When to buy a house

[netskyblue]

I just paid off my last debt (with pretty much my entire savings) and now am focusing on saving up first an emergency fund, and second a downpayment on a house.

I want to buy in the $125k -150k range, which is a small "starter" home price in my area.

My plan has been to save up $10k for an emergency fund, which is about 6.5 months of expenses (as they are now, not strictly bare-bones), then save $50k to put down on the house.  Everyone is telling me this is a stupid plan, and that I should put down far, far less.  I expect it to take me around 7-8 years to save up this much.

My financials:

I take home about $1875 a month (plus 2 additional paychecks a year that I don't count towards my budget, they go to savings).  I am currently paying $750 in rent, plus renter's insurance - this is bundled with my car insurance, but I think it comes to around $10/month.

I have a surplus of around $300/month.  (16%, not great, I know.)

I just don't think I can afford to pay much more than $750-$850 as a house payment, including mortgage, taxes, and insurance.  That is my reasoning for wanting to put down such a large downpayment, so that I would only be financing 75 - 100k

What do people think?  Is my plan to save up so much a good one, or should I do what everyone is telling me, and put down much less on a house, much sooner?  I do hate to think of all the money I'm throwing away on rent, and who knows where interest rates will be in 7-8 years, but the idea of being so cash strapped really scares me.  I'm not guaranteed any raises.  I HOPE to find a higher-paying job, but I've been applying for 2 years, to no avail.  All these "advisors" have spouses and two incomes paying for THEIR houses.  Should I smile & nod, and continue with my plan, or are they right?

[daverobev]

Generally you can afford to take on 3-4 times your salary as mortgage, gross.

So if your gross income is $30k, you wouldn't want to take on more than $120k maximum, with $90k being more reasonable.

The main reason to buy sooner rather than later is (in the US at least) the likelihood of increasing house prices AND mortgage rates - these two don't usually go together (rising rates usually dampens prices, or at least slows price rises).

The thing with buying a smaller house sooner is that it's like forced savings - you're paying principal down. And secondly, you're "on the ladder" as they call it in the UK - if prices go down, no biggie, the next house up has likely also gone down; if prices go up, the amount your house goes up at least dampens the pain of the new house also going up.

You'd need to do a rent-vs-buy comparison, but I reckon you'll probably be better off in the long run if you can buy something for $75k in the next year or so - if such a house is available and livable. If the lowest end house IS $120k, ideally save up $24k (20%) and mortgage the rest. A $96k mortgage is still going to be in your price range, just about.

If you don't feel secure in your job, don't buy, full stop. If you feel you might want to move (to earn more?), don't buy unless you are VERY unlikely to move away for 5+ years (or would be happy renting the house out..). And if you feel anxious, then absolutely don't buy - renting is a very safe option in that you are able to move out, relocate, up-size, down-size at very low cost.

[abhe8]

so right now rent is 41percent of your take home pay? and you are looking to buy a house with a monthly payment of 750 to 850? you do realize 850 would be over 45 percent of your take home income every month. and thats not even including utilities?

are you single? if so, i'd look for somewhere cheaper to live. rent out a room or find roommates and save up the money for the downpayment much faster. i'd also look at ways to increase your income. can you deliver pizzas or wait tables? i'd also only look at homes to buy that you can use part of them as a rental, so a MIL basement or a nice extra bedroom or something. or look for more traditional roommates. with a bigger down payment and some rental potential, you can build up the equity in the house more quickly. another option might be a small duplex, that you could rent out? it just seems like over 50 percent of your take home income on housing (rent/mortgage and utilities) is way to much to be able to build wealth quickly.

[capital]

You should probably do the math on how much it costs to live in a rental for the next several years, versus how much it costs to buy a house. Here's a fun calculator:
http://www.nytimes.com/interactive/business/buy-rent-calculator.html?_r=0

Since you're apparently single, will a house be a lot more room than an apartment? You should probably either look at getting a small house (there are some tiny old worker's cottage type houses in the Midwest, and a lot of the immediate postwar houses aren't very big), getting roommates, or getting a condo.

Also, are you at a phase in life where you may move cities or houses within the next 5 or 7 years? Transaction costs on real estate can be huge.

Many Midwestern cities with very low house prices do have buy/rent ratios that are extremely favorable to buying:
http://trends.truliablog.com/vis/rentvsbuy-summer-2013/
They also didn't see the big price swings that happened on the coasts, so you're less likely to go deep underwater if the market goes to hell.

