Author Topic: Preparing for house hunt/purchase; what to do with invested downpayment ?  (Read 1642 times)

ysette9

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We are finally, finally moving forward with getting pre-approved and seriously looking at purchasing a house. We have been dithering for the last 5 years and in the interim, decided to put all of the funds previously flagged for down payment into the market, since we had no firm timeline on buying. Our reasoning was: there is nothing pushing us to buy NOW, so we'll buy when the stock market isn't down by a bunch and we find a good place at a price we are willing to pay.

Now that this is looking like something will happen this year, I'm wondering if I should start siphoning funds out of Vanguard and setting them aside is a money market or something equally boring in preparation. What would you do? I have funds in VTIAX and VTSAX. We have been contribution exclusively into VTIAX to try to get us to our target AA which means that if I drew from VTSAX, those are all dollars that I invested over a year ago. The other thing I could do is start diverting current contributions into a money market, though that isn't enough to get us to a down payment in the next few months.

Finally, my plan is to get pre-approved at three places: two big banks and one local credit union. Does this sound reasonable?

Scortius

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We are finally, finally moving forward with getting pre-approved and seriously looking at purchasing a house. We have been dithering for the last 5 years and in the interim, decided to put all of the funds previously flagged for down payment into the market, since we had no firm timeline on buying. Our reasoning was: there is nothing pushing us to buy NOW, so we'll buy when the stock market isn't down by a bunch and we find a good place at a price we are willing to pay.

Now that this is looking like something will happen this year, I'm wondering if I should start siphoning funds out of Vanguard and setting them aside is a money market or something equally boring in preparation. What would you do? I have funds in VTIAX and VTSAX. We have been contribution exclusively into VTIAX to try to get us to our target AA which means that if I drew from VTSAX, those are all dollars that I invested over a year ago. The other thing I could do is start diverting current contributions into a money market, though that isn't enough to get us to a down payment in the next few months.

Finally, my plan is to get pre-approved at three places: two big banks and one local credit union. Does this sound reasonable?

A few thoughts.

It doesn't matter when you put money into a fund.  The money is either there or it isn't, so don't worry about that part of it.

If you're planning on a big purchase of any sort that is a significant percentage of your portfolio, your time horizon just got a lot shorter and you should move to a safer and more liquid allocation.  If that means bonds, then sure.  If that means an Ally savings account, that works too.  If the down payment is a not-very-significant part of your portfolio and you can liquidate quickly, then you may not need to bother.

Pre-approvals will hit your credit rating a little bit.  Make sure you look into how that works so you can anticipate and minimize the effect.

I've seen a lot of evidence that online mortgage retailers can offer some of the best rates.  Given that many mortgage retailers sell your mortgage quickly, it may be ok to go that route.  On the other hand, I've heard that online companies have a tougher time working through hiccups during the closing process, so if you're looking at a unique situation, it may not be worth the trouble.

ysette9

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The down payment would represent about 15% of our overall portfolio. It is a lot in two dollars but isn't the difference between dinner on the table or not. From what you say below, I think I interpret you to mean that it then doesn't matter so much whether I put these funds in a money market or not?

We are in a super hot market with lots of offers and houses selling on the first weekend. I think I prefer a local outfit with experience dealing with this market and jumbo loans versus an online retailer, but I am happy to be convinced otherwise.

Scortius

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The down payment would represent about 15% of our overall portfolio. It is a lot in two dollars but isn't the difference between dinner on the table or not. From what you say below, I think I interpret you to mean that it then doesn't matter so much whether I put these funds in a money market or not?

We are in a super hot market with lots of offers and houses selling on the first weekend. I think I prefer a local outfit with experience dealing with this market and jumbo loans versus an online retailer, but I am happy to be convinced otherwise.

Yeah, as long as you can get the money when you need it, I personally wouldn't worry too much at 15%.  The main concern would be, if the market tanks, will you lose the ability to withdraw the down payment amount.  It's up to your level of risk tolerance.  Let's say there's a black swan crash and your portfolio loses 1/3 of its value.  Well, that 15% now becomes 22.5% of your portfolio that you have to sell off during a market downturn.  That may or may not be a big deal to you depending on how comfortable you are with that scenario and your estimation of the probability of such an event happening in that time frame.

