Home purchase with a minimal down payment

[skruggie]

I know that the general advise is to not purchase without at 20% down payment. I would however like to propose the situation I am in and ask where the holes in my plan are. Aside from the fact that I don't have as much money in the bank as I would like, which is obvious

I live in Southern California and am looking at purchasing a 2 bedroom condo in the realm of $250-$320k depending on what I can find in the neighborhood I currently live in.

I am looking at FHA loans. I have the 3.5% required down payment no problem - once I put that down I have about $12k in my savings. I have no intentions of touching any retirement money, of which I currently contribute 20% of my salary to. I have about 107k in my retirement funds.

I am taking the next 6 or so months to save another $10k for closing costs and other expenses that go with a new home purchase. I don't intend to even start seriously looking until late summer.

The monthly payment including taxes, HOA, PMO, etc. will be about $500 a month more than what I pay in rent right now - I can easily take that $500 out of my disposable income and not miss it. Even with doing that, and my home payment, I still have approximately $1000k a month that I can save above and beyond my regular bills.

I have no debt at all - just the regular expenses such as groceries, cell phone, utilities, entertainment budget, etc. I am extremely aggressive about saving. If need be I can cut back on some of my entertainment budget, which is certainly higher than it needs to be.

Without actually listing out my expenses, I'm looking for some general advise as to in my situation, if it makes sense to go ahead and do this without the 20% down payment. I would need about $50k down to hit 20%, which is just not realistic for me. I've recently turned 40, and I don't want to wait too much longer to start a 30 year mortagage.

Unfortunately I did not embrace money management until the past couple of years, when my paycheck started to significantly grow. I feel a sense of urgency due to my age, and not wanting a mortage when I am ready to start thinking about retirement.

My credit score is in the 740's and completely clean, if that weighs into this decision at all.


Thoughts? Pros? Cons?

[skruggie]

Left out a vital piece of information - my salary is 95k, and I am single.

[disneysteve]

I vote no.

1. Nobody should ever buy a house with only 3.5% down.
2. The most you should consider spending for a house is 3 times income, so $285,000 for you, but that also assumes you are putting down 20%. That works out to a monthly payment of about 28% of income, which is also the recommended limit.
3. As an owner, your expenses will be higher than as a renter, so you need to account for that in your budget and in your emergency savings.

[skruggie]

Just to plat devils advocate - and I'm still mulling this all over, trying to weigh the pros and cons.

Is it more important to have a 20% down payment than to aggressively save for retirement? I don't see the option of doing both concurrently.

I know the standard advise is 20% down. What I don't really understand is for someone with no debt and enough money to cover expenses, the reasonng why.

I'm not saying 3.5% is ideal, or that I have enough money in the bank at the moment to be comfortable with moving forward, because I do not. Just trying to better understand the reasoning.

[maat55]

I would consider buying with 3.5% down only if the payment were no more than 25% of take home pay on no more than a 20 year note. I know this is a hard pill for California, but I value financial security over housing.

[Seeker]

I know that the general advise is to not purchase without at 20% down payment. I would however like to propose the situation I am in and ask where the holes in my plan are. Aside from the fact that I don't have as much money in the bank as I would like, which is obvious

I live in Southern California and am looking at purchasing a 2 bedroom condo in the realm of $250-$320k depending on what I can find in the neighborhood I currently live in.

I am looking at FHA loans. I have the 3.5% required down payment no problem - once I put that down I have about $12k in my savings. I have no intentions of touching any retirement money, of which I currently contribute 20% of my salary to. I have about 107k in my retirement funds.

I am taking the next 6 or so months to save another $10k for closing costs and other expenses that go with a new home purchase. I don't intend to even start seriously looking until late summer.

The monthly payment including taxes, HOA, PMO, etc. will be about $500 a month more than what I pay in rent right now - I can easily take that $500 out of my disposable income and not miss it. Even with doing that, and my home payment, I still have approximately $1000k a month that I can save above and beyond my regular bills.

