What should I do given all these variables (home mortgage edition)

June 21, 2013 7:46 AM

I'm getting married! And buying a house with my fiance! And I'm so, so confused about the best plan (longish question, totally special snowflake focus).

So, my sweet, sweet guy is selling his very nice townhouse that he only bought a year ago so we can stay in my daughter's school district after we move in together. It's a much more expensive area and the inventory on the market seems very strange in that there are some choices on the market for around $350 and lots of choices for $469 and above, but nothing in between the two price points. The area is fairly expensive - a $350 house or townhome would involve compromises and would not be a dream home by a long shot. It would be more likely a place we would plan to live in until my daughter finishes high school in 2 years. However, none of the places we've looked at in the range are _horrible_ really. We could find a place where we'd be happy.

So, here's all the variables that make a decision not so clear cut. He just got an offer on his place and if all things work out the way it looks like they will, he'll net about 80K. He's willing to use all of this for the down payment and other associated costs in closing on the house and moving. I'd like to help out where I can but the truth is I'm more of a drag than a help, I fear.

He's got great credit; I have a bankruptcy (discharged) and a foreclosure in 2009 stemming from my divorce. He owns his house and I rent (since 2009) so technically I would be a first time home buyer, I think? He's got the money from the sale of his house; I've got nothing except possibly some money that I could withdraw from my 401K. We both have 6 figure incomes.

The twist is that if we were to bump up what we were willing/able to buy to one of the >469K houses, I think we could get a house that we would want to live in for many years. Also, since it is in such a good school district, these houses have consistently appreciated in value - even during this downturn. And then there's interest rates - good now, apparently getting worse soon.

So, in order to get the down payment for a $460,000 house (just for an example), it looks like I'd need to contribute around $20,000. I could get that much from my 401k - as a first time buyer, would I incur the 10% penalty?

If I contribute to the down, then does my name need to be on the mortgage? He can qualify on his own for a fairly high amount - I think for the full amount of what we'd need to borrow. We've always assumed I'd hurt rather than help, so we haven't been planning to have me on the mortgage, although I will be on the deed.

So, it all comes down to this: in this market, is it smarter to buy the house you can totally afford even if you think you'll end up moving in less than 5 years. (But, you know, life - maybe we will or maybe we won't) Or is it better to stretch into a house that you think you'll probably never want to leave? Is that even a workable solution? Is there something I'm not even considering?

First world problems are the worst, amirite? Thanks for any input.

posted by Lizlemondrop to Home & Garden (10 answers total)

I'd need to contribute around $20,000. I could get that much from my 401k - as a first time buyer, would I incur the 10% penalty?

Most 401k plans have the option to take out a loan in order to buy a house, this doesn't have the withdrawal penalties because it is a loan that you will be paying back (bonus, you are paying yourself back, not paying a bank) not an early withdrawal. The major downside is that if you leave your job the loan is usually due in full so you'll need to factor in your job stability.
posted by magnetsphere at 7:59 AM on June 21, 2013 [1 favorite]

Response by poster: Promise not to babysit the thread, but did want to add that a loan would be the best plan, but unfortunately my 401K is one of the few that don't offer that.
posted by Lizlemondrop at 8:06 AM on June 21, 2013

Why not continue to rent in the good school district for two years and then buy? You can presumably buy a much nicer house per dollar spent if you don't care about the school quality, you can save up for a bigger down payment rather than raiding your 401(k), and you will likely qualify for a better loan if your bankruptcy is two more years in the past.
posted by backupjesus at 8:07 AM on June 21, 2013 [5 favorites]

I wouldn't buy a house I couldn't see myself living in happily for at least 5 years. Like the poster above suggested, I would rent for 1-2 years until you're ready financially to buy your long-term home.
posted by Asparagus at 8:53 AM on June 21, 2013

I'm on the rent bandwagon on this one.

