First Home Purchase when Mostly FI: How to Make It Work?

[aworkingrachel]

I'd like to buy a house or condo in 2021, but since I don't fit the typical profile of a first-time homebuyer I'm having a little trouble figuring out how much risk I'm taking. Can you help me figure out how much I can realistically afford?

Age 40, no kid. I downshifted careers a few years ago and am more or less FI but still work full time, with income of about $35K per year. I'm also in the process of getting divorced from someone with way more assets than me (divorce will be final well before any property purchase). Expenses since the have been running about $2700 per month, including $1150 in rent and a $400 car payment (new car bought when I was richer). I'll stop paying for my ex's health insurance in January or February, which will loosen things up by about $400 per month, leaving me living mostly off my salary but with a gap of a few hundred per month. I could make this up through freelancing fairly easily if I wanted to. I have no plans to go back to more lucrative full time work and my salary at this job will likely top out at about $40K long-term.

I talked to USAA several months back and qualified for a mortgage of $135K. They do not take assets into account, and from some Googling it looks like an "asset-based" mortgage is a unicorn that few people have been able to find. The sort of place I'd like to buy (2-bedroom condo or small house) will be somewhere between $200 and $300K, probably closer to the higher end. Properties under $200K exist but usually have a lot of issues. I'm not much of a handyman and have no real desire to become one, though I'm certainly willing to do cosmetic stuff like rip out carpet and replace cabinets.

My assets break down as follows:
403b: $87K
Traditional IRA: $407K
Roth: $72K
Taxable: $210K
about $8K in the checking account

Total: $846K

What I'm considering doing:
- mortgage for full amount I'm eligible for
- taking $10K out of IRAs for the "first-time homebuyer" exception
- pay the rest in cash. Set my max at $300K, including any cost for a parking space. Hope to pay closer to $250K.
- having decimated my taxable account, do an IRA ladder to build that back up for the gap in living expenses, emergencies, etc.

Other options:
- Finance part of it some other way? (0% credit card?)
- Cosigner? (Not super likely my parents or friends would go for it, but I could ask...)
- Compromise on the condition of the property (very willing to do ugly, not very willing to do major rehabs)
- Compromise on location of the property (the areas located near my job are a mix of fairly high-end areas and very poor areas--specifically the Austin and Lawndale neighborhoods in Chicago, which...I'm pretty open minded but I'm not sure I want to open my mind that far)
- Keep renting until I hit some magic number? (Is there a formula for this somewhere out there?)

I would be intending to live in this place indefinitely, though I'm interested in remarrying someday and there's a tiny chance I might move out of state, so I do want to retain the option of selling or renting it out.

How much of a risk would I be taking by using most of my taxable funds for a property purchase? I feel like this is risky but not, like, ruin your future risky. What's your take?

[SwordGuy]

We went thru this process last December/January.

The problem we had was that the mortgage company simply did not know how to do it.   I had to scour the internet for the Fannie Mae/Freddie Mac rules and then I was able to get it thru.

Here's what I did:

https://forum.mrmoneymustache.com/real-estate-and-landlording/mortgage-requirement/

[BikeFanatic]

Hi Rachel,
welcome, and also I am sorry to hear about the divorce, even if it is for the best it is alot to go through and very stressful.
I also bought a house at 40, and kept it 16 years. You are not too old to be a first time home owner, not at all.
You did not mention why you want to buy a house? Is the apartment too expensive or too big? Do you not like where you live? Sometimes rentin seems more expensive than home ownership, however there is much to home ownership that people do not calculate in.

I think you should wait a year, if you like your place and even consider a roomate if you have a 2 bedroom. Being in a hurry to buy
after so much change in your life, feels too rushed to me. You have a deficit of 400 a month already and I suspect home ownership will cost more than rent?  For example you did not mention how much you would pay per year in property taxes, and you have to calculate that in to your expenses. Taxes can be 1000- 4000 or more a year, and some condos have fees as well. Also you need a nice safe neighborhood, dont want to compromise  too much on location. MY home was a mortgage of 1300 per month on about 235 K financed and my taxes were on the low side at about 1500 per year. There are mortgage calculators online that can help you calculate your payments. But you have to add higher bills in for home insurance 1200 a year for me, higher electric and heat bills for a house than an apartment. Upkeep will be a few thousand a year, there are closing costs, decorations , blinds , a trash barrel, gardening/landscaping, and all sorts of things that means your first year will be expensive. 
As far as finaces go It seems that you are very close to FI, but you need to dial in your post divorce expenses. But you are in a great position and better off than I was at your age. (I was making 50 K a year when I financed the home for about 275K).

I will say though after all that, you do have enough to buy, just consider how your life may change and who knows you may meet someone and buy a place together. Good luck and congratulations on being in a very good way financially.

I am no expert at the financial side  but I am FI at 56 years old.

[Dicey]

Illinois taxes are insane. I would keep on renting for at least another year or three. You  on't have enough cushion to make a mistake. Use this time to research the market so you know exactly what to buy and where. Do not rush into this decision.

[waltworks]

I would under no circumstances buy a house in IL.

Just too much risk of property taxes exploding even further if the feds don't bail out the state and/or allow bankruptcy.

-W

[aworkingrachel]

Thanks for the responses so far!

@SwordGuy: Thanks for the link, I will definitely check that out.

@waltworks and @Dicey: I hear you on the state of Illinois, but, well, this is where I live. I like my current job and I value being close to family. I've finally hauled my brother and parents up here from Texas after 16 years, so I don't see leaving anytime soon. I don't necessarily want to be a lifelong renter just cause the taxes are high. But yeah, this might be more of a 2-3 year plan than this year.

