House Purchase Sanity Check

Non-investing personal finance issues including insurance, credit, real estate, taxes, employment and legal issues such as trusts and wills.
phxjcc
Posts: 1329
Joined: Thu Aug 23, 2018 3:47 pm

Re: House Purchase Sanity Check

Post by phxjcc »

OP,

I have been house poor and it is not a fun experience. HOWEVER, in hindsight, I was glad that I did it because the property value increased 60% in one year.
Here is what I see

Taxes: 500/month
Insurance 100/month
PI is ~ 1610/month
Repairs/maint.: plan on $500/month

So say $2800 for the house.

You say that you have $2500 in expenses and therefore 3700 for the house.

That leaves 900 head room for any surprises.

What no one knows is what you $2500 entails.

If this includes discretionary things like going out to eat or vacations, that is different than $2000 in car payments and insurance.

I think you are ok, but then I always stretched for Real Estate, and never got caught out.

BUT--I also always abought in a down market.
notPatience
Posts: 199
Joined: Mon Mar 24, 2008 2:46 pm

Re: House Purchase Sanity Check

Post by notPatience »

A few points, from living in North Arlington 1984-2007 and being ~very~ house poor after buying in 1985.

--Unless you let the house crumble, it’s not likely to lose value. Even crumbled, the value of the land will grow, especially if you're closer to Falls Church City, rather than the hinterlands sometimes called FC.
--Increased house value doesn't help your monthly budget one bit.
--Taxes and insurance will go up. A lot.
--You and your wife need to be prepared to make sacrifices to ensure this works. To be prepared to make any sacrifice to make it work no matter what.

There were stretches of months (but not years) when I wondered how I was going to do it, even as I scrimped (all groceries on sale AND a coupon ;-) .) Made sure to max retirement matches at start, but no more. As I got raises, all additional money went to retirement until I maxed that out. Only then to anything else.

And, just as I was getting a bit more comfortable, I made it more difficult by going p-t to pursue another career. I mean, it was ~tight~. Remember not being able to afford a $12 t-shirt and feeling sorry for myself. Until I reminded myself ~why~ I was, as a family member said, living like a pauper. <wg>

The Bogleheads telling you no here would all have fallen over in a faint if I'd posted the numbers back then. I knew it wasn't within recommended guidelines. (In fact, I was turned down for a refinance by one lender b/c not in their guidelines ... even though refi'd payment would drop a chunk from the payment I'd made on time to them for more than four years.)

But I knew I was good with scrimping to get what I wanted long-term. I never had any other debt. I never took money out in a refi.

Upshot was I sold the house for 7 times what I’d paid for it, leaving Career 1 in my early 50s, moving to MCOL, with proceeds from house in place to bridge to retirement income, allowing me to pursue Career 2. Weathered the 2008-9 woes and Career 2 took off after a few years, and now my retirement will be much more cushioned than I'd projected. That wonderful little house financed my pursuing my dream.

…and then a couple owners after me tore it down and built a $2.5 mil McUgly, ripping out huge magnolia and holly trees – the heathens.

Anyway … you have to know how much you want this and decide going in that you shall do whatever is necessary to make it work. Or if that’s not for you.

Good luck!
Topic Author
Turtlemilk
Posts: 58
Joined: Tue Dec 03, 2019 2:00 pm

Re: House Purchase Sanity Check

Post by Turtlemilk »

KlangFool wrote: Tue Nov 10, 2020 4:01 pm
Cobra Commander wrote: Tue Nov 10, 2020 3:51 pm
KlangFool wrote: Tue Nov 10, 2020 3:35 pm
Cobra Commander wrote: Tue Nov 10, 2020 3:31 pm
Turtlemilk wrote: Tue Nov 10, 2020 3:11 pm
It's hard to tell.

My salary is most likely going to bump to $103,000 in about one year but as a federal employee it's difficult to make much more beyond that, or at least quickly. I could work as a contractor for more money but I'm basically locked in my current position for the next couple years. I just started pursuing a master's degree for free (everything is 100% covered by the government) but it requires that I stay a fed until graduation.
What about your spouse? Could she start working full time? Is she planning to stay home with the child?

You posted before about child care but I would urge you to examine that very closely. Let's say you each take your parental leave sequentially (unlikely, you will probably need and want to take some concurrently) that buys you 24 weeks. Say your leave carryover is 240 hours each so that's another 12 weeks total so you've got nine months covered. I think expecting relatives to care for the child full time has a lot of pitfalls even when relatives have the best of intentions, it's just so much work caring for an infant that most grandparents don't have the stamina to do day in and day out. You really need a concrete, reliable child care plan because even though you're home it is impossible to work with an infant...just ask any of your co-workers that had their daycares close because of COVID.

I live further out in FFX Co. and I pay $1,200 per child at an in-home daycare which is really cheap. Centers by me are around $1,700 per child and they're probably more by you since you're closer in.

You didn't respond to my questions above regarding your net income but maybe you're currently both maxing your TSP and, if so, you could probably reduce that to the match amount and generate some cash flow that way. If that generates some additional moneys you could be ok and then just put your increases into savings going forward. I assume based on your ages you guys are not at Step 10 so those WIGI average about 1.5% per year plus whatever else congress provides.
Cobra Commander,

They are not. From the first post,


<<Thrift Savings Plan $50,864.98
Retirement Contribution Rate = 7.89% of total gross income>>


KlangFool
Got it, thank you, I didn't read carefully enough. In that case, I reiterate my questions above about how this is going to work from a net income standpoint once OP has children (i.e. probably daycare costs or loss of wife's income, probably about equal here) unless they dramatically cut their spending. OP said they are spending $2.5K per month on everything else (presumably includes all non-rent items since they are living rent free so includes utilities, car insurance, etc.) which isn't an extravagant amount so there's probably not a ton to cut there. Of course, there will be some extra items with a baby such as diapers. A baby doesn't have to be super expensive but if nursing doesn't work out or they need to supplement (almost everyone I knew did) formula, for example, can easily be $100 a month.

Cobra Commander,

It is very simple.


If OP is hardly saving any money living rent-free without a child, how could OP sustain his current lifestyle with a house and a child? The numbers do not add up.


