buy the house?
May 9, 2011 8:41 AM Subscribe
Can my wife and I afford this house?
My wife and I are looking to buy a house in Los Angeles(Woodland Hills). The prices of homes in Southern California are very expensive. Right now we have a home that we're very interested in. Our combined income is a little over $100,000. The cost of the house is listed at $390,000 we're hoping to get it for around $375,000. Our monthly expenses are about 3400(including rent). We'd like to do an FHA loan which is 3.5% down, the loan rate is 4.7%. We're choosing to put a small downpayment so that we still have a good cushion of money in savings just in case things go sour with either one of our jobs. We've got about $75,000 in savings. Our monthly mortgage would be about $2700 for this house. That includes taxes and home owners insurance. Currently we pay $1648 in rent. This would increase our monthly costs by around $1000. So here are the things going through our mind. The house we're looking at would probably have sold for close to $500,000 in the good times. It's definitely a good deal. Great location, great features. On the flip side it would seem this would be somewhat of a financial push for us, if we're being conservative. But this may be the only opportunity to buy a home in Los Angeles at a good interest rate and a reduced cost. Not sure what to do. Any help here is appreciated!
My wife and I are looking to buy a house in Los Angeles(Woodland Hills). The prices of homes in Southern California are very expensive. Right now we have a home that we're very interested in. Our combined income is a little over $100,000. The cost of the house is listed at $390,000 we're hoping to get it for around $375,000. Our monthly expenses are about 3400(including rent). We'd like to do an FHA loan which is 3.5% down, the loan rate is 4.7%. We're choosing to put a small downpayment so that we still have a good cushion of money in savings just in case things go sour with either one of our jobs. We've got about $75,000 in savings. Our monthly mortgage would be about $2700 for this house. That includes taxes and home owners insurance. Currently we pay $1648 in rent. This would increase our monthly costs by around $1000. So here are the things going through our mind. The house we're looking at would probably have sold for close to $500,000 in the good times. It's definitely a good deal. Great location, great features. On the flip side it would seem this would be somewhat of a financial push for us, if we're being conservative. But this may be the only opportunity to buy a home in Los Angeles at a good interest rate and a reduced cost. Not sure what to do. Any help here is appreciated!
The rule of thumb is total home cost shouldn't be more than 2.5x your gross annual income.
Ignore what everybody in the mortgage and house-selling business is telling you.
I understand that Southern California is expensive, but, you really, really, really, really don't want that much of your net income going to housing. It will f you really hard when something bad comes up (job loss, sickness, a/c unit fails and needs to be replaced, transmission goes out in the car, etc).
Most important thing you can do is dial back your needs and expectations.
posted by The Giant Squid at 8:46 AM on May 9, 2011
Ignore what everybody in the mortgage and house-selling business is telling you.
I understand that Southern California is expensive, but, you really, really, really, really don't want that much of your net income going to housing. It will f you really hard when something bad comes up (job loss, sickness, a/c unit fails and needs to be replaced, transmission goes out in the car, etc).
Most important thing you can do is dial back your needs and expectations.
posted by The Giant Squid at 8:46 AM on May 9, 2011
This would increase our monthly costs by around $1000.
Your post doesn't mention PMI, which you would need to pay until you get up to 20% equity, that's another $4-5k/year. Plus there are a lot of expenses that go along with ownership that don't apply to renting. Will you be able to continue saving at the rate you've been saving?
posted by headnsouth at 8:57 AM on May 9, 2011
Your post doesn't mention PMI, which you would need to pay until you get up to 20% equity, that's another $4-5k/year. Plus there are a lot of expenses that go along with ownership that don't apply to renting. Will you be able to continue saving at the rate you've been saving?
posted by headnsouth at 8:57 AM on May 9, 2011
Echoing what the posters above said: You really don't want to have that much of your income tied up in mortgage payments. There are thousands of dollars in small expenses required in moving and setting up household in a new place, and you will be tied so far back with your mortgage that you won't be able to handle a lot of those things. There is no one else that will bail you out. The loan and real estate industry is there to sell the house as many times as they can.
