First Time Home Buyer Affordability Feedback (round 2)

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Topic Author
TravelSaver
Posts: 19
Joined: Sun Apr 21, 2019 3:00 pm

First Time Home Buyer Affordability Feedback (round 2)

Post by TravelSaver »

Hey bogleheads, thanks in advance for any help. My wife and I are first time home buyers. Ideally, we'd like to move into something slightly larger (currently in a 2/2 bath apartment) to support our growing family (baby on the way). That said, we could certainly make-do in our current apartment, though it is a bit above what we'd like to be paying monthly.

***Income***
Gross Income (2020 no bonus): $205K
Gross Income (2020 w/ bonus): $320K (includes $70K yet to be paid in March, not reflected in cash balance below)
Gross Income (2021 no bonus): $230K
Gross Income (2021 w/ bonus target): $370K

***Cash (Checking/High Yield)***
~$85K

***Savings (Retirement)***
~$265K (this is mostly from me, spouse was late to enter employment)
Combined income allocation ~18% of pre-tax income 401K contribution

***Savings (Taxable Brokerage)***
~$40K

***Debt***
Student Loans: $50K (historically had not paid down due to full tax refund of both principal and interest – moved to new state and no longer applies)
Car Loan: $10k

Credit Scores: ~800

Age: 33/31

Current is ~$3000/month (again on the high end of what we could be paying and still live comfortably) and we spend generally about $2000 a month on food, utilities, etc. And maybe another $500-$1000 on travel (which we are prepared to pull back on), plus probably around $400 a month in additional IRA investment.

The houses that we like tend to run around $600-$750K for a 3-4 bedroom.

Based on averages of the gross income numbers above, using a 2.5x gross income number puts me at ~$700K housing price range. However, we would only have cash for ~12% +4% closing costs today, and closer to 16% + 4% once year-end bonuses are paid. In this scenario, I would seek to aggressively pay down the balance to have PMI out of the equation by the end of the year.

Any feedback on the feasibility or expenses I should be thinking about would be great. Thanks!

P.S. Regarding Net Worth vs. Total comp - I only recently increased my total comp (by approximately 2X) with promotion and paid off all of my student loan debt (did not accelerate this due state program allow special tax credits), while my partner took an extended education route and only began earning/paying off student loans 2 years ago.
Last edited by TravelSaver on Fri Jan 15, 2021 11:32 am, edited 1 time in total.
Jack FFR1846
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Re: First Time Home Buyer Affordability Feedback (round 2)

Post by Jack FFR1846 »

You don't say if DW is working or not. If she is, is your plan to buy a home you have to stretch to afford and then for her to stop working? I ask because this is a very common scenario and it is not good. And sometimes it's a surprise. Then it's really not good.

If it's just your income, then it really isn't out of line.
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onourway
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Re: First Time Home Buyer Affordability Feedback (round 2)

Post by onourway »

I'm a little bit confused by your statement that "Current (rent) is ~$3000/month (again on the high end of what we could be paying and still live comfortably)".

Is this what you see as the upper bound of your housing budget? Or just more than you're comfortably paying to rent an apartment? Houses in your price range with less than 20% down aren't going to cost you anything less than this once you pay mortgage, taxes, insurance, and maintenance and upkeep. And that's if you don't spend a fortune furnishing it and updating it to your liking.
Topic Author
TravelSaver
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Re: First Time Home Buyer Affordability Feedback (round 2)

Post by TravelSaver »

Jack FFR1846 wrote: Fri Jan 15, 2021 8:58 am You don't say if DW is working or not. If she is, is your plan to buy a home you have to stretch to afford and then for her to stop working? I ask because this is a very common scenario and it is not good. And sometimes it's a surprise. Then it's really not good.

If it's just your income, then it really isn't out of line.
Great question. The above numbers include DW's income (~$70K in all scenarios). So, call it ~25% of our combined gross across all 4 scenarios above.
KlangFool
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Re: First Time Home Buyer Affordability Feedback (round 2)

Post by KlangFool »

OP,


Let's start with the basic:


A) Your current annual expense.


B) Your current annual savings.

C) Your current rent.

<<The houses that we like tend to run around $600-$750K for a 3-4 bedroom.>>


D) What is the PITI (Mortgage Principal + Mortgage Interest + Property Tax + Insurance) of this house? You could find out from Zillow.