For comparison, if you were drawing on 50% of your portfolio, a 1/3 downturn would jack that up to 75%, leaving you with only 25% of what you started with (compared to your expectation of having 50% left, you just lost half of your portfolio on a 33% drop).  In this example, I would look to get that money into a safer location.

ysette9

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Honestly, if the stock market tanked that much I think we would just choose to hold off on the house purchase for a year or two until things bounced back. At least, that was the plan of record when we chose to invest what had been flagged as down payment funds.

notsofast

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I wouldn't have any dollar I planned to spend in the next year in the stock market especially for something as crucial to the down payment of a house.  We could enter a correction at any time and it may takes weeks / months to recover.    I would think in this situation 10-20% down hurts much more than 10-20% up.

mountainfamily

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Just to add my two cents: We're in a hot housing market (Seattle) and recently took a stab at a house we liked. Most of our money is in index funds as well, which is good for now because the stock market has been up. We were planning to wait until fall on a home but this one seemed like a good fit so we went for it. We didn't get it, but we found out that we needed a check for the earnest money the morning after our offer was accepted - that could be $15 to $50k or even $100k depending on your situation. The down payments funds are due at closing; 2-3 weeks after the offer is accepted if you have a fast lender and everything lined up in advance.
 
This might vary from situation to situation, but I was a little caught off guard about having to pay earnest money so quickly. I've researched this process a lot, but going through an offer attempt was a good "dress rehearsal" for the real thing.

Good luck!

ysette9

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Very good info to know. I'll talk to my husband tonight about moving funds. I'm guessing I can just have vanguard take money out of investments and have it in a sort of money market?

Dicey

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Hi ysette9, I'm not exactly sure where in the Bay Area you are, but I'm over in the East Bay. I have also been in the Bay Area Real Estate Market for over 20 years. Not as an agent, as a homeowner. I bought my first SFH all by myself, thirty years ago, in SoCal. IIRc, I've purchased at least eight houses so far and look forward to my next deal.

The market is at a nice high, so I would move your DP money into something totally safe. Just a money market or plain vanilla savings account. Do not put it into bonds. They can be more volatile than people realize. Then wait.

I would then look long and hard at my current living situation. If it's tenable, I'd stay put. Start going to open houses to figure out what and where you want to buy. But don't buy yet. Look, look, look. Tell anyone who asks that you have an agent, but you're out looking on your own this weekend. That way they're less likely to pester you. If you really click with someone, you can circle back later to interview them.

When the market crashed last time and people were terribly underwater, it was easy to say they should have seen it coming or "What the hell were they thinking spending that kind of money?" Truth is, it's not so easy to predict the future. Having said that, we pay a lot of attention to the market. We're in the process of choosing our next flip project. We actually spent Valentine's Day at a Foreclosure Auction. (Mustachian romance.) The prices people are paying these days is fucking insane!

Let me be clear, I am not comparing Bay Area prices to anything but Bay Area prices. Don't listen to anyone from anywhere else telling you how much they can get for their dollar in their flyover state. That's not what I'm talking about. What I'm saying is the more I see here, the less I understand how the market can keep going at this pace.

I would be really hesitant to jump into the market right now. I would secure my down payment, then I'd start looking everywhere to figure out your likes & dislikes and what kind of work you're willing to do. Don't be in a hurry to buy.

Here is my primary point: You have to be so in love with what you buy that you will happily continue to make payments on it, even if you should find yourself underwater. That's not easy to do in any market, especially for first-timers. Since you're here, I know I don't have to warn you not to buy more house than you can afford.

One more thing: You don't need to shop lenders yet. What you need is to get pre-qualified and pre-approved by a lender. You'll need that when you make an offer, but you only need ONE. If you find a house and open escrow, then you shop like hell for the best mortgage.

And mountainfamily is right about the earnest money. When you do open escrow, the lender is going to want a shitload of documentation right away. Prepare as much as you can in advance (copies of tax returns, pay stubs, account statements) to expedite the process.

Above all, trust your gut.

Feel free to PM me if you have questions.