KlangFool
Maybe this will help. This is currently our entire monthly budget (we use YNAB):

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We bumped the total budget up to $3,020.65 per month so with our current income that leaves $3,267.72 remaining for the mortgage. The reason we don't have more saved is because the focus until like two months ago was on paying down debt. The current arrangement is that we're living at my MIL's house for free except for the maintenance and utilities.
Last edited by Turtlemilk on Tue Nov 10, 2020 5:57 pm, edited 1 time in total.
Topic Author
Turtlemilk
Posts: 58
Joined: Tue Dec 03, 2019 2:00 pm

Re: House Purchase Sanity Check

Post by Turtlemilk »

Meg77 wrote: Tue Nov 10, 2020 3:50 pm As a banker I just want to chime in on your tax questions regarding the structure.

You won't owe any taxes on the gift of equity. Your MIL will owe gift tax though since she is making a gift of more than $15,000 to each of you in one calendar year, which is the max you can give without paying gift taxes (if MIL is married then both she and her spouse can give you each $15K which increases the per year amount that can be gifted to $60K to you guys as a couple). But gift taxes are paid by the GIVER, not the recipient. She can file special tax forms to take advantage of her lifetime gift tax exemption of $11.58MM and avoid paying any gift tax. Make sure she talks to her CPA about this to document it all correctly. But you guys don't need to sweat it.

If MIL is selling you the house - which is what it sounds like - then your cost basis will be the purchase price (plus capital improvements you make over time) just like in any ordinary real estate home purchase.

It's a stretch, but not a big one. You'll have 20% down (even better that you're getting that as a gift) and you'll have no other debt and nearly $20K of savings in the bank. Plus you've started retirement saving. Sure you should be contributing more like 15% of income to retirement, and sure in an ideal world the home would be less than a third of your take home pay - but you're young and can catch up, especially if you stay here long term. And you already live there and it would offend MIL if you decline this great gift and you can always sell it and move if it becomes a strain.

Enjoy the house. If you stop enjoying it down the road, sell it. It's not that big of a deal.
That's what I was thinking, since we'd have immediate equity we could just sell and move elsewhere if it doesn't work out. I guess it's possible 2008 repeats itself right as we need to sell, though.
KlangFool
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Re: House Purchase Sanity Check

Post by KlangFool »

Turtlemilk wrote: Tue Nov 10, 2020 5:43 pm
We bumped the total budget up to $3,020.65 per month so with our current income that leaves $3,267.72 remaining for the mortgage. The reason we don't have more saved is because the focus until like two months ago was on paying down debt. The current arrangement is that we're living at my MIL's house for free except for the maintenance and utilities.
Turtlemilk,

You are looking at the trees instead of the forest.


A) What is your current annual saving?


B) What will be your annual saving after buying the house?


That is the bottom line. Do you have enough safety margin for the kid and the house?

<<The current arrangement is that we're living at my MIL's house for free except for the maintenance and utilities.>>

Why in a hurry to buy the house? Can you pay rent to your MIL instead?


KlangFool
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Topic Author
Turtlemilk
Posts: 58
Joined: Tue Dec 03, 2019 2:00 pm

Re: House Purchase Sanity Check

Post by Turtlemilk »

KlangFool wrote: Tue Nov 10, 2020 6:02 pm
Turtlemilk wrote: Tue Nov 10, 2020 5:43 pm
We bumped the total budget up to $3,020.65 per month so with our current income that leaves $3,267.72 remaining for the mortgage. The reason we don't have more saved is because the focus until like two months ago was on paying down debt. The current arrangement is that we're living at my MIL's house for free except for the maintenance and utilities.
Turtlemilk,

You are looking at the trees instead of the forest.


A) What is your current annual saving?


B) What will be your annual saving after buying the house?


That is the bottom line. Do you have enough safety margin for the kid and the house?

<<The current arrangement is that we're living at my MIL's house for free except for the maintenance and utilities.>>

Why in a hurry to buy the house? Can you pay rent to your MIL instead?


KlangFool
I thought I just answered this question?

After budgeting for everything there's $3,267.72 remaining every month for saving or retirement on top of the current 7.89% contribution rate. Minus the mortgage would be $1,094.16 every month for saving or additional retirement.

Yeah, ideally we would do that, but unfortunately she didn't save enough for retirement nor does she have a pension. She desperately wants to retire.
marcopolo
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Joined: Sat Dec 03, 2016 9:22 am

Re: House Purchase Sanity Check

Post by marcopolo »

Meg77 wrote: Tue Nov 10, 2020 3:50 pm As a banker I just want to chime in on your tax questions regarding the structure.

You won't owe any taxes on the gift of equity. Your MIL will owe gift tax though since she is making a gift of more than $15,000 to each of you in one calendar year, which is the max you can give without paying gift taxes (if MIL is married then both she and her spouse can give you each $15K which increases the per year amount that can be gifted to $60K to you guys as a couple). But gift taxes are paid by the GIVER, not the recipient. She can file special tax forms to take advantage of her lifetime gift tax exemption of $11.58MM and avoid paying any gift tax. Make sure she talks to her CPA about this to document it all correctly. But you guys don't need to sweat it.

If MIL is selling you the house - which is what it sounds like - then your cost basis will be the purchase price (plus capital improvements you make over time) just like in any ordinary real estate home purchase.

It's a stretch, but not a big one. You'll have 20% down (even better that you're getting that as a gift) and you'll have no other debt and nearly $20K of savings in the bank. Plus you've started retirement saving. Sure you should be contributing more like 15% of income to retirement, and sure in an ideal world the home would be less than a third of your take home pay - but you're young and can catch up, especially if you stay here long term. And you already live there and it would offend MIL if you decline this great gift and you can always sell it and move if it becomes a strain.

Enjoy the house. If you stop enjoying it down the road, sell it. It's not that big of a deal.
Are sure about the highlighted statement?