On top of that, if the house is a good buy, someone will probably buy it with cash as a rental property for the price you're hoping to pay, and you'd be lucky if they . Nice parts of Los Angeles and San Francisco are this way because the FHA loan process is a lot of paperwork; sellers want a higher price if they're going to have to wait for the FHA loan process to go through.
On top of THAT, being a homeowner is expensive. Right now you have someone you can call if the water heater breaks or the sewer pipe or (knowing Woodland Hills) a retaining wall or some drainage needs to be replaced or re-done. When you own the place, there is no one else who will pay for that. If you're that stretched on your mortgage, how are you going to save money to afford that?
Don't do what you cannot afford. You cannot afford this. If you really want to own a home, then start working on a "Get out of LA" plan so that you can move to anther part of the state or country where real estate is cheaper and salaries are comparatively higher.
posted by SpecialK at 9:00 AM on May 9, 2011
On top of that, if the house is a good buy, someone will probably buy it with cash as a rental property for the price you're hoping to pay, and you'd be lucky if they . Nice parts of Los Angeles and San Francisco are this way because the FHA loan process is a lot of paperwork; sellers want a higher price if they're going to have to wait for the FHA loan process to go through.
On top of THAT, being a homeowner is expensive. Right now you have someone you can call if the water heater breaks or the sewer pipe or (knowing Woodland Hills) a retaining wall or some drainage needs to be replaced or re-done. When you own the place, there is no one else who will pay for that. If you're that stretched on your mortgage, how are you going to save money to afford that?
Don't do what you cannot afford. You cannot afford this. If you really want to own a home, then start working on a "Get out of LA" plan so that you can move to anther part of the state or country where real estate is cheaper and salaries are comparatively higher.
posted by SpecialK at 9:00 AM on May 9, 2011
I have a very low opinion of mortgage brokers in general, just from my own experience. They're going to sell you and sell you, no different than a car salesman.
Don't worry about what the house would sell for in "good times" -- We are probably not seeing them again for years. Don't go on what the value could be.
You didn't mention PMI.
Consider that things break and need repairs - even if they are "new" - and the not new stuff, needs replacing. Roofs, heating/AC, water heaters, etc. Home owners insurance doesn't cover all of these things, and even if they did, sometimes the deductible wouldn't make it worth it to you.
How will you deal with expenses above and beyond the monthly bills? How about landscaping and external home care that you probably aren't doing now? Water bills?
posted by jerseygirl at 9:03 AM on May 9, 2011 [1 favorite]
Don't worry about what the house would sell for in "good times" -- We are probably not seeing them again for years. Don't go on what the value could be.
You didn't mention PMI.
Consider that things break and need repairs - even if they are "new" - and the not new stuff, needs replacing. Roofs, heating/AC, water heaters, etc. Home owners insurance doesn't cover all of these things, and even if they did, sometimes the deductible wouldn't make it worth it to you.
How will you deal with expenses above and beyond the monthly bills? How about landscaping and external home care that you probably aren't doing now? Water bills?
posted by jerseygirl at 9:03 AM on May 9, 2011 [1 favorite]
If you feel that it is a financial push, then it is, before you even run any numbers.
I went through this during a former relationship 11 years ago and it simply isn't worth it.
So, now that I just bought a house the second time around, the house is less than 2.5 times our combined gross income, and it still feels like a push, and my family is so frugal it would disgust most people.
There is nothing much worse in life, to me, than feeling sick each time you have to make a house payment. If it's going to be that tight financially, then don't do it. Sorry. :(
[On Preview] Yes, read what headnsouth said very carefully! While your monthly costs will go up around $1000 because of a mortgage, does that account for basic homeownership? Within a year, my wife and I have put about $10000 into our house (okay, that includes a $7000 emergency sewer-to-the-street repair, but still), which would come out to an additional $833 per month on top of your budgeted $1000 a month. But what about washers, dryers, windows break, bug infestations, furnace goes out, water heater drops out...
posted by TinWhistle at 9:04 AM on May 9, 2011 [1 favorite]
I went through this during a former relationship 11 years ago and it simply isn't worth it.
So, now that I just bought a house the second time around, the house is less than 2.5 times our combined gross income, and it still feels like a push, and my family is so frugal it would disgust most people.