@BikeFanatic: Thanks, and yes, it has already been a lot of change quite fast. The reasons I'm interested in buying:
1) A more aesthetically pleasing place--being able to paint, choose colors of carpet, etc.
2) A "nicer" place--as a renter it seems to be a pain just finding things like a dishwasher and a place that allows pets.
3) Moving less--I am so tired of the "move or don't move?" decision every year.
4) Hopefully more connection with neighbors
5) My last two landlords have been openly racist, and I'm tired of giving my money to people whose values I don't respect. (Not saying a condo board or bank necessarily shares my values, but at least it's less direct...)

As I write this I can hear my frustration with renting, which might be a point in favor of waiting a bit! I'm just not really sure where that magic number is for someone in my situation who will necessarily have a lower mortgage and higher down payment than is discussed in most "can you afford it?" home buying advice.

[waltworks]

Renting is a very effective hedge against all sorts of potential pitfalls, but if you insist on buying something, sounds like you can finance about 50% of it (if you find the $250-300k place you're talking about) and then you'll still have plenty of money in the taxable account, especially if you use $10k worth of FTHB IRA money.

Seems pretty easy/low risk given your assets. You might or might not need to play around with an IRA ladder but given that it sounds like you're still working and your actual need for investment income is minimal (plus you'll have the spouse insurance and car payment gone in the near future) I doubt you'll have to bother with that.

-W

[Dicey]

I'm also a fan of owning, so you're not going to get pushback from me on the overall concept. I also understand that you live where your heart/family/work are. However, this feels like the top of a buyer's market and you are unsure of what you want. In your shoes, I would study, decide where the best place to be is, and keep accumulating dry powder. When the market dips, and I am certain it will as a result of this pandemic, you will be in a better position to act swiftly and make a good decision.

Buying low vs. at the top of the market will help mitigate the tax hit.

Just for fun, per Zillow, my grandmother's former home in Elmhurst, IL is valued at $385k. The 2018 property taxes (the most recent year available) were a whopping $8,015.

A friend who lives in a "three stop light town" between Chicago and Rockford owns a home that Zillow says is worth $289k. Their 2018 property taxes were $7,769.

One of our SoCal rentals is worth about $362k. The 2018 property taxes were $3,597. Huge difference. FWIW, it's also in a much posher enclave than the IL examples + no snow.

That's part of why I said you don't have enough cushion for a mistake. That's also why I think being a renter in your state, especially at the rate you're paying, is a much better deal than you realize, even though I agree with all your reasons for wanting to buy.

Another thought: after looking at the two properties above, I am shocked at how little they have appreciated in the last two decades. California may be expensive, but at least my shit at least doubles every couple decades or less. It is historically very unlikely that any property you buy in IL is going to do as well as the stock market. And we haven't begun to talk about winter utility costs and the more expensive property upkeep you face, due to harsh winters. The opportunity cost of moving money out of equities and into a personal residence is potentially huge.

[aworkingrachel]

@Dicey: Thanks, Dicey! By "dry powder," do you mean letting the investments continue to grow or increasing a cash position? (Currently virtually nil.)

I've never really thought of a house as an investment per se--more like an expensive luxury. I figure even if property values were increasing, when I sell I'd presumably want to move into something similar in a similar location, so the advantage is more in having flexibility with equity, HELOC lines of credit if that's your thing, etc.

I wonder about the heating and snow situation long-term--no snow yet this year, and we've had some 60-degree days in December. :) I don't know if the market will ever reflect this, but I like the climate change scenario in Illinois vs. anywhere in the south or on the coasts.

[Wintergreen78]

I'm also a fan of owning, so you're not going to get pushback from me on the overall concept. I also understand that you live where your heart/family/work are. However, this feels like the top of a buyer's market and you are unsure of what you want. In your shoes, I would study, decide where the best place to be is, and keep accumulating dry powder. When the market dips, and I am certain it will as a result of this pandemic, you will be in a better position to act swiftly and make a good decision.

Buying low vs. at the top of the market will help mitigate the tax hit.

Just for fun, per Zillow, my grandmother's former home in Elmhurst, IL is valued at $385k. The 2018 property taxes (the most recent year available) were a whopping $8,015.

A friend who lives in a "three stop light town" between Chicago and Rockford owns a home that Zillow says is worth $289k. Their 2018 property taxes were $7,769.

One of our SoCal rentals is worth about $362k. The 2018 property taxes were $3,597. Huge difference. FWIW, it's also in a much posher enclave than the IL examples + no snow.

That's part of why I said you don't have enough cushion for a mistake. That's also why I think being a renter in your state, especially at the rate you're paying, is a much better deal than you realize, even though I agree with all your reasons for wanting to buy.

Another thought: after looking at the two properties above, I am shocked at how little they have appreciated in the last two decades. California may be expensive, but at least my shit at least doubles every couple decades or less. It is historically very unlikely that any property you buy in IL is going to do as well as the stock market. And we haven't begun to talk about winter utility costs and the more expensive property upkeep you face, due to harsh winters. The opportunity cost of moving money out of equities and into a personal residence is potentially huge.

I’m also in my early 40’s and also considering buying a house for the first time. I’m in California and one of the big drivers of my decision has been the increase in housing prices for renting and buying. I don’t view buying a place as an investment, but rather a way to fix my housing costs going forward.

If the situation in Illinois is that houses haven’t appreciated, but taxes are high and could potentially increase in the future, it seems like that is a financial argument for renting. At least it means there isn’t pressure to buy right away. If you rent for a year, are you likely to find a place next year for about what it would cost to buy a place this year? If prices are going up 10% a year and you know you want to buy in a particular location, then buying right away might be a good idea. If prices are basically flat, then the pressure to buy right away is much less.

I’m also a fan of not making any big decisions/commitments when other thing in life are in transition.