I was under the impression that amounts over the annual exclusion levels need to be reported. But, when not reported, while there may be IRS fines, the amounts are still not subject to any gift tax as long as accumulated totals are still below the lifetime max.
Once in a while you get shown the light, in the strangest of places if you look at it right.
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Cobra Commander
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Re: House Purchase Sanity Check

Post by Cobra Commander »

Turtlemilk wrote: Tue Nov 10, 2020 6:08 pm
KlangFool wrote: Tue Nov 10, 2020 6:02 pm
Turtlemilk wrote: Tue Nov 10, 2020 5:43 pm
We bumped the total budget up to $3,020.65 per month so with our current income that leaves $3,267.72 remaining for the mortgage. The reason we don't have more saved is because the focus until like two months ago was on paying down debt. The current arrangement is that we're living at my MIL's house for free except for the maintenance and utilities.
Turtlemilk,

You are looking at the trees instead of the forest.


A) What is your current annual saving?


B) What will be your annual saving after buying the house?


That is the bottom line. Do you have enough safety margin for the kid and the house?

<<The current arrangement is that we're living at my MIL's house for free except for the maintenance and utilities.>>

Why in a hurry to buy the house? Can you pay rent to your MIL instead?


KlangFool
I thought I just answered this question?

After budgeting for everything there's $3,267.72 remaining every month for saving or retirement on top of the current 7.89% contribution rate. Minus the mortgage would be $1,094.16 every month for saving or additional retirement.

Yeah, ideally we would do that, but unfortunately she didn't save enough for retirement nor does she have a pension. She desperately wants to retire.
The two big items I see missing are daycare and 529s for college savings. You don't need to save for college right away and plenty of people start the 529s after the daycare years but I hope you have a really solid plan for childcare. Up by you will probably not be able to find part-time childcare because it is so in demand in your area.
Freetime76
Posts: 745
Joined: Wed Jun 26, 2019 8:26 pm

Re: House Purchase Sanity Check

Post by Freetime76 »

Thoughts for the OP: it may help to consider what your rate of debt payoff per month was? Your living expenses were minimal, so loads of extra money should’ve been flying around, right?
Basically food + insurance plus + utilities (maybe) + gas. Maybe cat or dog food. If you were putting **several** thousand a month - I.e. considerably more than the house payment will be towards debt....because that’s what you’ll need to really afford this house - then I’d feel more confident about being able to save a decent emergency fund, that your household is living on a budget and below your means, and you can follow a plan.

Personally, I wouldn’t do it. Too much risk, and I really don’t like debt. We buy cheaper houses, and yes, I am familiar with the area. We’ve been through too many periods of seriously, major, sleep-disturbing, fight-ensuing money stress...income interruptions, house repair fiascos, housing downturn when people literally can’t sell and need to. We learned the hard way to play closer to home (sorry if pun). Big savings, small house, small upkeep, small taxes. Yes, “it all worked out okay in the end” but I’m not sure the stress, near divorce, and hemorrhage of money to get a house sold (when our jobs changed and later income wasn’t cutting it) was worth it. Certainly not the golden ticket...maybe just evidence that we survived :wink:

I do agree that the OP is in the building phase of life. I also agree that you’re doing this regardless.
Are you sure you’ll be allowed to sell this place if you want?

This concerned me: I wouldn’t give a rip what *any* forum says :confused :annoyed :oops: ETA: as far as a major driver for a decision.
here’s the thing:
a) mmm and other forums contain people. People mess up their stuff all.the.time. Some people really like using OPM and having high payments etc etc as a way of life. Less experienced people (or maybe all) tend to talk when a financial thing is going well and cry/scream silently, alone when it’s going down in flames. You’ve got a highly biased sample. Consider the source...and all of us might be unemployed, living in our parents’ basements, you have no idea who is writing.

[ although, I will say, Bogleheads does have a frequent contributors who are experts, experienced, successful in seeming, based on many years of posts and references by other members. I find this an unusual benefit of this forum.]

b) you and your spouse are going from “ lala no rent “ to “ big payment and if the xyz breaks we are paying for it “ to ??kids? who knows? :D make sure your butts are covered. Thoroughly. Do NOT rely on the bank of MIl. That will wear thin for at least one of you rather quickly. Give yourselves the satisfaction of being self-sufficient adults.

c) are you absolutely sure your MIL isn’t going to need that 100K equity later in life ?

d) please at least delay until you have saved an emergency fund for life after the house purchase.
Last edited by Freetime76 on Tue Nov 10, 2020 8:37 pm, edited 2 times in total.
Please spell out new acronyms. Thank you.
wilked
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Re: House Purchase Sanity Check

Post by wilked »

What was the source of the debt you’ve been paying down? How much, how long to lay down?
KlangFool
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Re: House Purchase Sanity Check

Post by KlangFool »

Turtlemilk wrote: Tue Nov 10, 2020 6:08 pm
KlangFool wrote: Tue Nov 10, 2020 6:02 pm
Turtlemilk wrote: Tue Nov 10, 2020 5:43 pm
We bumped the total budget up to $3,020.65 per month so with our current income that leaves $3,267.72 remaining for the mortgage. The reason we don't have more saved is because the focus until like two months ago was on paying down debt. The current arrangement is that we're living at my MIL's house for free except for the maintenance and utilities.
Turtlemilk,

You are looking at the trees instead of the forest.


A) What is your current annual saving?


B) What will be your annual saving after buying the house?


That is the bottom line. Do you have enough safety margin for the kid and the house?

<<The current arrangement is that we're living at my MIL's house for free except for the maintenance and utilities.>>

Why in a hurry to buy the house? Can you pay rent to your MIL instead?


KlangFool
I thought I just answered this question?

After budgeting for everything there's $3,267.72 remaining every month for saving or retirement on top of the current 7.89% contribution rate. Minus the mortgage would be $1,094.16 every month for saving or additional retirement
.

Yeah, ideally we would do that, but unfortunately she didn't save enough for retirement nor does she have a pension. She desperately wants to retire.
Turtlemilk,

<<
After budgeting for everything there's $3,267.72 remaining every month for saving or retirement on top of the current 7.89% contribution rate. Minus the mortgage would be $1,094.16 every month for saving or additional retirement
.>>


So, what is your annual saving after adding these two numbers? This is for your own benefit. Not me. Are you comfortable with this number? Before having a child later.


<<Yeah, ideally we would do that, but unfortunately she didn't save enough for retirement nor does she have a pension. She desperately wants to retire.>>


A) And, why is this a problem if you pay her a market-level rent or $2,000 per month?


B) That is a better and safer deal than collecting 420K from you.