There is nothing much worse in life, to me, than feeling sick each time you have to make a house payment. If it's going to be that tight financially, then don't do it. Sorry. :(
[On Preview] Yes, read what headnsouth said very carefully! While your monthly costs will go up around $1000 because of a mortgage, does that account for basic homeownership? Within a year, my wife and I have put about $10000 into our house (okay, that includes a $7000 emergency sewer-to-the-street repair, but still), which would come out to an additional $833 per month on top of your budgeted $1000 a month. But what about washers, dryers, windows break, bug infestations, furnace goes out, water heater drops out...
posted by TinWhistle at 9:04 AM on May 9, 2011 [1 favorite]
Here's the way I think about it.
You have $75,000 in savings. You are putting about $13,000 down to buy the house at 3.5%. I think between closing costs, inspections, we should just call it $15,000 to buy the house, easy. Say $2,000 to move (this may be overestimating, depending on your circumstances). It would be nice if your lease on your current place dovetailed perfectly with the new place, but that's not always the case. So let's budget one month's rent for overlap (you don't specify, but let's say $2500 out of your $3400 monthly expenses). Then, you'll move in, and you could easily spend another $3000 (at least) to paint, fix that cupboard, buy a rug, etc.
So, at the end of the first two weeks, say, your savings are down to about $52,500. Keep in mind that the upkeep of a house is expensive (water heater, lawn, sidewalk, whatever). Plus if you're moving from an apartment, utilities will be much more expensive, etc.
If it's a push now, what happens if one of you loses your job? How long, realistically, will that $52.5K keep you in good standing on the mortgage?
It's a gut check. I don't think I'd go for it.
posted by Admiral Haddock at 9:06 AM on May 9, 2011 [1 favorite]
You have $75,000 in savings. You are putting about $13,000 down to buy the house at 3.5%. I think between closing costs, inspections, we should just call it $15,000 to buy the house, easy. Say $2,000 to move (this may be overestimating, depending on your circumstances). It would be nice if your lease on your current place dovetailed perfectly with the new place, but that's not always the case. So let's budget one month's rent for overlap (you don't specify, but let's say $2500 out of your $3400 monthly expenses). Then, you'll move in, and you could easily spend another $3000 (at least) to paint, fix that cupboard, buy a rug, etc.
So, at the end of the first two weeks, say, your savings are down to about $52,500. Keep in mind that the upkeep of a house is expensive (water heater, lawn, sidewalk, whatever). Plus if you're moving from an apartment, utilities will be much more expensive, etc.
If it's a push now, what happens if one of you loses your job? How long, realistically, will that $52.5K keep you in good standing on the mortgage?
It's a gut check. I don't think I'd go for it.
posted by Admiral Haddock at 9:06 AM on May 9, 2011 [1 favorite]
I should clarify. When I said, "Take a look at your budget and see if there are ways you can reasonably and permanently cut back," I meant that you should check and see if you can afford slightly more than you're currently paying for rent. I in no way think you can afford this house.
posted by runningwithscissors at 9:12 AM on May 9, 2011
posted by runningwithscissors at 9:12 AM on May 9, 2011
Not directly the question you asked but take a look at the NY Times better to rent or buy calculator. http://www.nytimes.com/interactive/business/buy-rent-calculator.html
posted by mac-way at 10:02 AM on May 9, 2011
posted by mac-way at 10:02 AM on May 9, 2011
Lots of good advice above.
The most pertinent bit, to my mind, is your comment about what the house sells for "in good times."
Buying a house on this basis is dicey at best and foolish at worst. Buy based on what you can afford now, not on the basis of what you think the house will be worth at some indeterminate point in the future.
I agree with the other people who have said it doesn't sound like you can afford this place.
posted by dfriedman at 10:03 AM on May 9, 2011
The most pertinent bit, to my mind, is your comment about what the house sells for "in good times."
Buying a house on this basis is dicey at best and foolish at worst. Buy based on what you can afford now, not on the basis of what you think the house will be worth at some indeterminate point in the future.
I agree with the other people who have said it doesn't sound like you can afford this place.
posted by dfriedman at 10:03 AM on May 9, 2011
>>The rule of thumb is total home cost shouldn't be more than 2.5x your gross annual income.
