How Much to Spend on Your First Home
Could you live a little longer with your parents if that meant saving more on your down payment? This is one of the questions we will explore this week.
Every Monday, we address one of your pressing personal finance questions by seeking advice from several financial experts. If you have a general question or money issue, or just want to talk about something PeFi-related, leave it in the comments or email me at [email protected].
This week a question from Veronica:
I recently returned to California from New York for work. My boyfriend and I said we would move into an apartment together when I return, but we decided to stay at our parents’ house a little longer to save more money for the down payment of the house instead. We collectively saved $ 30K in down payment, but now I’m afraid of such a huge commitment!
We cannot afford the recommended 20 percent on a $ 400,000 new building. Should we rent instead while we save 20 percent more? (I wouldn’t want to stay with my parents for long.) I think the question is, which is better: pay five to ten percent on your FHA loan, pay off your mortgage insurance, but you have some savings left, or wait and make 20 percent [down] but spent all your savings?
Also, isn’t it time to buy a house? Especially in California, where are the houses so expensive? I feel that the value will drop and we will lose money, especially with so much talk about the lack of housing as the reason for the high prices and the construction of more housing stock. I know no one can predict the state of the housing markets, but if more housing stock is built, will its value fall?
My third and final question is, how do we find a bank / mortgage company that we can trust? Is there a site where we can compare interest rates and reliability? Some of the lowest rates I’ve found come from companies I’ve never heard of, so I want them to feel safe giving their savings back to them, especially as a first home buyer!
This is what individual experts usually say about a problem that affects each person differently: if you need personalized advice, you should see a financial planner.
Buy or not buy
What an exciting time! And it’s good that you were frugal and did your research.
That’s a lot of questions, but first one of mine: are you * sure * you want to buy a house now? If your time frame for owning a home is less than five to seven years, you should rent a home, according to Michael Ciccone, a certified financial planner from New Jersey. Imagine yourself in six years: what will you be then? Where will you be?
If you are thinking, “Yes, Alicia, my boyfriend and I have clearly thought a lot about this and worked hard to save money, so I am writing to you, of course I want to buy a house. “Then” an FHA loan with some mortgage insurance isn’t the worst if you can afford to pay with it, “says Ciccone.
While this is ideal, there is “usually no need” to invest 20 percent on the value of a home, adds Jane B. Novak , a CFP spokesman based in Georgia. In fact, according to the National Association of Realtors , the average down payment in 2016 was just 11 percent, compared to just eight percent for those under 35. “Keeping a cash cushion for contingencies is really important.”
And there will be unexpected expenses. So if you really want to buy now, you can put in less than 20 percent ( it’s detailed here how you can qualify for an FHA loan) and pay your mortgage insurance.
“I would strongly advise against wasting my entire egg to avoid additional costs,” says Joshua Mungavin , CFP based in Florida. And make sure you factor in the insurance premiums you’ll have to make as part of the total cost of buying a home. “If you can’t afford it, then now is not the time to buy a house,” he says.
But keep in mind that FHA loans can make it difficult to buy a home in a hot market like California. “Offers at a lower down payment may make your offer less attractive to the seller, in part because FHA loans take longer to close,” said Aaron Terrazas, senior economist at Zillow . “Of course, the longer wait time for a purchase means that homes will continue to appreciate, and in many parts of California they are appreciating faster than incomes.”
There are other programs available to first-time home buyers besides the FHA loan. For example, you can take out a loan from your 401 (k) or IRA (more on that here ), but you should talk to a financial advisor about your specific situation before doing so. And in California, you can try to qualify for the Golden State Treasury GSFA Platinum program , which offers grants to homebuyers that do not need to be repaid.
Otherwise, think about what it takes to get that 20 percent (or 10 or 15 percent). Can you live with your parents for another six months? A bit helps in this situation (although trust me I don’t want to live at home, especially after you’ve been living on your own for a few years).
“If you’re both committed to owning property and to each other, I would recommend setting a goal for when you want to move out of your parent’s home, say six to nine months from now, and putting together a savings plan,” suggests Jesse Culbert , Redfin ‘s listing agent at Seattle. “Can you live off one of your incomes, or save 70 to 80 percent of your income? See if you can turn it into a game and know that although you fail for a few months, it won’t last forever. “
You can’t count the time in the market
As for your second question, you are absolutely correct that you cannot time the market. “Don’t try,” Mungavin says. “There’s only the right time for you, and that’s when you can afford the home you would like to live in in the long run.”
To get the best deal, you can research the rates before talking to your real estate agent or local credit unions on sites like Bankrate and then compare the terms. “Often times your realtor has one or two mortgage brokers that he or she already works with,” says Novak. “Start from there to find a mortgage loan expertise and get pre-approved.”
But, as Mungavin points out, the creditor is less important than the terms. “Keep in mind that you will not give your savings to the company you do business with, you will give your money to whoever sells you the house,” he says. “Your mortgage will most likely be sold to another company if your lender goes bankrupt and the mortgage can be sold by your original lender to someone else.”
Ciccone agrees. “A lot of smaller lenders that you haven’t heard of offer competitive rates for doing business, so this is not necessarily a red flag,” he says. If you are really concerned, you can check for scams through the Better Business Bureau.
Other considerations
There is one important thing to keep in mind that I did not see in your question (although this does not mean that you did not think about it): who will own the property, between you and your boyfriend?
“For unmarried couples, I always recommend consulting with a real estate lawyer in the country of residence, who can advise on how to properly issue a title to the purchased property,” says Novak. “In addition, both parties must protect themselves by hiring a lawyer to draw up a legal agreement governing the disposal of property in the event of a breakdown.” You want to be safe and smart. Good luck!