KlangFool
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Outer Marker
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Re: House Purchase Sanity Check

Post by Outer Marker »

Turtlemilk wrote: Mon Nov 09, 2020 11:34 am ...I must say I'm surprised by the responses.

I asked this exact question on other forums and the reactions were overwhelmingly positive. For example, "You're violating the rule of thumb that you shouldn't assume a mortgage greater than 3x your annual income, however you'll have immediate equity and a low interest rate." Or, "Hell yeah I would take that deal, your numbers are solid." Maybe Bogleheads is just way more conservative?
I'm more than surprised by the responses, I'm shocked. I'm very financially conservative, but this a "no brainer" in my opinion. First off, you're being gifted $110,000, so if it turns out to be too much house and you decide to sell, you're $110K ahead right off the bat. That might not be your MIL's intention, and it probably won't happen, but why in the world would you say no to a $110,000 gift.

Falls Church is a great area and I don't think people that aren't from the DMV have a clue as to what it costs to live here. $2,200 doesn't buy you much of a rental, even in a crappy older building. If you were in Manhattan, you could easily be paying 50% of your income for housing. 3.5x earnings is not at all unreasonable in a HCOL area.

There's something wacky with your closing costs and title insurance estimate. I suppose that the county stamp and title transfer could amount to that much, but definiately fly speck it and make sure they are unavoidable goverment fees.

Does your MIL need the money right now? This might be a candidate for an owner-financed transaction where you'd be paying the interest to her vs. the bank. There are pros and cons - i.e. "doing business" with family, but you might want to think about it.

Keep plugging away and investing as best you can in the TSP. Stay away from junk like cryptocurrency, etc.

Say a huge thank you to your MIL, enjoy your house and family, and sleep well.
PowderDay9
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Re: House Purchase Sanity Check

Post by PowderDay9 »

Turtlemilk wrote: Mon Nov 09, 2020 11:34 am I asked this exact question on other forums and the reactions were overwhelmingly positive. For example, "You're violating the rule of thumb that you shouldn't assume a mortgage greater than 3x your annual income, however you'll have immediate equity and a low interest rate." Or, "Hell yeah I would take that deal, your numbers are solid." Maybe Bogleheads is just way more conservative?
Yes, us Bogleheads are very conservative. :D We talk about whether a 2.5% or 3% withdrawal rate on millions of dollars is safe for a traditional retirement. Meanwhile about half of people in the US have zero retirement savings and the median at retirement age is less than $200k.

You're going to buy this house regardless but I think you should. Here are the reasons.
1. You already live there and know the house well.
2. You have solid job security, a pension and good benefits.
3. You're young and might increase your salary.
4. You are getting a $110k equity gift.
5. You have an extensive family support system near by.
6. You'll still be saving about $1k each month with your reasonable expenses.
7. If you plan to stay there long term (>10 years), the house will probably appreciate considerably.
8. You have to live somewhere and even if you find a smaller place to rent, it probably won't save you much money given you're in a HCOL area.
9. Interest rates are at record lows. 2.625% on 30 years is incredible.
KlangFool
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Re: House Purchase Sanity Check

Post by KlangFool »

Turtlemilk wrote: Tue Nov 10, 2020 6:08 pm

Yeah, ideally we would do that, but unfortunately she didn't save enough for retirement nor does she have a pension. She desperately wants to retire.


Turtlemilk,

I do not know which culture you belong to. But, please understand the cultural and family obligation of your culture about accepting 100+K gift from your MIL that didn't save enough for retirement with no pension.

In some cultures, that means if your MIL ever runs out of money, you are obligated to support her in her retirement. This may or may not comes into play in your case.

KlangFool
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cchrissyy
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Re: House Purchase Sanity Check

Post by cchrissyy »

Freetime76 wrote: Tue Nov 10, 2020 6:56 pm Thoughts for the OP: it may help to consider what your rate of debt payoff per month was? Your living expenses were minimal, so loads of extra money should’ve been flying around, right?
I'm curious about this too. OP, you don't have an especially large amount in savings and you say it's because until now you were paying off debt. ok. how much did you pay and over how long? is it more than what this house payment will be? if yes, that's a strong sign you can afford this house in terms of the monthly cash flow.
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z06ray
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Re: House Purchase Sanity Check

Post by z06ray »

This purchase makes sense given the gift of equity... but why are you accepting 110k in a gift from your MIL who desperately wants to retire but didn’t save enough?

Maybe you answered it, but can your wife work full time? I don’t think you mentioned kids yet. Why not work full time at least until kids come. I am not quite sure why one would work part time during prime earning years when they really don’t have much going on.

You mention recently paying off debt.. I am assuming this was education? Assuming bachelors degree and 4 year duration. She should be ~13 years removed and you ~9. Seems like a long time given you aggressively paid down the debt and are living rent free.

You’re going to do it anyway
HomeStretch
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Re: House Purchase Sanity Check

Post by HomeStretch »

Turtlemilk wrote: Tue Nov 10, 2020 6:08 pm Yeah, ideally we would do that, but unfortunately she didn't save enough for retirement nor does she have a pension. She desperately wants to retire.
If your MIL does not have enough saved for retirement, reconsider living in her house rent free and accepting a gift of $110k in equity if you purchase her house. It sounds like she can use the money more than you and your spouse can as you both are in your 30s/prime earning years.
Outer Marker
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Re: House Purchase Sanity Check

Post by Outer Marker »

Is the house fully paid off?

What are your MIL's expected expenses in retirement?

And what is her SSI? (If you know these things).

Just thinking out loud - It is possible that an owner-financed transaction, with you paying her roughly $2,000/mo in P&I, plus social security, say, $1,500, would give her $42,000 in annual income. $48,000 is middle income for a family of 4, so that's not too bad for one in retirement, especially if she moves to a lower cost of living area.

I think that the obligation to support elder relatives exists in most cultures and will be there whether or not you accept the gift. You're not going to leave your wife's mom out on the street regardless. She wants to help give you guys a head start. It's a very thoughtful gift, and I'm sure she has some attachment to the house and wants her home to go to a good home.
TheDDC
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Re: House Purchase Sanity Check

Post by TheDDC »

Good. Now plan your budget going down to one income. You probably won't want to outsource child care.