Is this really the case? Maybe on the lending side they would like for this to be true. In the UK, it's around 3.5-4x income. With the mortgage interest deduction, I would have thought 2.5x would be a very low threshold for borrowing. On the other hand, what are you going to buy in the market you live in for $250k?
Still expensive, still a stretch, and I agree the comment that you shouldn't because it seems cheap now relative to before. On the other hand, you're building equity, you've got a safety net, you get a home you really want, the interest rate is good and you could anticipate that your total income would rise over time making the house more affordable. With the caveat that you shouldn't buy your home as an investment, I think this doesn't sound like a bad prospect.
posted by sagwalla at 10:18 AM on May 9, 2011
Is this really the case? Maybe on the lending side they would like for this to be true. In the UK, it's around 3.5-4x income. With the mortgage interest deduction, I would have thought 2.5x would be a very low threshold for borrowing. On the other hand, what are you going to buy in the market you live in for $250k?
Still expensive, still a stretch, and I agree the comment that you shouldn't because it seems cheap now relative to before. On the other hand, you're building equity, you've got a safety net, you get a home you really want, the interest rate is good and you could anticipate that your total income would rise over time making the house more affordable. With the caveat that you shouldn't buy your home as an investment, I think this doesn't sound like a bad prospect.
posted by sagwalla at 10:18 AM on May 9, 2011
Don't decide if you can afford it by using current interest rates. Use a 20 year average, because what happens if rates go up in a couple of years? I've heard many people say you should calculator your payments at 6% to see if you could afford it. If you can't afford the payments at 6%, then you can't afford the house, period. No matter what the price is.
posted by blue_beetle at 10:19 AM on May 9, 2011
posted by blue_beetle at 10:19 AM on May 9, 2011
Yeah, those "good times" were part of one of the boldest cons of the American consumer we've seen in a long time. Mortgages were falling out of the sky like candy from a pinata, and people assumed that being given one meant they could afford it, even when the numbers did not work on paper. It's going to be a long while before that happens again. It's not a $500K house, so stop thinking about it like this is a deal. It costs $390K, you may be able to get it a little less - there's your deal.
Our income was probably a smidge higher than yours when we bought our house 5 years ago, and I wouldn't go over $1500 all told on mortgage (PMI and all). We had two car notes as well, but in my opinion one should always either be paying for a car or making car payments into savings, unless you live somewhere where you truly don't need a car. We still had some tight times, especially the couple of times we had some kind of repair that wasn't covered by our home warranty.
When my husband lost his job last September, we got by on my improved-since-purchase income, unemployment, savings, and some sporadic contract work, which we wouldn't have been able to do if we'd been overextended on the mortgage.
We've just moved to Southern California. My hard upper limit on rent was $1800, and I realize that most people here would probably go a little higher at our income level just as a matter of course, but not an extra thousand.
Chances are good that as you get older you will make more money. Chances are also good that the market is never going to do what it did a few years ago. One day you will be able to afford a house in the city in Southern California. That time is not now, but if you've been able to put away money so far, you should be able to put away even more money in a few more years.
posted by Lyn Never at 10:20 AM on May 9, 2011 [1 favorite]
Our income was probably a smidge higher than yours when we bought our house 5 years ago, and I wouldn't go over $1500 all told on mortgage (PMI and all). We had two car notes as well, but in my opinion one should always either be paying for a car or making car payments into savings, unless you live somewhere where you truly don't need a car. We still had some tight times, especially the couple of times we had some kind of repair that wasn't covered by our home warranty.
When my husband lost his job last September, we got by on my improved-since-purchase income, unemployment, savings, and some sporadic contract work, which we wouldn't have been able to do if we'd been overextended on the mortgage.
We've just moved to Southern California. My hard upper limit on rent was $1800, and I realize that most people here would probably go a little higher at our income level just as a matter of course, but not an extra thousand.
Chances are good that as you get older you will make more money. Chances are also good that the market is never going to do what it did a few years ago. One day you will be able to afford a house in the city in Southern California. That time is not now, but if you've been able to put away money so far, you should be able to put away even more money in a few more years.
posted by Lyn Never at 10:20 AM on May 9, 2011 [1 favorite]
mac-way:
I just used your linked calculator, and I was somewhat shocked to read that I should have continued to rent for the next 30 years.