Put the money away in a nice account for a downpayment on your future house, in the mean time, rent something you'll all enjoy. Personally, I'm all about a Dee-Lux apartment in the sky these days. No yard work, a swimming pool, a gym, etc.

In the intervening two years a LOT will happen.

1. You'll be that much further away from your bankruptcy/foreclosure and rebuilding your credit.

2. You'll be able to save up for part of a downpayment contribution.

3. In two years your daughter will be off to college or out on her own and your housing needs will be very different.

4. IMHO, real estate isn't such a great place to park your money any more. Caveat: I'm in a house that is sucking the life out of me and I can't wait to sell that mofo and move somewhere where I'm not responsible for coughing up for huge repairs.

Seriously, do the math on this one. Are there rental properties that will allow you to live comfortably without a lot of extra 'honey-do's' every weekend? Perhaps you can now afford a cleaning lady and wouldn't THAT be nice? Blending a family is no picnic, so anything you can do to alleviate stress will be to your benefit.

Things are stressful enough without rushing to make a half-million dollar investment on something that isn't 100% exactly what you want.
posted by Ruthless Bunny at 8:59 AM on June 21, 2013 [1 favorite]

I would second the thought of renting for two years and then making a decision based on your finances at that time.

Real estate has the potential upswing but there are some very real potential downsides to consider and one of the key factors you need to consider is how long you are planning to stay.

As a personal story, I purchased a condo when my now husband and I just started dating in 2006. A year and a half later we built a house. I would have lost money on the sale of the condo so it has been rented out since 2008. Even with a 4% rate on my mortgage and purchasing it for 35k under comparables at the time. Figure transaction costs in two years will probably be 8-10% of your sale price. That is a lot of money you could lose and may make renting more attractive if you are only staying for a few years. I wish I had never made that purchase and that is even with great tenants and no issues with the condo. Sure, you could make money on a place or not take a loss in two years. But lets be realistic - do you think the market in your area has that sort of potential? The economy has improved but I don't know it's realistic to assume you will end up ok after only two years.

Now if you think stretching your budget may allow you to get some thing you would stay in long term it may make sense to do that. But you need to be honest about how long you are going to be staying in the house. That is the biggest thing you need to consider.

As for the question of your name on the mortgage or deed, speak with your loan officer to see how adding you to the mortgage might impact the loan. Your credit history may mean the rate is higher. If that does not make financial sense you can gift him the down payment and keep your name off. But banks in my area wouldn't typically allow for a person to be on the deed but not the mortgage. After all, you own half the house but the loan is for more than 50% of the value. You should ask your attorney and loan officer if you can do that. But yes, if you add to the down payment, the bank will want to know that is a gift or that you are on the loan. They would want that document because if its a loan to him, they would factor that payment in as part of his application review.
posted by polkadot at 9:01 AM on June 21, 2013 [1 favorite]

I N'th that you rent for two years, and then move to an ideal house. Your fiance is probably taking a bath in all of the buying/selling expenses for the one year move; you don't want to do this again in two years unless you really do have more money than you know what to do with. 3% (that's pretty low for commission) on a 350k house is 10k ; not to mention moving costs, and real estate land transfer taxes.

If you're planning to move in two years, consider this sales pitch. "Yes, you can rent this house for two years. But you have to give me an 80K deposit, and there's a non-refundable $15k move in cost. And I don't do any repairs. And you still pay rent. And you can't move out until I find a new tennant willing to meet these agreements." That's a really crappy land lord, and he hasn't even gotten to the part that he might require more than the 80k deposit covers on move out if the market is really crappy. Or that it might take months to move out, and you need to keep the apartment in a show-worthy state during that time.

The one thing that I could see being a problem with selling the house and renting is need-based financial aid. If your fiance (then your husband, her father according to FAFSA (I think)) has $80K or more sitting around, they're going to expect you to throw all of that into your daughter's 1st year of college. Well, or however much your daughter's first year is. I'm pretty sure that you don't want money that you're planning to use for a non-college expense sitting in any sort of account.