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novolog
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Re: House Purchase Sanity Check

Post by novolog »

OP,

Why is your MIL giving you a gift of 110k if she does not have enough saved for retirement? Genuinely curious.
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onourway
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Re: House Purchase Sanity Check

Post by onourway »

Turtlemilk wrote: Tue Nov 10, 2020 5:43 pm Maybe this will help. This is currently our entire monthly budget (we use YNAB):
This is great - and would help me be somewhat more supportive of you making this purchase. I will reiterate a couple of things though.

- Where is childcare in this plan? I know you have a bunch of accrued time off coming to you - but what’s the long term plan? As noted many times - this alone could blow a $1500+/month hole in your budget that you don’t have.

- There are no other kid expenses let alone college savings in this plan.

- $200/month for auto expenses is not sustainable long-term if you intend to have two automobiles (likely if even just one of you is commuting - the other staying home with the kids will also need a vehicle.

- I agree that taking $100k from someone who doesn’t have enough to retire is concerning. Does she really need the money as a lump sum or would owner financing be a possibility, giving her a nice income stream?

Obviously many of us on this site are more conservative with housing costs than the majority of people - so I can see why you are getting different responses from other sites. Still, owning a home that stresses you financially is a lot to endure year over year. You are getting the voice of experience here - with many responses from people who have been through this at least once, if not twice or more. Things change, and having a buffer to allow you to absorb those changes without having to make painful cuts is a much more pleasant path to follow. With this purchase and a kid in the future you won’t have much of any buffer at all, so every bump is going to hurt. You and your spouse will have to decide how comfortable you are with that.
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Re: House Purchase Sanity Check

Post by neverpanic »

As a prior poster noted, northern VA is an area where housing is often a much higher percentage of household income than it is in average COL areas.

1) Yes, you can afford it as long as nothing too bad happens to either of you.

2) BUT your statement about MIL not having enough money to retire caught my attention, given the size of the gift. I understand that it's against the rules to be rude (so I'll try to be gentle), but while it's her home to do whatever she wants, it's my distant observation that you and your wife may want to consider the position you are helping to put MIL in.

I understand wanting to be able to raise a family in a great area like Falls Church. And in a lot of cases, the grandparents do contribute financially to make it possible. But I would think cases where a grandparent works 3-4 more years past a normal retirement age to make it happen would be extremely rare. I have no data to support that supposition, but personalizing things a bit, I would not be able to put my parents in that position, nor could I do it to my wife's parents just so that we could have a dream home.

Some might complain that many posters here are "too conservative" regarding home purchase questions, but when it comes to educating readers about self-sufficiency - e.g. savings rates and living within one's means, etc., I find the typical BH forum contributor to be spot-on.

My apologies if this was too harsh, but I hope you understand I mean no harm or insult.
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Re: House Purchase Sanity Check

Post by KlangFool »

Outer Marker wrote: Tue Nov 10, 2020 9:53 pm Is the house fully paid off?

What are your MIL's expected expenses in retirement?

And what is her SSI? (If you know these things).

Just thinking out loud - It is possible that an owner-financed transaction, with you paying her roughly $2,000/mo in P&I, plus social security, say, $1,500, would give her $42,000 in annual income. $48,000 is middle income for a family of 4, so that's not too bad for one in retirement, especially if she moves to a lower cost of living area.

I think that the obligation to support elder relatives exists in most cultures and will be there whether or not you accept the gift. You're not going to leave your wife's mom out on the street regardless. She wants to help give you guys a head start. It's a very thoughtful gift, and I'm sure she has some attachment to the house and wants her home to go to a good home.

Outer Marker,

If OP's wife is the only child, it may not matter. But, if there are siblings, then, disputes may occur who should support her mom more.


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Re: House Purchase Sanity Check

Post by HMSVictory »

You can not afford this house.

While your MIL is extremely generous to offer you a $110k gift it is causing you to overlook the fact that it's too much money for you. You should wait until you have a significant down payment and an emergency fund. Build your cash (maybe she will let you live there rent free for 2 more years) then execute on the deal when you have the money.

Just saw the part about MIL not having enough in retirement money. Run away from this deal you are asking for a world of trouble with this one!
Stay the course!
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Re: House Purchase Sanity Check

Post by Outer Marker »

HMSVictory wrote: Wed Nov 11, 2020 9:09 am You can not afford this house.

While your MIL is extremely generous to offer you a $110k gift it is causing you to overlook the fact that it's too much money for you. You should wait until you have a significant down payment and an emergency fund. Build your cash (maybe she will let you live there rent free for 2 more years) then execute on the deal when you have the money.

Just saw the part about MIL not having enough in retirement money. Run away from this deal you are asking for a world of trouble with this one!
I don't understand the negativity. A decent apartment in N. VA is going to be the same or more monthly. Cash flow from an owner-financed transaction plus social security is enough to fund a reasonable retirement on some $42,000 a year. If MIL runs short, you're probably going to have to step in in any event, but this seems like deal that works well for everyone, gives you a jumpstart on home ownership, and makes your MIL feel good. It also avoids transaction costs to realtors that would eat up 6% of the home value. Having a federal job is practically an emergency fund, and I don't see any real cash shortage.
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Re: House Purchase Sanity Check

Post by HMSVictory »

Outer Marker wrote: Wed Nov 11, 2020 10:16 am
HMSVictory wrote: Wed Nov 11, 2020 9:09 am You can not afford this house.

While your MIL is extremely generous to offer you a $110k gift it is causing you to overlook the fact that it's too much money for you. You should wait until you have a significant down payment and an emergency fund. Build your cash (maybe she will let you live there rent free for 2 more years) then execute on the deal when you have the money.

Just saw the part about MIL not having enough in retirement money. Run away from this deal you are asking for a world of trouble with this one!
I don't understand the negativity. A decent apartment in N. VA is going to be the same or more monthly. Cash flow from an owner-financed transaction plus social security is enough to fund a reasonable retirement on some $42,000 a year. If MIL runs short, you're probably going to have to step in in any event, but this seems like deal that works well for everyone, gives you a jumpstart on home ownership, and makes your MIL feel good. It also avoids transaction costs to realtors that would eat up 6% of the home value. Having a federal job is practically an emergency fund, and I don't see any real cash shortage.
Your math is correct but you are not including the emotional side of money into it including the other family members who will feel cheated! "Why did so and so get gifted house equity"???? Everyone has crazy somewhere in the family (I know I do). This is asking for trouble in my opinion (which is worth what the op paid which is zero). Ha!

