Home purchase with a minimal down payment

[skruggie]

In CA, I kind of wonder how strong the real estate market is? I know we could sell our house tomorrow if we needed to, but I would honestly be a bit more hesitant if I were in CA...I have heard in parts of the state the market is really bad. Foreclosures are common even here...it worried us about reselling our own house when we drove by some in the city we live in. They are everywhere.

From my perspective 20% is not a realistic goal in Southern California. I am very comfortable with a 10% down payment in a condo. It keeps my monthly payments comparable to my current rental situation, and gives me the ability to still have a savings.

I am absoutley not looking at SFH's, I couldn't even afford the cheapest house out there - in any neighborhood I would be willing to live in you are looking at a starter point at 450k - not going to happen. I'm perfectly happy to go the condo route, as long as I can find one in my price range that meets my standards, and I have a pretty long list of "must haves" and "nice to haves"

[Hector]

From my perspective 20% is not a realistic goal in Southern California. I am very comfortable with a 10% down payment in a condo.

Do people in southern California have higher job security than elsewhere? Last time I checked, unemployment rate was 9% in US and 12% in California.

t keeps my monthly payments comparable to my current rental situation, and gives me the ability to still have a savings.

As others mentioned make sure that you are not including only mortgage installment in your monthly payments.

[skruggie]

As others mentioned make sure that you are not including only mortgage installment in your monthly payments.

I am not, I am looking at the full price including taxes, PMI, etc. Which is why I am very diligent in my price point, knowing how few properties are available at what I can afford.

[couchrobt]

Getting a housing loan is a very serious and high risk act. Deciding on making that move takes a lot of courage and deliberation (or self-talk if single) to know if the move is right. At some point it is, but look at the payment factor too. That is the more important thing here, first and foremost.

[MonkeyMama]

I don't think there is any rhyme or reason to the California real estate market. I think on some level it is and will always be strong (very desirable place to live).

I personally wouldn't invest there for long term appreciation. Average housing is many times higher than average wages. People have proved for decades that they are willing to pay the price, and are somehow mostly able to hang on to their homes. The problem was when home prices doubled overnight and people really thought that would never end - borrowed against all their equity - etc. The percentage of people who did that borrowing were quite high. But, anyway, I think home prices continue to defy logic and are on the extremely high side - even after the bubble bursting. So, it's the last place I would invest for large amounts of future inflation. As long as the weather is nice and jobs are abundant, these prices may be sustainable.

I am a California home owner. I look forward to paying off my house rather than paying rent for eternity. Grandma pays $30k per year to rent a "closet." I ain't doing that. We bought a reasonable home, will pay it off, and hopefully can live rent and mortgage-free for many decades. I do not expect to get rich off our house (though our parents sure did!) Our home doubled in price overnight, and then went back to the price we paid in 2001. In 2001 many people told me THAT was the peak - and I don't blame them for thinking it was. Prices continue to stay insane. The fact that home prices depreciated 50% overnight mean nothing if they went up 100% the night before that. In the city we live in, prices were significantly lower just a few years before we bought.

[skruggie]

My bank is completely insane - my prequalification is for twice what I would ever borrow. Sheez, they qualify me for almost what my monthly takehome is after my 401k contribution.

I can see how people get in over their heads so easily. That's just nuts.

[disneysteve]

My bank is completely insane - my prequalification is for twice what I would ever borrow. Sheez, they qualify me for almost what my monthly takehome is after my 401k contribution.

I can see how people get in over their heads so easily. That's just nuts.

Yep. And that's after the whole housing and mortgage mess. Imagine what it was like before. Lots of naive people just assume that the bank must know what they are talking about so they take on loans that they can't possibly afford. When we bought our house, we got pre-qualified for for 25% more than we actually borrowed (or would ever have considered borrowing).

[skruggie]

Yep. And that's after the whole housing and mortgage mess. Imagine what it was like before. Lots of naive people just assume that the bank must know what they are talking about so they take on loans that they can't possibly afford. When we bought our house, we got pre-qualified for for 25% more than we actually borrowed (or would ever have considered borrowing).

along that note, here's a question I'd like to throw out for some opinions. I am very, very early in my search. I think its going to be several months before I find something in my price range that I'm willing to invest in for the long term.

My plan is to cap my loan at 250k, with 10% down, for properties at the approximate 270k tipping point. However, if all I can find are properties that are closer to 300k that meet my standards - would it make sense to put down a larger down payment - even if it takes me longer to save enough and still have a cushion in my savings, so that I am still at the 250k tipping point for my loan?

Or does the majority thing that even with a larger down payment, I still should not go above the 2.5x my salary formula? If I do a max property of $270k I would put down 30k - but if I went up to a 300k property, then I would possibly wait longer and put down 50k. Either way I would not borrow more than 250k.

