Author Topic: Questions on First Time Home Purchase - am I close? :)  (Read 846 times)

JCPoE

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Questions on First Time Home Purchase - am I close? :)
« on: January 04, 2019, 05:11:20 PM »
Hi all, first time post here, I am hoping to get some advice / feedback on my situation.

Financially speaking, I make $70K a year, salaried, no bonuses or commissions. I have $0 Debt, $18.4K cash, $55K in my 401(k) that I am 5 years vested in, and an 800 credit score. My current all in living expenses (rent, utilities, etc.) are $1,050 a month, and I've been faithfully saving $1,500-$2,000 a month for half a year. I spoke with a lendor whom a friend recommended and is close to, and he sent me over 6 worksheets (3/5/10 down each on a 275 property and a 300 property). My lease is up at the start of May, and I entered 2019 not sure the timeline on this would be. I still don't know. Here are my breakdowns:

3 - Financially, I could swing this right now, have a large amount leftover to recover from the big initial hit, but then have a larger mortgage long term
5 - I would either need to borrow from the 401(k) to assist with the purchase costs, or basically walk away broke afterwards
10 - Not possible unless I borrow heavily from the 401(k)

With all that said and written, I am 35, single, not in a relationship, and using this as a long term retirement asset. I could see myself dying in a home in the area I am looking at. My life is established, I have no intentions to move from this area, and I don't think the purchase in itself is unwise. In the 275-300 range in this area I could get a 20 year old property, 4/3/1500-2000 ish, well-maintained, literally across the street from a 5 mile wide park, safe area, good schools, established neighborhood.

Currently, I don't have a realtor, but my friend is having the one he has used for two home purchases in the same zip code contact me. The lendor can get me a conditional offer if I send him over my documents. At that point, the only thing preventing me from proceeding is 1) making the wisest financial decision in whatever timeline that is, and 2) finding a property I want.

With all that said, are there any major blind spots I'm missing? Is this a wise / unwise path forward? Thanks

ilsy

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Re: Questions on First Time Home Purchase - am I close? :)
« Reply #1 on: January 04, 2019, 09:16:37 PM »
I haven't bought a property on a mortgage lately, is there still mortgage insurance in place, if you don't have 25% down-payment?
If so, I would suggest to save till you have 25% down-payment, should be more than $18.4K on a 275-300 range. I wouldn't touch 401k. Just wait, seems like the market is cooling down. In meantime, sign up for a few websites that will send you new properties coming to the market, choose your area and wait new emails. Soon, you'll have a good idea of what is a great deal in your area. When you are close to your 25% sum, go to your bank and get a per-approval letter for the amount you want to pay.

Good luck.

ilsy

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Re: Questions on First Time Home Purchase - am I close? :)
« Reply #2 on: January 04, 2019, 09:25:42 PM »
I would also get a 10 year mortgage, so your rate is low.

cchrissyy

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Re: Questions on First Time Home Purchase - am I close? :)
« Reply #3 on: January 04, 2019, 09:41:58 PM »
4 bedroom 3 bath?!

I'd keep renting the size place you actually need, or, buy something that makes much more modest assumptions about your future needs.  Maybe a 2/2.

I don't think buying is itself a bad idea, since you know the area well and want to stay in it. But I think renting looks really good here. Your expenses are low and you are saving a good amount every month. Keep doing that!  It looks like you don't have an IRA, so how about instead of holding cash for the house, you open one and fund it with $5500 for both 2018 and 2019

J Boogie

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Re: Questions on First Time Home Purchase - am I close? :)
« Reply #4 on: January 07, 2019, 01:10:52 PM »
4 bedroom 3 bath?!

That's bed bath and beyond what OP needs.


actonyourown

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Re: Questions on First Time Home Purchase - am I close? :)
« Reply #5 on: January 07, 2019, 02:00:58 PM »
I'm a littlw younger but on a same track, so some things for you to consider for self-reflection:

1. Why do you want to buy over rent? Is it something solvable because you buy or can you rent a different place to get past the renting aspect?

2. Do you need the space? This is my largest issue. What would I do with 5 rooms if I had them? What will you do with 3 bathrooms, 4 bedrooms, plus other space? Are you going to clean the entire house yourself regardless if you use them? Sounds like a lot of upkeep of you aren't using it all.

