Need some financial advice - I want to buy a house!

chi83March 14, 2013

Hi Everyone,

I'm looking for some advice on my financial situation. I just turned 30 and it’s time for me to really consider the next big purchase in my life, which is my own house.

Here are my facts:

• I just moved to Orange County, CA which is incredibly expensive. A starter house in a safe area would run probably at least $400k. Rents are very high as well ($1,700 a month where I am currently) and I hate spending so much money every month without building any equity. I like the area and I would prefer to stay here but I don’t have any deep roots.

• I make $80k a year

• I contribute 10% to my 401k every pay period in higher risk accounts given my age but I have gotten very little growth and a little loss. Probably about $15k in there so far that I don’t plan on touching.

• I have no debt other than a $5k student loan that I pay $80 a month. I could have paid it off ages ago but I keep the installment to boost my credit score.

• I have about $10k in savings

• My credit score is 782

My biggest problem is that I do not have the $80k required for a down payment, or really anything close to that. I make decent money, have no debt and have the small emergency savings fund built up but that’s it. The cost of living makes it harder to save out here but I do my best.

My question is - I know I have a good credit score and I can easily make the mortgage payments. I know I can get mortgage insurance but it’s a little bit expensive and I’m not sure if that is the best financial decision, especially since I read that the FHA just required that the insurance be paid for the lifetime of the loan instead of just to 22%. I’ve also heard of taking out two mortgages - the main one and then another to cover the down payment. Does anyone have any suggestions on options I might have?

I’m trying to weigh the pros and cons of spending more on insurance and probably a higher interest rate by not having a full down payment vs. continuing to pay high rent and trying to save up for years until I have enough and risk losing out on the lower housing prices and great rates.

I am very new at this so if anyone has any advice I would really appreciate it. I really want to own my own home! Thanks.

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You are not ready to be a homeowner.... yet.

Save, save, save as much as you can. You need a down payment. You need money for renovations and upkeep. You need money for furnishings. You need money for taxes.

    Bookmark   March 14, 2013 at 5:31PM
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I was afraid of that. You're probably right. I will keep at it and hope the market doesn't improve too much ;)

    Bookmark   March 14, 2013 at 5:37PM
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Also if you are single I would suggest waiting. If you have a long term relationship or even marriage in your future owning a home might turn into a noose around your neck if you decide to move. May I suggest you read books by Elizabeth Warren(excellent book : The Two Income Trap), Jane Bryant Quinn and Michelle Singletary ? Michelle Singletary also has a column in the Washington Post.
Here's how to tell quickly if you are ready to purchase:
Add up all housing expenses, and I mean all: homeowner's insurance, PMI(if you are required to purchase it)mortgage, taxes, maintenance(2% of purchase price each year), garbage disposal, water, electricity(this will increase substantially going from an apt. to a house) heating, furnishings(ie; window treatments, renovations, paint). Divide by 12. This is the amount you should be saving each month.

    Bookmark   March 14, 2013 at 7:18PM
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A few years ago, when house prices were advancing rapidly in many areas, especially in California (parts of it, at least), people were in a hurry to buy, to have that house working for one as well as one's hands and brain: two income centres are better than one. Not quite: the house would be building asset, as the value (above transfer costs) grew greater than the total of the down payment, ongoing payments, and the amount of mortgage still owing.

Some stretched their savings and income as much as possible ... too much, when they thought that if a $200,000. house went up 10%, that was $20,000. ... but a $300,000. house would almost certainly go up $30,000. ... and they liked that scenario better. So they overbought.

The cold rain shower in recent years came as a major surprise to many - that was a shocker.

"I like the area and would prefer to stay here but I don't have any deep roots", was part of your original post.

Many say that an owner-occupied house should be a long-term investment, and buying not a good idea if one were considering less than a five or ten year time horizon, as there are evaluation, inspection, lawyers', real estate fees and a good deal of costs to get into it, above the actual cost of the house.

I don't think that you spoke of how long you've been there, up till now, so how many tentative roots may have been put down.

Do you have some friends, relatives, etc. who are capable managers of money, especially ones who've been involved with buying and selling a home (or more) for themselves? Most people like to be consulted about issues with which they are familiar ... and spending some time picking their brains is - free.