Doing the math, it looks like I am actually aiming to put down between 12-15% and not 10%, as I want to keep my monthly payment reasonable. I am in no rush here, I want to make sure I am doing this as correctly as I can. I also suspect that as I continue to save for my down payment over the next 6-ish months before getting really serious about looking, prices are going to continue to fall as they seem to be on a very small downward spiral.

[snafu]

1st keep in mind the asking price is the opening negotiating price, not necessarily the contract price. If you would be willing to list your 'must haves' we might be able to make some suggestions to help your process. The agent's commission is based on price and may not encourage negotiations for a reduced price.

[skruggie]

1st keep in mind the asking price is the opening negotiating price, not necessarily the contract price. If you would be willing to list your 'must haves' we might be able to make some suggestions to help your process. The agent's commission is based on price and may not encourage negotiations for a reduced price.

Thanks - the realator I'm working with told me I should look at properties up to 300k, with the idea of negotiating down to 250-270k. The problem is that most of the properties that look interesting to me are more in the 300-350k price range. Of course I know that no matter what i couldn't afford to go higher than 300k, even with a higher down payment than I originally planned.

My top line list:

Must haves:
Zip codes - 91505, 91506, 91423, 91604 (this is my biggest challenge as there aren't many deals in these zip codes)
2 bedroom/2 bathroom
kitchen with eating area - or enough space to move around in. Not a kitchenette.
at least one bedroom must be very large
square foot minimum of 1200, but I prefer closer to 1600
washer/dryer hookups
Urban area with walking distance to grocery, starbucks, etc.
Prefer not to have neighbors above me
HOA fees not more than $300-350


And in general, I'm looking for a condo that is in relatively good condition and does not much in way of structural changes. I expect that I will upgrade appliances as I can afford to, but I don't want a fixer upper either.

Not asking for much

[skruggie]

Well, I'm super frustrated. Saw a bunch of places today, the only.one I remotely liked was closer to 300 than250.

I'm really not fazed by how long a process this will be but I clearly need to adjust my thinking to the financial realities of what I want in a neighborhood and a condo. I'm going to need significantly more starter moneythan I originally thought.

[jerrycates]

Minimal down payment is just fine as long as you can keep the payment regular. Pay it on time and do not fail. Sometimes when you fail one payment it goes down to paying more. Crazy.

[Little House]

I'd have to agree with Steve. You can always pay a 30-year mortgage off earlier by adding payments to the principal. You are already on the right financial track, maybe save a little bit more for a heftier down payment (but I empathize with you, I live in SoCal too - not easy to buy a nice property here for under $350K!). Keep your eye on the interest rates while you save up a bit more, I really think property here in sunny CA will stagnate for a couple of more years. Good luck!

[Hector]

My bank is completely insane - my prequalification is for twice what I would ever borrow. Sheez, they qualify me for almost what my monthly takehome is after my 401k contribution.

I can see how people get in over their heads so easily. That's just nuts.

You are planning to take a mortgage for which you will have to pay half of your take home after your 401k contribution. Interesting!

[skruggie]

You are planning to take a mortgage for which you will have to pay half of your take home after your 401k contribution. Interesting!

How is that interesting? I have no intention of lowering my 401k contribution, although that seems to be what most people in real life are advising me to do.

I'm not, BTW, planning on taking a mortgage at half my takehome pay. Which is why I'm sticking to a 250k pricepoint, and had my reality check of what I can actually afford. I think you may have misread or misunderstood some of my comments. There is a huge difference between what the bank says I can afford, and what I say I can afford.

I'm also stepping back a bit here - I'm going to go out again with my realtor this weekend to look at condos in my price range, but honestly at this point I feel like I should take another year to save aggressively, and really try to reach the 20% down payment point. I'm not terribly far off as long as I stay at a 250k price point, I can probably do it in another year.

Something I really haven't decided on, and I'm going to talk to an financial advisor about my overall picture next week - I've been saving for years in a Roth IRA, and I have about 17k in there (of the money I invested - not including returns) - it has been attributing to retirement funds, but the only reason its retirement money at all is because when I set it up I didn't realize that I could create a non-retirement vehicle in mutual funds, I thought retirement was the only way.

So, its a small part of my overall retirement package - I also have rollover IRAs, and my 401k that I am very aggressive about. I'm considering using part of those funds as my down payment if I go the 20% route in a year. No decision has been made yet, and I really want to speak to a professional about my particular situation before moving forward with any one idea.

But really, after thinking this over and rethinking and obsessing, I am really believing that 20% down is probably the best scenario here for my long term strategy. If I really get serious about saving over the next year, I could probably be ready to make a move at this time next year. And by all projections, the market will continue to come down, and there will be potentially better inventory for me to choose from.