Note 1: My rent was $900. My mortgage on my house (including taxes and insurance) is: $1065.
Note 2: I bought my house in 2007, and have 45% of it paid off.
posted by The Giant Squid at 10:21 AM on May 9, 2011 [1 favorite]
I just used your linked calculator, and I was somewhat shocked to read that I should have continued to rent for the next 30 years.
Note 1: My rent was $900. My mortgage on my house (including taxes and insurance) is: $1065.
Note 2: I bought my house in 2007, and have 45% of it paid off.
posted by The Giant Squid at 10:21 AM on May 9, 2011 [1 favorite]
Is this really the case? Maybe on the lending side they would like for this to be true. In the UK, it's around 3.5-4x income
I imagine some of the additional cushion in the US comes from the fact we don't have a single-payer healthcare system, and thus illness and injury can be exceedingly expensive.
posted by Admiral Haddock at 10:21 AM on May 9, 2011 [2 favorites]
I imagine some of the additional cushion in the US comes from the fact we don't have a single-payer healthcare system, and thus illness and injury can be exceedingly expensive.
posted by Admiral Haddock at 10:21 AM on May 9, 2011 [2 favorites]
I imagine some of the additional cushion in the US comes from the fact we don't have a single-payer healthcare system, and thus illness and injury can be exceedingly expensive.
My mortgage (including taxes and insurance) is $1065. My monthly health insurance (despite being very, very healthy, having a healthy wife, and having two small healthy children) is $1365.
posted by The Giant Squid at 10:24 AM on May 9, 2011 [1 favorite]
My mortgage (including taxes and insurance) is $1065. My monthly health insurance (despite being very, very healthy, having a healthy wife, and having two small healthy children) is $1365.
posted by The Giant Squid at 10:24 AM on May 9, 2011 [1 favorite]
The key question for you: Is it worth an extra $1,000 + random ownership expenses each month to own vs rent.
FWIW, the answer in my case was/is yes it was worth that expense, but every person and situation is unique.
posted by forforf at 10:29 AM on May 9, 2011
FWIW, the answer in my case was/is yes it was worth that expense, but every person and situation is unique.
posted by forforf at 10:29 AM on May 9, 2011
Three things saved me when buying my home. I would have lost it if not for these 3 things.
1) I made sure it was a duplex so half my mortgage would be paid (hey, once I pay it off, I can live in the whole place if I want)
2) I have a room that can take in a boarder if times are tough (I have had times with and without)
3) I'm a welder chick, and I can fix lots of stuff myself. (Water heaters are what I consider a diy project.)
You can't just buy a house on the high side of your budget and not have contingency plans that you can fall back on. You HAVE to be able to use a hammer. You have to be prepared to find work arounds that work for you.
So, with the ability for a renter, a boarder, and your own repair abilities, you could actually be paying less per month for a house than you are renting. But you are still going to have to have unexpected issues arise that you need to be able to handle.
posted by Vaike at 10:56 AM on May 9, 2011 [5 favorites]
1) I made sure it was a duplex so half my mortgage would be paid (hey, once I pay it off, I can live in the whole place if I want)
2) I have a room that can take in a boarder if times are tough (I have had times with and without)
3) I'm a welder chick, and I can fix lots of stuff myself. (Water heaters are what I consider a diy project.)
You can't just buy a house on the high side of your budget and not have contingency plans that you can fall back on. You HAVE to be able to use a hammer. You have to be prepared to find work arounds that work for you.
So, with the ability for a renter, a boarder, and your own repair abilities, you could actually be paying less per month for a house than you are renting. But you are still going to have to have unexpected issues arise that you need to be able to handle.
posted by Vaike at 10:56 AM on May 9, 2011 [5 favorites]
The rule of thumb is total home cost shouldn't be more than 2.5x your gross annual income.
Yeah, but that varies substantially by location. Another rule of thumb is, don't pay more than 25% of your monthly income for housing. However, in NYC, for example, people commonly pay 30% or even 40%. In this case, the OP would be paying 32%.
Now in NYC you don't necessarily have to have a car, so that's certainly a difference between here and LA. Are taxes as high in LA as in NYC?
