Author Topic: Buying: If less than 20% down payment, how much less?  (Read 460 times)

put me in coach

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Buying: If less than 20% down payment, how much less?
« on: February 14, 2019, 02:41:59 PM »
Hello,

This is my first time buying a house.

SO+my income=$140k

Debt=$30k in student loans

Credit=Excellent

Cost of living=VERY high (Bay Area)

$ for DP=$60k (leaves us with $ for closing costs and ~$10k stash for emergencies/repairs)

Handy man skills=not great

Using the rent vs buy calculator (New York Times), the verdict is buy despite HCOL.

Cheapest home prices for what we need=$500k-600k

I talked to a lender for the first time yesterday. He was encouraging us to put 3.5-5% down contending that would only cost us $50-60 more per month on our payment than if we put 10% down (all we can afford). After 2 years or so as the value of the home increases (presumption) and as we paid off the mortgage, we could likely refinance in order to remove PMI when our LTV would be <80%. I presume that would be at a greater interest rate, right?). He argues that having the extra $30-40k in cash is better than having a lower monthly payment.

1. His advice doesn't sound very mustachian. Am i correct?

2. But neither is my notion (admittedly) to buy a house with <10% dp. Should I give up on buying a house for now? We are paying low rent right now, but will need to upsize with a baby likely on the way sometime this year. (Renting a bigger place would cost us ~40% more than our current rent.) It's not possible to stay in the same place. We'd be okay with renting out a room in a new house. Our idea is to rent out the room, hustle to pay off the mortgage until we don't have PMI.

3. There is a special loan for houses in certain census tracts that is at 3.61% rate even if we only put 10% dp (trying to find out if there's a minimum dp to get this rate). It includes houses in neighborhoods where we're already looking. Should we look into the minimal dp strategy with this rate?

Thank you in advance for feeding me your knowledge. I need it.

LPG

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Re: Buying: If less than 20% down payment, how much less?
« Reply #1 on: February 14, 2019, 04:34:52 PM »
What a crazy coincidence. I too am on the verge of buying in the Bay Area.

A few thoughts:

  • I, for one, disagree with the lender about having some savings in the bank being better than a lower monthly payment. That's partly reflecting my values - I want to have a low monthly payment so I can get back to maxing out my 401k and IRA quickly! But it's also because I'm highly skeptical about the estimate of $50-80/month savings. I compared 10-15-18% downpayments on a $450k place and was seeing a difference of ~$300/month. Have you seen actual mortgage expense projections for those different downpayments? I think a 10% downpayment would help you more than you've been lead to believe.
  • I was shocked about PMI when talking to a broker. I was expecting it to be ~$350/month, and was adamant about pushing for a 20% downpayment (My estimates came from Zillow's mortgage calculator, and who knows how accurate that is). The broker informed me that, with my credit rating, PMI would be $40/month. No, I don't want it. Yes, I would want to hit 20% as fast as possible to get rid of it. But...that's not so bad. How's your credit rating? If you're 740+ you should be in decent shape.
  • Another thing to consider is just how much it locks in your cost of living. Property taxes increase at most by 1% of home value per year. Mortgage stays the same (Assuming fixed interest rate). Insurance probably slightly increases, but can't be too much. On the other hand, my rent has increased by 8-10% each of the last three years. Buying may/may not be a better financial deal right now but it sure will be after a few years of rent not increasing that fast. And since you plan to rent out part of the house, you could be on the positive side of those rapid rent increases. Does that apply to your situation? If you have to move to a new place and lose your below-market rent I'm guessing you'd end up in a place where rents rise pretty rapidly.
  • Can you tell me more about these special loans for houses in certain census tracts? I'm being pretty specific about where I want to buy, but if a special loan is a possibility I'm all ears.

put me in coach

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Re: Buying: If less than 20% down payment, how much less?
« Reply #2 on: February 14, 2019, 05:20:06 PM »
Hi, Thanks for the reply.

  • Ya, me too. I doubt it as well. He was a little slick. I'm a noob, and I still noticed it early. I have not run actual projections. Just hypotheticals with the lender.
  • Oh that's good news. I'll keep that in mind. Hopefully it can work out. Credit is 740+. Zillow's mortgage calculator sucks! Run away!
  • That's true... Place now has not raised rent in 3 years! Next place (and everywhere around here) presumably will.
  • Look up Eagle Community Loan by First National Bank.. Lucked upon it on our first open house. Still learning about it. 3.61% rate on 10% dp (maybe less? still learning, supposed to have a phone call today), and no closing costs up to $7k (said in my situation I'd probably pay $2k-3k in closing costs). The realtor at the open house said the only qualifier is the census tract of the home, nothing about income. But you cannot pair it with FHA assistance unfortunately.

put me in coach

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Re: Buying: If less than 20% down payment, how much less?
« Reply #3 on: February 14, 2019, 08:04:15 PM »
I feel like 10K for repairs and emergency fund are insufficient.  On a 600K house, that's what -- about 3K each month for mortgage/homeowners/prop tax?   That's about 3 months of liquidity if $hit hits the fan on your jobs.  For me, that would be running a little too close to the edge of the cliff.  One wind gust and I'm over the edge.

A.  I probably would not purchase a home that expensive when I made only 140K.  I would rent instead.

B. If you are determined to buy a house in that price range, then put 5% down and pay the PMI.  You should be leaving yourself sufficient liquidity in case a deep recession hits.  if things go really well, then you can prepay extra principle to eliminate part of the PMI; and if things don't go really well, then it's a good thing you kept that money liquid.

Do you have other liquid funds that you just have mentioned? 

What do you and your SO do for a living?  Are they the same type of job?

Ya, just talked with the lender. They'll require about 6-8 months in reserves for the loan we would want. That's just fine and is a good idea anyhow as you have suggested. That's not a problem for us. We will look to stretch our low-priced rent as long as we can. The child is no closer than 9 months away ;). That's when we'll look to move and by then we can save that much for the difference. 5% isn't an option for this house.

$600k is the top. We see options for 550, even 500. We shall see.

LPG is right, though. Rent can go up 10% on a whim. $2700 to start with then all of a sudden almost $3000. If monthly rate bottom line is $3100, that seems to me much more favorable, especially if we can rent out a room.