I have no debt at all - just the regular expenses such as groceries, cell phone, utilities, entertainment budget, etc. I am extremely aggressive about saving. If need be I can cut back on some of my entertainment budget, which is certainly higher than it needs to be.

Without actually listing out my expenses, I'm looking for some general advise as to in my situation, if it makes sense to go ahead and do this without the 20% down payment. I would need about $50k down to hit 20%, which is just not realistic for me. I've recently turned 40, and I don't want to wait too much longer to start a 30 year mortagage.

Unfortunately I did not embrace money management until the past couple of years, when my paycheck started to significantly grow. I feel a sense of urgency due to my age, and not wanting a mortage when I am ready to start thinking about retirement.

My credit score is in the 740's and completely clean, if that weighs into this decision at all.


Thoughts? Pros? Cons?

Why (the bolded part above)? I understand not wanting to pay a mortgage when you are 70 years old, but if you buy today that may still be the case.

Why buy now at all? You are looking at 500+ more dollars spent per month or 6k per year. In 5 years you would have 30k just on that money. I know that 5 years sounds like a long time, but it really isn't... and especially if you can save an additional 1k per month. You can literally half that time if your really wanted to purchase soonish.

If you can save $1.5k per month now, without stressing finances too much, then my advice would be to give that a shot for a few months. See if you can really live under that financial constraint. Then look at your savings and this question. Look at job security.

You really have very little to fall back on if anything were to happen. That's the weak point in your plan. Without describing your finances, deep down inside, you know that this probably is not a good idea in spite of the fact that you want because of your age.

It's not that you need, it's that you want. Save first.

[Seeker]

Just to plat devils advocate - and I'm still mulling this all over, trying to weigh the pros and cons.

Is it more important to have a 20% down payment than to aggressively save for retirement? I don't see the option of doing both concurrently.

I know the standard advise is 20% down. What I don't really understand is for someone with no debt and enough money to cover expenses, the reasonng why.

I'm not saying 3.5% is ideal, or that I have enough money in the bank at the moment to be comfortable with moving forward, because I do not. Just trying to better understand the reasoning.

Just to add to this, one option might be to curtail the saving for retirement in order to advance your saving for a house. Maybe save 10% for retirement now to accumulate 20% of a DP sooner. Then ramp up your retirement once you get that DP saved.

The reasoning why is always the same. No one ever knows what the future holds for them. Here in CA, there's always a chance for an earthquake that can take all. There's always something that can befall us individually as well (job, health, etc).

You're single, and that can make it harder to qualify. Not impossible, just more risky for some lending company to take you on.

[skruggie]

Just to add to this, one option might be to curtail the saving for retirement in order to advance your saving for a house. Maybe save 10% for retirement now to accumulate 20% of a DP sooner. Then ramp up your retirement once you get that DP saved.

The reasoning why is always the same. No one ever knows what the future holds for them. Here in CA, there's always a chance for an earthquake that can take all. There's always something that can befall us individually as well (job, health, etc).

You're single, and that can make it harder to qualify. Not impossible, just more risky for some lending company to take you on.

This is what I'm thinking too - maybe I cut bank on retirement savings this year, and focus on stashing more money away towards the down payment.

Realistically, I wasn't planning on even starting to look at properties until September. I am probably a year away from purchase if I stick to the timeline I originally mapped out.

I admit that age is a huge factor here. I don't want a mortgage when I'm ready to hit retirement.

You are right though in that I don't "have" to buy. I am very happy in my neighborhood, and in my current apartment. It's just something that I am starting to feel like I am ready for.

If I do cut down on my 401k, I can put at least $1500 a month away. I can see how that goes over the next several months.

One more question - I have a mutual fund at t. Rowe price that I opened, with the original intent to save for overseas travel. I will need to funnel that money into this down payment - is it wise to pur the money into a mutual fund, or am I better off keeping it in my emigrant direct account? I am only earning 1% on it right now, which is also something that concerns me.