3. What is your net worth? Can you justify putting your life savings (and with a mortgage, future earnings) into one asset?

AK

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Re: Questions on First Time Home Purchase - am I close? :)
« Reply #6 on: January 07, 2019, 03:07:08 PM »
Would you consider being a landlord by buying a house, living in it, and renting out other units or bedrooms? Could be a nice way to accelerate FI.

Resource: https://www.biggerpockets.com/renewsblog/2013/11/02/hack-housing-get-paid-live-free/

waltworks

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Re: Questions on First Time Home Purchase - am I close? :)
« Reply #7 on: January 08, 2019, 08:39:34 AM »
Keep renting.

-W

ericrugiero

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Re: Questions on First Time Home Purchase - am I close? :)
« Reply #8 on: January 16, 2019, 08:03:31 AM »
Think about why you are wanting to buy. 

Do you want to buy because that's what people do when they are "successful"?  Probably not the best reason.

Do you want your own place so you can make it your own and feel like you are more secure, won't have to move, don't have to deal with landlords, etc?  This is a valid reason but it may not be the best financial move in terms of numbers.  You may be better off keeping that money in the market and renting instead.  (historically that's been the best move in most markets and time periods)

If you are willing to deal with the headache of a "house hack" that could be a great financial move but it will be more work.  You will have extra work and less privacy but could get free housing while you build equity. 

Only you can really decide what your goals and priorities are.  It sounds like you should save up more first and you are looking at a larger house than you need right now.  That could be a good move if you want to house hack and make some money off the extra space.  If not, you might look at something a little smaller/cheaper.  Keep in mind that the larger the house is the more you will have in upkeep, taxes, cleaning, etc. 

JZinCO

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Re: Questions on First Time Home Purchase - am I close? :)
« Reply #9 on: January 17, 2019, 12:12:08 PM »
Do you want your own place so you can make it your own and feel like you are more secure, won't have to move, don't have to deal with landlords, etc?  This is a valid reason but it may not be the best financial move in terms of numbers.  You may be better off keeping that money in the market and renting instead.

This is me right now. I decided to forgo renting to buy a condo; even though it isn't the most prudent decision. The PITI+HOA is likely to be ~$2400/yr greater than a comparable rental (even that isn't comparable; I have never rented a full condo and would have rented an apmt with several ppl to save money).

I can tell you what I am doing and offer you some thoughts/questions to think over.
- Based on your income and your savings it sounds like you have either been on the spendy train for awhile or just got a big bump in income. I wouldn't make any big financial decisions for a couple years until your new spending habits/income become normalized.
- Do you have any other debts?
- That's a big house for a single person. Do you really need a bigger loan and utilities to pay for a big house? Do you plan on 'house hacking'?
- Have you considered all of the additional monthly expenses? HOA, property insurance? And immediate closing costs? I'm under contract and expect to shell out $5-6K for closing and $2K for modest furnishings.
- Having the money put together is one thing but think about what it means for your future cash flow. Have you examined how your current cashflow might change?
- I assume you have considered how long you will stay put in the house?

Here is my case. As I said it is not the most prudent thing but I have run the numbers and feel okay about it. Consider it a case to compare against. FYI I am early 30s, single, graduate student with a salary, been wanting a home for ~3 years but never set up a dedicated savings bucket for it.
I wanted to put 10% down to get a better rate and a big drop in PMI. I could cover the down payment, closing, moving and getting-settled-in costs in cash but I wouldn't have an adequate emergency fund. Currently I save something like 2/3 of my income so waiting to come up with a downpayment would have been doable and a smart move. But instead I took a loan from retirement funds to cover 10% downpayment and closing. It will take me a year to replenish my retirement account. My cash flow will get tighter and for the foreseeable future, I will only be able to save half of my gross income. Paying the bank, insurers and HOA for the privilege of living in 'my' home will cost me 30% of my income. I do plan on renting a room (equivalent to 10% of my income pre-tax or 1/2 of PI) but I did not want to build that into my budget in case there is vacancy.
I also scraped the bottom of the housing market barrel, buying the cheapest home that fulfilled 3 needs: 2 bed, garage, near public transport. I didn't get greedy (which is hard to do home-shopping).