If you're seriously considering it, it would be a good idea to visit open houses and talk to some real estate agents, and mortgage brokers and others who may have a depth of knowledge about the real estate market in your chosen area. - or help you choose an area that might be ideal.

If your continuing in the area may be a bit iffy, though, I think that it would be a good idea to do some learning, but not to the point of purchase, now.

I agree that you'd probably feel better with the situation if you had money for an adequate down payment, with some to spare, for some of the other start-up costs that others have mentioned.

When it comes to mortgage insurance, I don't know what alternatives you may have, but some of my friends recommend having term life insurance with an outside carrier, rather than with the bank's recommended carrier, for insurance through them will have the bank as beneficiary, and you'd prefer to have your trustee receive the money, as it might not be the wisest thing to pay the mortgage in full. Also, the amount insured with the bank's carrier declines, as the balance owing decreases, but your term insurance would be for an equal dollar amount, which would stay constant through the whole term, which would allow your trustee to pay the remaining mortgage in full and have some left over for other needs of the estate. Often that cost is even lower than for regular mortgage insurance.

Many folk find dealing with current money issues easiest, but one needs to have long-term goals and plans, as well.

Learning how money works is an interesting hobby ... AND IT PAYS WELL!

If you don't boss your money ... quite likely it'll boss you. And usually your part of the bossing comes now and in the near future ... while the money's bossing of you ... comes later, when you can't afford some things that you'd like, e.g. home, education for kids, retirement, and such.

Good wishes as you proceed with your plans.

ole joyful

    Bookmark   March 15, 2013 at 5:46PM
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With $80k salary, that's about $4700/month take home pay. Safest rule is your mortgage should not exceed 30% of your take home pay, so that means you can afford about $1400/month in mortgage monthly. That's about a $275k home with a 5% down payment, with a good interest rate.

We did an FHA loan for our first home (a condo - but in the even more expensive SF bay area). It was fine, and the PMI is currently tax deductible actually.

Condos and townhomes are a good option for first homes in CA, your exterior and structure costs are budgeted in HOA fees, and your utility costs are similar to an apartment. However as someone else mentioned you are single now, what if you meet someone and want to move in together but they don't like your home or location.... many couples want to buy a home together that suits them both.

On the other hand, not sure what it's like down in SoCal but up here the real estate market is back on fire. Inventory is very low and prices are rising fast. If you find an affordable home, it can help protect you against the crazy rent market. Rents here average over $2000/month for 1 bedroom, we pay less for our mortgage and HOA fees.

As for repairs etc, that's what an emergency fund is for.

    Bookmark   March 16, 2013 at 12:51AM
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With your credit rating, low monthly debt load, and today's mortgage rates, you would easliy qualify for a mortgage in the 400K rage. Home prices are rising in Orange County and mortgage rates will likley rise in a few year, if not earlier. Those are reasons to buy sooner rather than later.

Other posters have given you reasons not to buy so I won't go into them. Bottom line is it's very hard to tell you what is the best financial decision for you to make. The fact that you hesitate says that you're probably not ready to take this step. Why don't you start putting away some money for a downpayment and revisit the issue down the road some months or so?

Since you're single, you might spend the time looking for a bargain-priced fixer-upper that you could rehab over time. That might make better financial sense for you than buying one in move-in condition with little or no downpayment.

Whatever you do, good luck!

    Bookmark   March 16, 2013 at 1:46PM
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I agree with the other comments. You might not be ready to be a homeowner yet since you just have a little emergency savings fund. Better keep it for emergency purposes. I know it would be good to pay for your own house instead of paying for a very high rent. However, it would be wiser if you just save for a moment for your downpayment. Save more and when you're ready, go. Goodluck.

    Bookmark   March 18, 2013 at 10:29PM
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Thanks for all the advice! I spoke with my grandparents and they are willing to loan me the money for the down payment so that is something else to consider.

    Bookmark   March 18, 2013 at 11:26PM
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How would you pay them back?

    Bookmark   March 19, 2013 at 4:51PM
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So you can't afford a mortgage, and you think more debt helps?

Bad idea!

