]

FHA loan options

Did you check with FHA loan option? FHA homeowners will save an average of $900 annually because of the savings, adding that it is also expected to spur 250,000 new homebuyers to purchase their first home over the next three years.