[snafu]

1st, there is a huge mess-up in the mortgage market since the courts ruled lenders must have paperwork proving title before instigating foreclosure procedures. This is more complex on derivatives so you can expect another tranche of foreclosures and likely lower condo/home prices.

Why not try-out paying sums to support your anticipated ownership expenses HOA,PIT/Mortgage Ins., Insurance, utilities for the next six months to see how it feels to be house poor. The money can rest in whatever virtual savings instrument that pays the best rates.

[skruggie]

1st, there is a huge mess-up in the mortgage market since the courts ruled lenders must have paperwork proving title before instigating foreclosure procedures. This is more complex on derivatives so you can expect another tranche of foreclosures and likely lower condo/home prices.

Why not try-out paying sums to support your anticipated ownership expenses HOA,PIT/PMO, utilities for the next six months to see how it feels to be house poor. The money can rest in whatever virtual savings instrument that pays the best rates.

This experiment would be minus what I am paying in rent right now, correct?

I really appreciate all of this advise - the nagging voice that has been in the back of my head about all of this agrees with you. I do not want to jump into something that I am not yet financially ready for.

I know that I have the money here to afford the monthly outtake.its a matter of what I am willing to sacrifice make it happen. One thing I am not willing to sacrifice is my longterm savings goals.

[disneysteve]

I know that I have the money here to afford the monthly outtake.its a matter of what I am willing to sacrifice make it happen. One thing I am not willing to sacrifice is my longterm savings goals.

I think this is really the key. If you can continue to save 20% or more of your income, pay all of your bills, maintain an adequate EF, live debt-free, maintain a lifestyle you are content with and still afford the condo, then you are probably okay.

[skruggie]

I have changed my 401k contributions back to 15%, rather than the 20% I was planning on this year. I will use my mutual finds account with t. Rowe price to aggressively save this year, and see where I am when I get my January 2012 bonus.

I appreciate the advise, most people in my real life are encouraging me to jump into this now, but it didn't feel right. I really needed the reality check here, I have worked way to hard the past few years in turning my financial life around.

My goal is going to be 20% down and financing a non-FHA at a 15 or 20 year fixed conventional loan. And I will take my excellent credit score out for a spin to see just how competitive a rate I can get under that scenario.

[disneysteve]

most people in my real life are encouraging me to jump into this now

Most people are broke. Taking financial advice from broke people is like taking diet advice from fat people. I run into the same thing everyday in my line of work (I'm a doctor). Patients constantly come in and tell me what all of their friends diagnosed them with. One patient I saw just this morning was convinced that her gallbladder is on the left side because that's what everyone told her. She was shocked when I told her it was actually on the right side.

So the moral is to stop listening to people who don't know what they're talking about.

[bjl584]

I have changed my 401k contributions back to 15%, rather than the 20% I was planning on this year. I will use my mutual finds account with t. Rowe price to aggressively save this year, and see where I am when I get my January 2012 bonus.

I appreciate the advise, most people in my real life are encouraging me to jump into this now, but it didn't feel right. I really needed the reality check here, I have worked way to hard the past few years in turning my financial life around.

My goal is going to be 20% down and financing a non-FHA at a 15 or 20 year fixed conventional loan. And I will take my excellent credit score out for a spin to see just how competitive a rate I can get under that scenario.

I agree with Steve on not listening to the masses. More often than not they have no idea what they're talking about.

I put 20% down on my house when I bought it, and even with the housing market crash I still had positive equity in the place. My next home I will probably have around 40% down.

[skruggie]

I just put together a relatively strict budget that cuts my expenses down to bare bone and has me saving $1785 a month, plus the 15% that I currently contribute to my 401k. I don't know if this is realistic or not, but I can start here and make adjustments as needed.

I'm also not going to put pressure on myself here, I think it is a much more realistic goal to look at this as 5 year plan, and really think about what it is that I want. This is a decision that I want to make sure I am 100% ready for. If it comes sooner great, but I'm not going to jeopardize myself financially to make that happen.