I would have been better off waiting and saving. I am making a decision that is emotional; I recognize that but I looked into the numbers to ensure I would be comfortable with the decision. I only use my case to (1) demonstrate that it is possible to touch retirement savings but I would only do so if I had a means of replenishing it quickly, (2) suggest partial 'house hacking', (3) illustrate that it could adversely affect your liquidity and cash flow which can yield additional stress. I'm not sure how long it would take you to repay up to 27.5K but having a 401k loan hang like an albatross could be stressful.

JZinCO

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Re: Questions on First Time Home Purchase - am I close? :)
« Reply #10 on: January 17, 2019, 12:15:32 PM »
I would also get a 10 year mortgage, so your rate is low.
Payments on a 10 year mortgage on a loan that is >>3x one's annual income would kill the ability to save for retirement and other needs..

patchyfacialhair

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Re: Questions on First Time Home Purchase - am I close? :)
« Reply #11 on: January 17, 2019, 03:18:55 PM »
You don't make enough nor have enough down payment to buy in that price range (unless you are giving us your after-tax pay). Remember, just because the bank approves you doesn't make it a good financial decision to take a large loan.

A $285k loan on a $300k house for 30 years at 4.2% interest is:
$1393.70 monthly for principal and interest
plus
$XXX monthly for insurance
plus
$XXX monthly for taxes
plus
$XXX for PMI (since you'll be less than 20%.

So playing with numbers, you're looking at at least $1600 for a house payment, likely more though.

Plus, don't forget ALL utilities, plus an HOA if that's relevant, and another huge line item:

HOME MAINTENANCE: General consensus is to set aside 1% of the home value each year for maintenance costs. So $3k per year (or $250 a month) added to that if you're going to be smart about this.

That's not to mention that this would drain your cash reserves and/or require you to take a loan.

And that's not to mention that a 4bed/3bath is absolutely massive for a single person. I'm two adults and a baby in a 4bed/3.5bath and it is very much underutilized 99% of the time. Literally. 3 times a year we have all the family over and eat in the dining room and actually sit in the formal living room. The rest of the time we're in the family room, kitchen, or master bedroom.

AND, be prepared to spend more than you're planning to on move-in stuff. For us, we dropped $15k almost immediately on furniture, a new A/C, decorations, tools, etc. I'd say that you need to rent at least another year to build an actual emergency fund, and consider a place in a much lower price range unless you get a massive pay raise.

We purchased at around $400k with 5% down, but we also made at the time like $150k, and that has allowed us to continue saving for retirement and to pay off 100% of our non-mortgage debt, and still have extra to pay  for medical expenses fully (baby, dental work) and travel.

Jon Bon

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Re: Questions on First Time Home Purchase - am I close? :)
« Reply #12 on: January 18, 2019, 06:37:18 AM »
You are not there yet.

Do put more then 10% (preferably 20%) down
Don't borrow from a 401k (pretty much ever)

You don't have enough cash and that would be a big loan for one person to swing on that income. Sit on the sidelines for a bit, house prices will come down (at some point?!) and you will be very thankful that you did. I am not a fan of all these low down-payment programs, kind of how we got into the mess the first time around.

Papa bear

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Re: Questions on First Time Home Purchase - am I close? :)
« Reply #13 on: January 18, 2019, 06:56:44 AM »
You are not there yet.

Do put more then 10% (preferably 20%) down
Don't borrow from a 401k (pretty much ever)

You don't have enough cash and that would be a big loan for one person to swing on that income. Sit on the sidelines for a bit, house prices will come down (at some point?!) and you will be very thankful that you did. I am not a fan of all these low down-payment programs, kind of how we got into the mess the first time around.

I’ll disagree with you here under one condition.

Buy a house with as little down payment as possible, like 3.5% FHA. Sure you’ll have PMI, but buy something that needs work and that you can build equity in quickly. Do a lot of the work yourself.  Refinance and get an appraisal that gives you your 20% equity in the property.  Bam! No PMI, a cool house that you’re proud of, and very little up front cash.




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