Buying a principal residence
Question: Please excuse the nature of this message – my question does not relate to investment – but this forum may have the answers(s.
After a long time being unemployed in the mid-west (mechanical engineer, I have landed a great, well paying job in Orange County California. My credit is probably good enough for 5% or 10% – but not zero down. So how the heck do I (creatively) buy a home that will cost me around $450,000 for a SFH when I only have $10,000 to put down??? Sure I could save more – but the home appreciation outpaces my abilty to save! Common problem I’m sure.
I have sked around in OC for any lease option deals – that may help me get a foot in the door – but the market is definately a sellers right now. Any thoughts? BTW – I’m married with 4 child
Answer: It might be a good market today, but what happens when things cool off or turn around. Those that think that it cannot happen have a short memory–there was a crash in real estate prices in California not too many years ago.
Lets say you get into this $450K house. Your $10K means almost nothing here, it will barely cover closing costs. Now then, in the next 5 years, California real estate goes up 10%, then drops 30%. That leaves you upside down. Then you lose your job when it gets exported to someone in India. Now, you cannot get out of your house without coming up with almost $100,000 to make up for the loss in value. Your option then is bankruptcy. You go from great job to homeless, not a good place to be with 4 children.
I have sked around in OC for any lease option deals – that may help me get a foot in the door – but the market is definately a sellers right now. Any thoughts? BTW – I’m married with 4 children – so a SFH at around $450,000 gets me my minimum needs.
You have to have an awful good job to be able to even think about buying a $450,000 house. According to my personal responsibility formula, you shouldn’t buy a house that has a value of more than twice your annual income. That means that you need $225,000 in income to even consider this house. If you don’t meet this standard, companies will still let you in, but the number of bad things that can happen to you are so high that this becomes a high risk move at the personal level. Given that you have a family with 4 kids, you should not be taking these kinds of risk.
This is also not a bright financial move given that you only have $10K saved up. First, you are going to be getting a jumbo loan, which has a higher percentage interest rate. Next, with little down and a short job history, you are going to get dinged again on the interest rate. Finally, you are going to have to pay mortgage insurance since you don’t have the required 20% down. All this put together means that you are going to be throwing away (on PMI and extra interest) more money each month than what the average american has for disposable income. You really need to be pretty wealthy in order to afford to do this month in and month out.
If a $450K house is your only option, then I would say that you cannot afford to take this job. Quit, and move some place where you can afford to live. There are a lot of $40K and $50K jobs in the midwest. This would allow you to buy a small plot of land and put up a double-wide home. Total investment of less than $80K, and your $10,000 in savings puts you well on the way to being able to afford this place. All you need is $16K for the 20% down payment and a few more thousand for closing costs.
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