    Bookmark   March 19, 2013 at 5:12PM
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By the calculations that I've done, I could buy a house with a similar amount to what I'm paying for rent (including paying my grandparents back), including taxes and misc costs. I'm not looking for a $600k house here but $300k-$400k a little further out.

To me, it doesn't make sense to spend years and years saving up a down payment while paying so much in rent when I could be building up equity. If I do nothing but save for the next 6 years, that's over $130k that i'm spending in rent alone and that doesn't seem like a great financial decision.

I agree I do need to save more, though. I want a larger emergency fund and then another for other expenses that come with owning a house, not including the down payment/mortgage.

Honestly I don't think I will ever be able to afford a house here because by the time I save up enough money, the prices will probably be much higher and I will be constantly trying to save up enough.

Thank you for your suggestions.

    Bookmark   March 19, 2013 at 7:35PM
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Actually, there is fair argument to be made for not owning a home or at least it is not the right financial decision for everyone. Your favorite search engine should give you more information and you might want to take a look at the attached link.

Here is a link that might be useful: The Myth of Home Ownership...

    Bookmark   March 20, 2013 at 8:14AM
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If I were in this situation I might consider buying a double/duplex. Why not have an investment property as well as a place to live?

If you don't like it you could rent out both places.

Since your grandparents are willing to help, is there a possibility (in the future), they might be interested in living downstairs from you in a double?

I know a few folks who have done this. Win/win for the parents and the kids, plus the mortgage/rent deductions.

    Bookmark   March 21, 2013 at 4:36PM
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One person said to go to open houses and talk, but make no commitment or sign anything---just to see what to do and what is avaiable. Also you might check out condos. There are alot in Orange County but do watch out for HO fees. Sometimes there are good articles in the Orange County Register paper in the RE section to help you out. My relatives live there. Maybe talking to a good financial advisor, may help (or maybe your grandparents could help) with some advice as to how and where to put your money. Even the colleges offer courses in that area. Many companies do that too, in that area.Good luck

    Bookmark   March 25, 2013 at 6:38PM
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Good research article you posted MikeK. I agree with you that homeownership is not always the "dream" people think it is. I know many people here and abroad who wish they were renting right now.
Have you ever read Max Kaiser or Richard Wolf ?

chi83--This statement alone would scare me if I were advising you: "I’ve also heard of taking out two mortgages - the main one and then another to cover the down payment."

"I could have paid it off ages ago but I keep the installment to boost my credit score."
Debt paid off is good for your FICO score. We have been fooled into running our lives based on the magic FICO score. Pay off the student loan there is absolutely no need to keep it. Having the student loan paid in full and a large down payment will give you leverage when mortgage shopping..

    Bookmark   March 27, 2013 at 7:39PM
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Really? I am not an expert by any means but I assumed 10 years of payments on an installment loan boosted the credit score, since my only other credit types are cards and I know a variety is helpful.

I pay less than 2% interest on it so I assumed the small amount of extra money would be worth the credit boost. I'll have to do some more research on that.

    Bookmark   March 28, 2013 at 2:06AM
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You've already established your record of making payments on time. Now you are just throwing money away. Pay it off -- that looks good to a lender.

    Bookmark   March 28, 2013 at 7:10PM
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Paying off debt early does NOT always save money - especially if the interest rate is low. Better to put that money towards a home purchase, or invest it in mutual funds.

chi83, I suspect a lot of the responses here are not from people living in CA, and they do not understand the housing market or rent market here, and the fact that it IS very common to have 2 mortgages. However the double mortgage is almost always for homes over $500k when a "jumbo" loan is needed.

I would highly recommend looking at condos in the $250-$300k range - I think any more than that would be in over your head at this time. It's very tempting to justify just a bit more" when home shopping but you really need to look at the reality of the total cost - mortgage, property tax, insurance and HOA fees (or the higher cost of regular maintenance if no HOA). The total figure is often about 2x more than the "mortgage" payment alone that the mortgage companies and online calculators will quote you.

Since you need to save more, you need to be sure that you can live well within/under your means. If you stretch your budget, you will not be able to save any more and then your emergency fund will be depleted when there is an emergency and you will no way to restore it.

    Bookmark   March 31, 2013 at 1:44PM
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Hi. I'm in OC too. Been here since the early '70's. Welcome!