You might be able to buy a house not too far away in the middle of your daughter's last school year, and she can continue to go to the same school if you provide transportation. Consider looking into that.

If it's something that can be swung, consider not selling the townhouse, and keep renting. While it won't be fun to be accidental land lords, renting the current house might be an option for just the two year period. Even if you don't rent, depending on incomes and rent/mortgage and FAFSA and school boards, it might even be cheaper in the long run to rent, carry a vacant house, and then either sell and move, or just move into the town home 2 years down the road.

But don't sell one house, and buy a house you'll plan to move out of in two years.
posted by nobeagle at 9:20 AM on June 21, 2013 [1 favorite]

I agree with those suggesting you rent, but I can answer some of the questions on the 401k.

If you are a first time buyer (which isn't clear as you mention a foreclosure), you can withdraw up to 10,000 as a hardship (if your plan allows this) and you will not be subject to the 10% penalty (although you will have to pay regular income tax as it was pre-tax money).

My husband did this when we bought our first house (before we were married). We forgot about the income tax part.
posted by hrj at 10:56 AM on June 21, 2013

Rent for 2 more years.
Have fiance put that 80k in a cd or index fund and earn a little for the next 2 years. Or keep the house until you can both look together somewhere in a different school district.

Any savings you amass in the meantime will go towards your assets that FAFSA looks at, so think about that and do some calculations.

If you are concerned about FAFSA (which most people are), my advice would be to not legally marry your fiance or have him adopt your daughter until after she is out of college.

A stepparent is treated like a biological parent if the stepparent has legally adopted the student or if the stepparent is married, as of the date of application, to a student’s biological or adoptive parent whose information will be reported on the FAFSA. A prenuptial agreement does not exempt the stepparent from providing information required of a parent on the FAFSA.
You reapply for the FAFSA each year, so if you do not want your fiance's financial information involved in your daughter's schooling, that means you are looking at 6 years til marriage. I'd have a real talk with him about whether he is going to contribute to her education and whether he understands what marriage means in terms of the FAFSA, because even if he doesn't put in a dime, his assets will be counted towards the expected family contribution. (FAFSA info)
posted by rmless at 11:10 AM on June 21, 2013

I don't understand how you can be a first home buyer AND have a foreclosure in the past, but maybe these terms are defined differently in the USA.

I think you need to define what "a stretch" would be - does it mean there is an actual chance you will not be able to make mortgage payments, or does it mean you have to skip your annual European vacation? If you and your partner are both on six figure incomes, I don't really see how a $470k house is a stretch. My husband and I are on less than half that, and we bought a $580k house two years ago (with a large down-payment thanks to years of savings, admittedly), and will have paid off the mortgage completely by the end of next year. Admittedly we don't have kids, but I can't imagine that would add an extra 20+ years to the mortgage.

If you will have no trouble making the payments, but will just have to adjust your lifestyle a bit, you'll need to weigh up whether the personal (psychological, emotional) cost of doing so balances out the pleasure of living in a better place, and the convenience and economic cost of not having to resell/buy and move again in two or three years.

I am not unhappy that we bought in the mid-range of the market instead of looking for something 100k or so lower, which is the absolute bottom here. The advantages paying extra got us were being closer to work, better energy efficient design, and few repairs in general needed, a (small) garden, central heating, a better school district, a townhouse instead of an apartment. I think that for me, the location, the energy efficiency, and not sharing walls with my neighbours are things that made paying more worthwhile. The school district thing was irrelevant, except that it will make the house easier to sell one day, and central heating and repairs are things that having extra spare cash could have sorted out anyway. The garden is nice, but I personally wouldn't pay 100k more to have one.

You need to figure out what the actual practical differences are between the $360-ish places and the $470-ish ones, and then for each decide whether those specific things are worth very much to you.
posted by lollusc at 8:04 PM on June 21, 2013 [1 favorite]