With the low down payment, lsj30 & household really do have a good cushion left in savings, for repairs and so on. It doesn't sound to me like this is nearly as risky as some posters are suggesting. I'd call it borderline, but not necessarily impossible or irresponsible.
lsj30, do check into PMI and see what you could do to get out of that. It might be worth making a larger down payment to avoid PMI.
posted by torticat at 1:49 PM on May 9, 2011
Yeah, but that varies substantially by location. Another rule of thumb is, don't pay more than 25% of your monthly income for housing. However, in NYC, for example, people commonly pay 30% or even 40%. In this case, the OP would be paying 32%.
Now in NYC you don't necessarily have to have a car, so that's certainly a difference between here and LA. Are taxes as high in LA as in NYC?
With the low down payment, lsj30 & household really do have a good cushion left in savings, for repairs and so on. It doesn't sound to me like this is nearly as risky as some posters are suggesting. I'd call it borderline, but not necessarily impossible or irresponsible.
lsj30, do check into PMI and see what you could do to get out of that. It might be worth making a larger down payment to avoid PMI.
posted by torticat at 1:49 PM on May 9, 2011
We'd like to do an FHA loan which is 3.5% down, the loan rate is 4.7%.
Oh one more thing, I'm hoping that's a fixed rate? DO NOT do this if the 4.7% is an ARM.
posted by torticat at 1:54 PM on May 9, 2011 [1 favorite]
Oh one more thing, I'm hoping that's a fixed rate? DO NOT do this if the 4.7% is an ARM.
posted by torticat at 1:54 PM on May 9, 2011 [1 favorite]
It wasn't clear to me what's happening with your savings in the meanwhile. We just bought our first house (in Australia, so the market and mortgages are different), and also had quite a lot of savings, that we didn't want to lose.
So we considered mortgages with unlimited extra payments and redraw facilities, so we could put all our savings in as a large lump payment and then redraw whenever necessary, and we considered line-of-credit mortgages. Both of those had slightly higher rates.
What we got in the end was a low rate variable mortgage at 6.9% (low for here), and a 100% offset account tied to that. Our savings went into the offset account, and our salaries are paid in there, and that counts against the mortgage for calculation of interest. I.e. our mortgage is $460,000 (yipes, I know: the median house price in this market is $800,000, ours was the cheapest place that has sold in this suburb in the past 12 months, and still cost $580,000); our offset account contains $200,000, and so we only pay interest as though our mortgage were $260,000.
But we can use our offset account like any normal chequing account (it is a normal account for all intents and purposes). I'm really happy with this arrangement, since it gives us the benefit of having an enormous down-payment, without the stress of having no financial buffer.
posted by lollusc at 4:51 PM on May 9, 2011
So we considered mortgages with unlimited extra payments and redraw facilities, so we could put all our savings in as a large lump payment and then redraw whenever necessary, and we considered line-of-credit mortgages. Both of those had slightly higher rates.
What we got in the end was a low rate variable mortgage at 6.9% (low for here), and a 100% offset account tied to that. Our savings went into the offset account, and our salaries are paid in there, and that counts against the mortgage for calculation of interest. I.e. our mortgage is $460,000 (yipes, I know: the median house price in this market is $800,000, ours was the cheapest place that has sold in this suburb in the past 12 months, and still cost $580,000); our offset account contains $200,000, and so we only pay interest as though our mortgage were $260,000.
But we can use our offset account like any normal chequing account (it is a normal account for all intents and purposes). I'm really happy with this arrangement, since it gives us the benefit of having an enormous down-payment, without the stress of having no financial buffer.
posted by lollusc at 4:51 PM on May 9, 2011
This thread is closed to new comments.
This should have absolutely no bearing on your decision. You're trying to figure out if you can afford this house, with your life as it is right now. You need to be as realistic as possible, and saying that something is a good deal right now doesn't mean you can afford it.
this would be somewhat of a financial push for us
Here's your answer. If one of you did in fact lose your job, then what?
Take a look at your budget and see if there are ways you can reasonably and permanently cut back. If you can't or don't want to cut back, then you need to look at other, less expensive houses.
posted by runningwithscissors at 8:46 AM on May 9, 2011 [2 favorites]