The other thing you want to watch out for is Mello-Roos taxes in newer neighborhoods. I paid those on my first condo, but it was based on a mortgage not much over $125k. They can add quite a bit to your property tax bill and they are not tax deductible.

Don't rush it. Rent sucks, but so does being house poor. Spend some more time here. North OC is a lot different than South OC. I've lived in both and done a complete 180 on where I prefer to be.

In the 20 years I've owned homes, I've been in an equity position and upside down on several occasions. It will work out, but wait until the time is right.

Oh, and that thing about waiting until you're married....I think it's nuts. Don't wait to do anything you want (and CAN) for someone else. I know someone who wants to go to Hawaii only when they are married. It's a 5 1/2 hour flight. This person is almost 50. They haven't been.

There is no guarantee that two people always mean two incomes. BUT, don't do something you can't afford on your own either.

    Bookmark   April 1, 2013 at 11:28PM
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Thanks for all of the advice! I'm saving like crazy. I've just started dating someone who is actually going through the process right now and actively bidding on homes, so I'm watching closely to see what to expect. It's a good learning experience but it's also fun because I can live a little vicariously. :)

    Bookmark   April 2, 2013 at 12:52PM
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You have gotten a lot of good advice here. I agree that socal is a different animal than other places (I live outside of L.A.), although our utilities actually went down when we moved out of our apartment and into a house.

What I would do is see what is out there in your price range and add all of the monthly expenses together (include some extra for repairs.) If it is over what you currently pay in rent, put the difference in the bank and see if you are comfortable living that way for a while.

Personally, I am not a fan of HOAs as I can usually find a better deal on my own insurance, utilities, etc., but I understand that that may be your price point at the moment. Some places have outrageous fees and if you look at enough complexes, you will be able to get a better gauge of what is reasonable. Take this time to educate yourself while saving more money. Get the best area you can comfortably afford. Try and get into the area that has the best school district. This will help you if you decide to sell or rent your home later. Good luck!

    Bookmark   April 4, 2013 at 5:17PM
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Just another thought -
Make sure to speak to a real estate attorney before taking the money from your grandparents. If it is above the $14,000 gift limit and they give it to you or lend it to you below the current rates then it may be taxable under the gift tax laws. Banks often ask where the down payment is coming from or ask about large spikes in bank deposits partially for that reason.

Just something to look into.

    Bookmark   April 11, 2013 at 9:45PM
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Sounds to me like you are ready to buy. You've got a good handle on your finances and seem to be thinking about this carefully.

I bought my first house at age 29, and it turned out to be a really smart financial move. Fixers-uppers are a great way to get into an expensive market cheaply.

It's great that you're dating someone who's actively looking for a house, you are smart to vicariously learn from their experience.

Good luck! I think you'll do well.

    Bookmark   April 15, 2013 at 8:56PM
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Thanks! I am a little worried but for new reasons. I tagged along with him last weekend on his round of open houses and most of them that we saw were only listed for 1-3 days and already had multiple offers and bidding wars. My favorite one I saw had been on the market for 2 days and already had a sight-unseen cash offer for asking price.

Crazy! I will just keep saving and see what happens. Maybe we're in a mini bubble in CA now due to low inventory.

    Bookmark   April 16, 2013 at 3:06PM
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I know in the SF area, briefcases of cash are going to open houses, and some properties are going 110-120% of asking price with no contingencies.

    Bookmark   April 16, 2013 at 5:20PM
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Forgot to add...
and some people are waiving inspections and the like, just to get the property.

    Bookmark   April 16, 2013 at 5:21PM
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Just a thought: In order to get into the housing market back in the day, I bought a *fee simple* townhouse (i.e., not a condo). Not huge, but it has 3 BR and 2.5 BA, basement family room with fireplace, and a small fenced back yard. Because it's fee simple, the quarterly HOA fee is less than most monthly condo fees on smaller places.

    Bookmark   April 21, 2013 at 12:57PM
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A single person lacking financial resources buying into this stage of the housing market is not only essentially gambling, but has arrived very late at the party.
Don't do it. Stay flexible and keep saving.

    Bookmark   May 24, 2013 at 8:25AM
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