I am an essential governmental employee and went 3 months without a paycheck once. Yes I got the money in backpay but it can and does happen.
Stay the course!
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Re: House Purchase Sanity Check

Post by sd323232 »

I really don't understand OP, why is there need to convince people here that he is making right decision? He got the answer already. He is grown man, go buy house lol
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Re: House Purchase Sanity Check

Post by sd323232 »

Outer Marker wrote: Tue Nov 10, 2020 8:29 pm
Turtlemilk wrote: Mon Nov 09, 2020 11:34 am ...I must say I'm surprised by the responses.

I asked this exact question on other forums and the reactions were overwhelmingly positive. For example, "You're violating the rule of thumb that you shouldn't assume a mortgage greater than 3x your annual income, however you'll have immediate equity and a low interest rate." Or, "Hell yeah I would take that deal, your numbers are solid." Maybe Bogleheads is just way more conservative?
I'm more than surprised by the responses, I'm shocked. I'm very financially conservative, but this a "no brainer" in my opinion. First off, you're being gifted $110,000, so if it turns out to be too much house and you decide to sell, you're $110K ahead right off the bat. That might not be your MIL's intention, and it probably won't happen, but why in the world would you say no to a $110,000 gift.

Falls Church is a great area and I don't think people that aren't from the DMV have a clue as to what it costs to live here. $2,200 doesn't buy you much of a rental, even in a crappy older building. If you were in Manhattan, you could easily be paying 50% of your income for housing. 3.5x earnings is not at all unreasonable in a HCOL area.

There's something wacky with your closing costs and title insurance estimate. I suppose that the county stamp and title transfer could amount to that much, but definiately fly speck it and make sure they are unavoidable goverment fees.

Does your MIL need the money right now? This might be a candidate for an owner-financed transaction where you'd be paying the interest to her vs. the bank. There are pros and cons - i.e. "doing business" with family, but you might want to think about it.

Keep plugging away and investing as best you can in the TSP. Stay away from junk like cryptocurrency, etc.

Say a huge thank you to your MIL, enjoy your house and family, and sleep well.
I'm not shocked, I'm actally glad people here have enough decency to point out that MIL does not have enough for retirement and may be OP should not profit from this deal even if MIL wants it. MIL does not have many years to save for retirement, while OP is still young and has many years ahead of him to save for retirement.
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Re: House Purchase Sanity Check

Post by Outer Marker »

HMSVictory wrote: Wed Nov 11, 2020 10:27 am Your math is correct but you are not including the emotional side of money into it including the other family members who will feel cheated! "Why did so and so get gifted house equity"???? Everyone has crazy somewhere in the family (I know I do). This is asking for trouble in my opinion (which is worth what the op paid which is zero). Ha!

I am an essential governmental employee and went 3 months without a paycheck once. Yes I got the money in backpay but it can and does happen.
I take your point. I was sort of assuming that DW was an only child. That said, its her Mom's money and if she's the favored daughter, well, too bad for Aunt Millie. Its not at all uncommon for family members to help each other out and get a head start. If you get a $100,000 gift on the front end, and MIL needs support 30 years down the road when the payments run out, just keep paying her at the same and make it up on the back end. And, yeah, the budget battles are rediculous, but the feds always get paid eventually. The contractors get screwed, but the OP is unlikely to, especially with the incoming administration. A HELOC can be used to cover any hicups.
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Re: House Purchase Sanity Check

Post by KlangFool »

Outer Marker wrote: Wed Nov 11, 2020 10:45 am
HMSVictory wrote: Wed Nov 11, 2020 10:27 am Your math is correct but you are not including the emotional side of money into it including the other family members who will feel cheated! "Why did so and so get gifted house equity"???? Everyone has crazy somewhere in the family (I know I do). This is asking for trouble in my opinion (which is worth what the op paid which is zero). Ha!

I am an essential governmental employee and went 3 months without a paycheck once. Yes I got the money in backpay but it can and does happen.
I take your point. I was sort of assuming that DW was an only child. That said, its her Mom's money and if she's the favored daughter, well, too bad for Aunt Millie. Its not at all uncommon for family members to help each other out and get a head start. If you get a $100,000 gift on the front end, and MIL needs support 30 years down the road when the payments run out, just keep paying her at the same and make it up on the back end. And, yeah, the budget battles are rediculous, but the feds always get paid eventually. The contractors get screwed, but the OP is unlikely to, especially with the incoming administration. A HELOC can be used to cover any hicups.
Outer Marker,

OP has the ability to refuse the gift. By accepting the gift, OP takes responsibility for the consequences of the decision.

<<MIL needs support 30 years down the road when the payments run out, just keep paying her at the same and make it up on the back end.>>

OP cannot afford the house even with the gift. If OP cannot sustain his own lifestyle with his income, he is not in any shape to help anyone else.


In summary, financially, this house purchase created 2 problems.


A) Unsustainable MIL retirement


B) Unsustainable OP's household


Financially, it is a bad idea. The family dynamic side is a bad idea too.


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Re: House Purchase Sanity Check

Post by Sagefemme »

This is an amazing thread--I am learning so much!! There is an amazing amount of perspective for the OP. And the plot keeps getting thicker.

What I want to know is, what does your wife think of all this? Is she reading the posts/replies? I very much hope that whatever happens, you and she are FIRMLY on the same page. Otherwise it is difficult to endure the (possible) hardships to come, together. You will need to be able to support each other unequivocally. You want to avoid bitterness and blame like the plague.
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Dan-in-Virginia
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Re: House Purchase Sanity Check

Post by Dan-in-Virginia »

I would ask for a price reduction to $400K. If not, there are plenty of small single family homes

You didn’t say if you lived in Falls Church City or not (as I do) which has a terrific school system, but higher property tax. Many people refer to Greater Falls Church (Fairfax and Arlington) as “Falls Church.” Falls Church City is zip 22046.

https://ggwash.org/view/43792/where-is- ... ch-exactly

https://www.usnews.com/news/healthiest- ... hurch-city

Renting is also an option, and one that shouldn’t be dismissed. I remember child care costs. Man... My next door neighbor is a renter and the owner lives a few doors down on my street.