[netskyblue]

More information:

My gross is bit over $39k, but part of that comes in quarterly bonuses, and those go straight to savings, I do not build my budget around them, I just "live" off of 2 paychecks each month.  If I counted my total yearly rent against my total yearly take-home, it's about 30%.  I have been at my job for 7 years, but have been looking elsewhere for better pay, though I will not move cities.  I would like to live in a rural area just outside of my city, no more than 30 miles.

But I truly hate living "in town."  It's to the point where I'm wondering what's the point of working at a job I don't really enjoy, to pay for an apartment I don't want to live in, where I have no land, no garden, none of the things I want in life.  (Ok, a roof and heat are good, I guess.)  I grew up on a farm, and want a small acreage (2-4 acres) just outside of town, with around a 1000-1200 square foot house.  My apartment is 850 square feet, and only as cheap as it is because I've lived here so long and they've not increased rent on me in the last 5 years.  I know they are now renting out units similar to mine for $885.

Here, you MIGHT find a condo for 90-110k, but anything under 90k is likely a bug-infested hovel.  Most middle to upper-middle class families here live in 200-300k homes.  So I am looking at small.  Also, once I buy, I plan to live there for the rest of my life - I'm not one of those "upgrade houses" people.

My whole point in wanting to put down so much was to ensure that I'm NOT paying a vast % of my income on housing each month.

[Rural]

Congratulations on clearing your debt! now you can really start to plan.

First thought: Are you in tornado country? If not, in your position and with your rural leanings, I'd look at whether land and a mobile home would be a lower-cost way to get the land. $750 as a mortgage payment is a lot on your income.

Another thought: have you looked into renting out where you want to live? We rented a farmhouse while we looked for our land to buy and saved money. The rights to the farm didn't come with (pastures were rented to someone else) but I had room for a garden in the old garden plot, which was already fenced. I know such things aren't all that common, but you're looking at a timeframe of several years anyway, so you can just keep looking. You only need one, after all, and many times adult children have moved away and don't want to sell the old home place when parents pass or go into assisted living.

I'll also second the idea of looking for a side income, but I'll suggest something like selling on eBay would be less exhausting than delivering pizza. In the Midwest, you can buy secondhand for relatively lower prices and sell high(er) to people in higher COL areas. You would need to develop expertise on something(s) that's considered rare or collectible (or do something like clothes), but you can do a lot of the research on that on eBay itself.

[avonlea]

Congratulations on clearing your debt! now you can really start to plan.

First thought: Are you in tornado country? If not, in your position and with your rural leanings, I'd look at whether land and a mobile home would be a lower-cost way to get the land. $750 as a mortgage payment is a lot on your income.

Another thought: have you looked into renting out where you want to live? We rented a farmhouse while we looked for our land to buy and saved money. The rights to the farm didn't come with (pastures were rented to someone else) but I had room for a garden in the old garden plot, which was already fenced. I know such things aren't all that common, but you're looking at a timeframe of several years anyway, so you can just keep looking. You only need one, after all, and many times adult children have moved away and don't want to sell the old home place when parents pass or go into assisted living.

I'll also second the idea of looking for a side income, but I'll suggest something like selling on eBay would be less exhausting than delivering pizza. In the Midwest, you can buy secondhand for relatively lower prices and sell high(er) to people in higher COL areas. You would need to develop expertise on something(s) that's considered rare or collectible (or do something like clothes), but you can do a lot of the research on that on eBay itself.

I think Rural's advice is excellent.  In a tornado-free area, owning a mobile home is a great way to save money.

[netskyblue]

I've thought about a mobile home.  We do have tornadoes here, but we're not in "tornado alley."  I have *NO* understanding of how it works to buy a plot of land, get whatever kind of hookups needed installed, and buy a mobile home and get it hooked up.  Is that harder to get a loan for than a traditional house?

[Rural]

I've thought about a mobile home.  We do have tornadoes here, but we're not in "tornado alley."  I have *NO* understanding of how it works to buy a plot of land, get whatever kind of hookups needed installed, and buy a mobile home and get it hooked up.  Is that harder to get a loan for than a traditional house?

The loan availability depends on the bank. It's free to ask, though. You also have the option of looking for a place with a mobile in place, and there's the in-between of a place with hookups already installed.

With your longish savings schedule, you have the time to really do the research and to look for. The perfect place. It's a problem in terms of not wanting to wait, I know, but it really does set you up to find the perfect situation and know what you're doing when you find it. We were three years looking for this place and knew where to go for a land loan when we found it (small local bank). The MH that was here was listed uninhabitable, or we probably could have gotten a more traditional loan, too.

Many credit unions loan on land, too. Navy Federal offered us one, and a signature loan, too, for that matter, but the local bank had the best rates.