please talk me off the ledge

[StepRightUp]

Hello all,

My landlord just dropped the bomb that she wants to sell her condo, which I am renting at the moment and love, and she offered me first dibs.

The list price would be $395K (yes, I know, it is insane where I live).

I am 35 and single and make $95K at relatively secure job in higher education. I have a 5-6 mo EF based on my current rent ($1,750) and expenses. I save 15% for retirement and 5% additional. I have a $310/mo student loan that has a couple more years on it.

I have pristine credit.

I have no additional savings from which to draw a down payment aside from my IRAs (~80K).

It is fair to say that I cannot afford this at all? I've heard that one should by a house that is 2.5-3 times one's salary. And banks aren't eager to offer loans with little or no downpayment.

I'm just going to have to think about moving out and renting some more for the time being right?

Please help me look at this dispassionately.

[Nika]

Is this a good market price for this apartment?

I would negotiate if I was to consider this.

[JoeP]

Most advice you'll find here suggests 20% down and a 15 year fixed rate mortgage. It doesn't sound like you have $79k in liquid assets, without hitting your retirement or EF.

A quick run of numbers against a mortgage calculator with no property tax, 3.5% interest rate, and 0.5% PMI...
15 years on 395000: $2823.79/mo
30 years on 395000: $1773.73/mo
15 years on 316000: $2250.03/mo
30 years on 316000: $1418.98/mo

Add in taxes, HOA fees, insurance, utilities and see if you are comfortable with the monthly payments. Also, your EF will need to be bigger, since your monthly budget will be bigger.

My vote is for you to walk away from this.


eta: forgot interest rate

[StepRightUp]

Nika - It's difficult to say. I'd say it's a little on the high side, but not by much ($20K?) considering the area and the building.

JoeP - thanks for your input

[bjl584]

It's a tad pricey for your income. If you had a substantial downpayment you could probably swing it, but it doesn't look like you do. It would probably be best to walk away.

[disneysteve]

The list price would be $395K

I make $95K

I have no additional savings from which to draw a down payment aside from my IRAs (~80K).

Let's make this simple.

NO, NO, NO!

You can't possibly afford it.

Three times income is 285K so you're not even close.

You have ZERO down payment. Your IRA doesn't count since there is no way in hell you should cash out your retirement savings to buy a house (or anything else for that matter).

[ua_guy]

A couple of things to think about. Is it impossible? No. But you need to decide if it's worth it, or advisable, for your situation.

You can probably secure a 30y fixed FHA loan at just 3.5% down. Note: PMI rules are changing, read up..

You can probably secure a conventional loan with just 5.0% down.

You are able to withdraw from an IRA as a first-time homebuyer without penalty. Read up on that.

The best interest rates are right at 3.5% or below on a 30y fixed mortgage right now.

Having a traditional 20% down payment has its benefits and drawbacks, but is less "important" than it used to be, because the cost of borrowing money is so low right now. The idea being that having that extra 15% ($45,000) could be doing other things, like earning you a net 2% if your mortgage is at 4% and your rate of return on your IRA is 6%. Is that better or worse than having the money tied up in the house, or having that money available, and having to pay PMI? You need to figure that out.

Most experts recommend you spend no more than 25% of your gross income on housing, all related costs considered---taxes, HOA, insurance, etc.

Most banks will not approve a loan if your total debt to income ratio is more than 36-40% of your gross income, with good credit.

The upside--no moving expenses! And, you already know the place well enough to know what kind of shape it's in, and what might need attention if you assume ownership, what the neighbors and neighborhood is like. There's value in those things.

My advice would be to talk to a bank---maybe go so far as pre-qualification on a mortgage to understand what kind of money could be available to you. That way, you'll have more specific numbers and can better understand the situation you'd be in.

There's a lot of people on here that can't comprehend paying $395k for a home, let alone a condo. However, in some areas, that is the cost of living.

Let's say you can only theoretically afford 285k based on housing price as a multiple of salary. If that puts you 50 miles away from your job, in an undesirable area, then it doesn't make sense to move there, period.

If you're already paying over $1700 for rent....You can easily calculate what a mortgage would cost you. Compare the two. Also take a good hard look with regards to the condo itself...do you think it will ever increase in value? Will you want to move? If so, when? It's also worth taking a look at the condo building's financials, and understanding if there's any "gotchas" with regards to future improvements or needs for the building that could come to you in the form of an assessment.

You've theoretically got 30 years before you retire at 65. Understand what you're doing with regards to any retirement money that you use. Will you still be able to save enough? Will you still have enough money to fulfill your retirement goals?

All things to think about.

[MonkeyMama]

I agree with bjl. If you had a lot of cash to afford a nice down payment (or to have some cash reserves) would be an entirely different story. Though condos are generally far less expensive and lower maintenance than actual single family homes, there is still potential of large assessments or repairs. I would also not buy real estate without a substantial down payment (keeps things flexible - easier to refinance or sell when market values fall). Though I'd be a little looser with the price having lived in a sky high expensive region.

It's interesting though because I could see the appeal with your sky high rent. But without any more cash on hand, you are just setting yourself up for a big fall. & if you are in such an expensive area, I doubt you will have much negotiating room with the seller. (If they can probably find a buyer within 24 hours, they probably have little incentive to cut you a break).

[StepRightUp]

I appreciate your enthusiasm, disneysteve. It could be the slap in the face I need.

UA, thanks for that input.

I know that I have to walk away from this. If I were not emotionally involved, I would tell myself that I would be crazy for thinking about buying.

I needed others to confirm this.

I've lived in this dream place and don't want to say goodbye to it, but alas...

[disneysteve]

I appreciate your enthusiasm, disneysteve. It could be the slap in the face I need.

UA, thanks for that input.

I know that I have to walk away from this. If I were not emotionally involved, I would tell myself that I would be crazy for thinking about buying.

That's a great point. Think of it this way. If you were going out today to shop for a condo, would you be looking at places listed for 395K? Also, would you even be in the market to buy right now if not for this deal cropping up? Probably not I'd guess since you have no savings.

I'd keep renting, get the student loan paid off, and then save up a 20% down payment for a place priced within the 2.5-3 times income range.

[StepRightUp]

Exactly. I wasn't even thinking of buying, so I'd be buying in reaction to something as a means of keeping the status quo. Hardly the mindset to make such a purchase.

I'd been intending on doing exactly that: rent, pay off SL, save up for a down payment. I need to stick to the plan despite having to uproot my life and go through a move.

Financial decisions would be easier if emotions didn't get in the way

[disneysteve]

Financial decisions would be easier if emotions didn't get in the way

That's the truth.

[theduc]

Another possible downside is the monthly maintenance fees... you would need to calculate what they are and add them to your monthly payments and allow for them to grow in the future. My first condo had $702/month maintenance when I bought it and $890/month when I sold it... and as MonkeyMama mentioned you should also be prepared for the possibility of a special assessment (some insurances cover this depending on what the assessment is for). In the last year I lived in the above mentioned condo we had two assessments that totaled over $700,000! that was divided by the sq ft of the units and my share was $7,700... no questions asked... just give over the money! I loved the building but was so happy to see it sell and no longer be throwing money away. We also have a rental condo we purchased about a year and 1/2 ago... the maintenance fees were $526/month when we bought it and they are now $552/month. And thankfully no assessments to speak of!

[StepRightUp]

Thanks for that story, theduc. Makes me feel better. I wasn't aware that condo owning could be so volatile. (I knew real estate carried risk, but that I hadn't heard before.)

[~bs]

A 15 year mortgage is not feasible in most high cost areas. That probably only applies to places where the median cost is maybe 200k or less.