I do recommend the area, but consider the crime heat map. There are parts of Falls Church that are better than others. I live in the west part of Falls Church City north of Rt 29. I monitor the crime report each week and it’s mostly nothing. A typical report includes a random drunk or DUI near the restaurants on West Broad St. Most of the consistent property crime occurs in the Hillwood Ave area in southeastern Falls Church City.
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Re: House Purchase Sanity Check

Post by Ron Ronnerson »

Ten years ago, at age 35, we purchased a house that cost a bit over $500k. We had almost identical income, assets, and expenses as the OP along with stable jobs and expectations of a future pension. Our interest rate was 5.25% and property taxes were $9k/year. We did not have kids at that time but hoped to someday.

Some people advocate not spending more than a certain multiple of income on a house but that ignores important individual circumstances. The interest rate greatly affects the size of the payment. Non-housing expenses, how many kids you have, taxes you pay, and job security are important to consider too.

As someone who had very similar numbers, I can say that it worked out fine for us. Though, of course, there are no guarantees in life. We were able to afford the house but just couldn’t save much at first; we maxed our Roth IRAs and I made mandatory pension contributions but that was it. As my income went up, we slowly increased our savings rate. We became parents in our late 30s and my wife stopped working in her early 40s to be a stay-at-home parent. We’re in our mid-40s now and are in a good place on just my income these days (I’m a teacher in the Bay Area).

The big difference is that we did not rely on family to help us afford the house. No help was offered to us but even if it were, we would certainly not have accepted a large gift from a parent who could not afford to give it. If the gift is necessary to be able to buy the house, I personally wouldn’t proceed. Otherwise, run the numbers carefully and buy it if it seems manageable. You don’t want to over-extend yourself but too much caution has risk in it too.

By the way, I would also have a plan carefully developed for child care when thinking through all this. Kids can cost a lot of money but family support can definitely help with that. My mother-in-law used to take care of our daughter for part of the week and it helped significantly in terms of keeping child care costs low.
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Re: House Purchase Sanity Check

Post by wilked »

No offense, but the above story and others that are often in these threads aren't the most helpful for OP.

Typically they go something like

"X years ago we were in a similar position, with similar income. We bought a house for 3-5X our salary, and while it wasn't easy, we made it through"

What is not written but implied

"We didn't experience an unexpected job loss, nor a major health issue that precluded us from working, nor have a child with special needs, etc etc"

Most people don't have the above events. It doesn't mean it's a good idea to overextend yourself to a point where you have no safety net.
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Re: House Purchase Sanity Check

Post by boomer_techie »

I think OP mentioned already living in this house. What hasn't been mentioned: Where does the MIL live? In this house? Will she remain in the house after a hypothetical purchase?

So the MIL has insufficient retirement funds. What's the reason for wanting a 400K lump sum? Is it to diversify out of real estate? Is it to buy an annuity? Or does the MIL want to buy a retirement condo in Florida/Arizona/somewhere?
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Re: House Purchase Sanity Check

Post by Ron Ronnerson »

wilked wrote: Thu Nov 12, 2020 7:39 am No offense, but the above story and others that are often in these threads aren't the most helpful for OP.

Typically they go something like

"X years ago we were in a similar position, with similar income. We bought a house for 3-5X our salary, and while it wasn't easy, we made it through"

What is not written but implied

"We didn't experience an unexpected job loss, nor a major health issue that precluded us from working, nor have a child with special needs, etc etc"

Most people don't have the above events. It doesn't mean it's a good idea to overextend yourself to a point where you have no safety net.
I shared the experience because I have very similar circumstances as OP. Most people aren't in a public sector job with greater job security and a pension. Also, using a multiple of income to determine house affordability is too blunt a tool for the job. Individual circumstances matter such as how much an apartment would cost, what the other expenses are, the ages of the people involved, and the interest rate on the loan. According to some people who are familiar with the geographical area in which the OP resides, rent in the area would not exactly be cheap either.

Also, I agree that overextending yourself is not good and, actually, I specifically said this above. Too much caution has issues too, though. It's sort of like an all-bond asset allocation. You expose yourself to other types of risk. That being said, it is definitely useful to have a safety net. We don't have a special needs child and haven't had major health issues but our daughter's adoption was not inexpensive. Unexpected expenses will come up and people should have an adequate emergency fund.
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Re: House Purchase Sanity Check

Post by BrklynMike »

Wanted to comment for perspective.

My wife and I just bought a $500k house in the northeast with the same property taxes. Our payment closely tracks what you calculated for yourself for PITI.

My wife and I have a combined income of close to $300k per year. We put $100k down, put another $25k into the house immediately for deferred maintenance (refinishing floors, painting, replacing rotted wood, etc.), and are keeping another $50k in emergency funds. This is what we are comfortable with. I'm mostly worried about falling trees or the HVAC system going.

We have one child but hope to have another soon. One child costs about $2k per month in daycare and diapers, etc., if they go full time. We have about $500k in investments. And we spend about $8k per month.

I couldn't imagine buying this house in your shoes. And I suspect the only reason you want to is because of the equity gift. If you can make it a few years and get your wife's income up, then you'll probably be fine. But if you have a problem, it's debt, debt, debt.
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Re: House Purchase Sanity Check

Post by gblack »

This is an interesting conundrum/thread... a few additional thoughts:

1) Couple might be on the hook for MIL under-funded retirement whether or not they accept the equity gift.

2) Couple does not have a child yet, so wouldn't over plan on that situation yet.

3) In fairness, the couple has 100K saved up all total after paying off debt. A couple posters are saying they have no money. 100K is not nothing.

Overall, it's still a hard call. I still think it can be done financially if income going up in next 1-3 years (second jobs? side hustle?). Agree the tangled relationship issues do complicate matters, but not sure if NOT buying house solves those.

Maybe rent for another year? If the MIL needs money, maybe pay her rent? Save during this time and if situation becomes more clear in 1 year?
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Re: House Purchase Sanity Check

Post by Bimmer »

Klangfool,

He did say in his original post that living debt-free allowed him to pay off debt. He didn't say how much, but that is important.

I think it will be tight, but with that family support for childcare (and likely more $$ in the future), as long as feel they could live in this house for a long time (or possibly forever), I think it could work. In this HCOL area, a $510,000 is a very modest house and you likely cannot find a better deal.

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Re: House Purchase Sanity Check

Post by Cobra Commander »

Bimmer wrote: Thu Nov 12, 2020 11:35 pm Klangfool,

He did say in his original post that living debt-free allowed him to pay off debt. He didn't say how much, but that is important.

I think it will be tight, but with that family support for childcare (and likely more $$ in the future), as long as feel they could live in this house for a long time (or possibly forever), I think it could work. In this HCOL area, a $510,000 is a very modest house and you likely cannot find a better deal.

-Bimmer
That's a huge "if" and there's no way I would count on that when making my housing budget. The wife is part time but it is asking a lot to expect family to consistently cover childcare on a weekly basis (2-3 days per week I assume). Even with the best of intentions older family members may just not have the stamina to handle child care on a consistent basis and that's perfectly understandable as dealing with infants and toddlers is really hard. Also, will those same family members be able to handle two children if OP decides to have a second child? I think it will be very difficult for OP to find part-time daycare where OP is at...I live further out in FFX County and it is still difficult to find part-time care. There is such a shortage of child care as you get closer in there's really no reason for providers to offer part-time.

OP will have $1K extra per month if they buy the house (unclear if home repairs are budgeted in there or not), day care costs will probably be at least $1,500 so I don't see how this works unless the DW goes back to work full time.
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Re: House Purchase Sanity Check

Post by wilked »

Cobra Commander wrote: Fri Nov 13, 2020 8:01 am
Bimmer wrote: Thu Nov 12, 2020 11:35 pm Klangfool,

He did say in his original post that living debt-free allowed him to pay off debt. He didn't say how much, but that is important.

I think it will be tight, but with that family support for childcare (and likely more $$ in the future), as long as feel they could live in this house for a long time (or possibly forever), I think it could work. In this HCOL area, a $510,000 is a very modest house and you likely cannot find a better deal.

-Bimmer
That's a huge "if" and there's no way I would count on that when making my housing budget. The wife is part time but it is asking a lot to expect family to consistently cover childcare on a weekly basis (2-3 days per week I assume). Even with the best of intentions older family members may just not have the stamina to handle child care on a consistent basis and that's perfectly understandable as dealing with infants and toddlers is really hard. Also, will those same family members be able to handle two children if OP decides to have a second child? I think it will be very difficult for OP to find part-time daycare where OP is at...I live further out in FFX County and it is still difficult to find part-time care. There is such a shortage of child care as you get closer in there's really no reason for providers to offer part-time.

OP will have $1K extra per month if they buy the house (unclear if home repairs are budgeted in there or not), day care costs will probably be at least $1,500 so I don't see how this works unless the DW goes back to work full time.
I tend to agree here. OP talked about having a baby in next year. I think it's 15-20% of babies are 'high needs'. That family member may be more than happy to watch a non-high needs baby, but may be overwhelemd with a high needs child. My neighbors had a grandparent lined up to watch their children but their second child is autistic and the husband ended up quitting his job to stay home as the grandparent was overwhelmed (he was a Harvard professor, since then stay at home dad). Life throws you curve balls, you need to be able to adjust to those. It's why I advise keeping a nice margin on finances to handle those curve balls
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Re: House Purchase Sanity Check

Post by Meg77 »

marcopolo wrote: Tue Nov 10, 2020 6:16 pm
Meg77 wrote: Tue Nov 10, 2020 3:50 pm As a banker I just want to chime in on your tax questions regarding the structure.

You won't owe any taxes on the gift of equity. Your MIL will owe gift tax though since she is making a gift of more than $15,000 to each of you in one calendar year, which is the max you can give without paying gift taxes (if MIL is married then both she and her spouse can give you each $15K which increases the per year amount that can be gifted to $60K to you guys as a couple). But gift taxes are paid by the GIVER, not the recipient. She can file special tax forms to take advantage of her lifetime gift tax exemption of $11.58MM and avoid paying any gift tax. Make sure she talks to her CPA about this to document it all correctly. But you guys don't need to sweat it.

If MIL is selling you the house - which is what it sounds like - then your cost basis will be the purchase price (plus capital improvements you make over time) just like in any ordinary real estate home purchase.

It's a stretch, but not a big one. You'll have 20% down (even better that you're getting that as a gift) and you'll have no other debt and nearly $20K of savings in the bank. Plus you've started retirement saving. Sure you should be contributing more like 15% of income to retirement, and sure in an ideal world the home would be less than a third of your take home pay - but you're young and can catch up, especially if you stay here long term. And you already live there and it would offend MIL if you decline this great gift and you can always sell it and move if it becomes a strain.

Enjoy the house. If you stop enjoying it down the road, sell it. It's not that big of a deal.
Are sure about the highlighted statement?

I was under the impression that amounts over the annual exclusion levels need to be reported. But, when not reported, while there may be IRS fines, the amounts are still not subject to any gift tax as long as accumulated totals are still below the lifetime max.
You're right; my response was poorly worded. Though it's technically correct - she would owe taxes if she gives more than the excluded amount if she doesn't have them exempted through the lifetime exclusion. Which presumably she'd be eligible for unless she's already given away $11.8MM. She'd just need to make sure to file that. Otherwise in an audit she WOULD be charged for the gift tax unless she could go back and amend her returns (not sure the timeline limits for that), in which case you're right it would probably just be some kind of fine or fee.
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Re: House Purchase Sanity Check

Post by andypanda »

I didn't know there were any $500,000 houses left in Falls Church. :) I grew up in Rockville MD a long time ago, so what do I know, but I do have friends from up that way.

www.realtor.com/realestateandhomes-deta ... 2292-59093

3 bed, 1 bath, 884 sq.ft., .23 acres, built 1954 - only $590,000. "Last Sold$ 390k in 2004"

"Location location location!! Great investment opportunity, or an opportunity to own a nice piece of land in sought after Pimmit Hills! Build your own custom home. Value is in the land. The home is livable and rentable."
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