E) How are the public school in the area? Do you plan to send your kid to private school? Do not end up having to move again due to the school issue.


F) What if the school goes bad just when your kid started school? Aka, 4 to 5 years from now.

<<However, we would only have cash for ~12% +4% closing costs today, and closer to 16% + 4% once year-end bonuses are paid>>


G) Then, why are you in a rush to buy a house?


<<Ideally, we'd like to move into something slightly larger (currently in a 2/2 bath apartment) to support our growing family (baby on the way).>>


H) And, why moving now is a good idea?

i) It is harder to raise a baby/toddler in a bigger house. I assume that you are a first-time parent.


ii) In some cultures, it is a bad idea to move while the spouse is pregnant.


KlangFool
Topic Author
TravelSaver
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Re: First Time Home Buyer Affordability Feedback (round 2)

Post by TravelSaver »

onourway wrote: Fri Jan 15, 2021 9:05 am I'm a little bit confused by your statement that "Current (rent) is ~$3000/month (again on the high end of what we could be paying and still live comfortably)".

Is this what you see as the upper bound of your housing budget? Or just more than you're comfortable paying to rent an apartment? Houses in your price range with less than 20% down aren't going to cost you anything less than this once you pay mortgage, taxes, insurance, and maintenance and upkeep. And that's if you don't spend a fortune furnishing it and updating it to your liking.
The Latter. I would say comfortable housing budget, but the upper end of comfortable paying to rent a 2 bed / 2 bath apartment.
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N1CKV
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Re: First Time Home Buyer Affordability Feedback (round 2)

Post by N1CKV »

While you have most things are lined up with a fair assessment, I would take a step back and revisit this next year.
I think you should focus on: getting the 20% down + adequate liquid emergency fund + eliminate auto loan
Do the above while you are getting a taste of childcare costs, while your spouse is not working and I think you should be even better prepared within a year.

To me the saving up for 20% down really helps you to make a better decision. It helps to make sure you are really committed enough for a purchase as large as buying a home. If you are too impatient or not committed enough to come up with 20% then you aren't ready. There is of course exceptions (housing markets, the "right house is available now", etc.) that can change my opinion, but nothing you have presented says that you must buy now.
wilked
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Re: First Time Home Buyer Affordability Feedback (round 2)

Post by wilked »

Pay off your car loan tomorrow, no good reason to carry a $10K loan at your income level. I could see delaying student loan repayment assuming it's a low interest rate and prioritizing house savings.

Continue to save aggressively. Do the math on your savings and when you project to have 20% downpayment is a good time to buy. That disciplined savings will help as a future homeowner and beyond
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sapphire96
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Re: First Time Home Buyer Affordability Feedback (round 2)

Post by sapphire96 »

N1CKV wrote: Fri Jan 15, 2021 9:09 am While you have most things are lined up with a fair assessment, I would take a step back and revisit this next year.
I think you should focus on: getting the 20% down + adequate liquid emergency fund + eliminate auto loan
Do the above while you are getting a taste of childcare costs, while your spouse is not working and I think you should be even better prepared within a year.

To me the saving up for 20% down really helps you to make a better decision. It helps to make sure you are really committed enough for a purchase as large as buying a home. If you are too impatient or not committed enough to come up with 20% then you aren't ready. There is of course exceptions (housing markets, the "right house is available now", etc.) that can change my opinion, but nothing you have presented says that you must buy now.
+1. Too add, I would get rid of all debt before taking on the house.
Keep interest as your friend, not your foe. | Use money as a tool for bettering your life, not squandering it. | Stay the course, don’t deviate from it.
onourway
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Re: First Time Home Buyer Affordability Feedback (round 2)

Post by onourway »

I agree that I don't see any pressing need to buy now. Pay off your existing debts and save the 20% down. As KlangFool rightly notes, raising a baby is not any easier in a larger house - in fact it's harder. That said, I do understand the draw of raising a family, from the beginning, in a home you own.

Still, I think you should take your time, save a bit more, make sure you know exactly what you want, figure out what your wife wants to do with her career, etc. If your bonuses were to fall through and your wife had decided to quit work, houses in this range could quickly become a handful.
Topic Author
TravelSaver
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Re: First Time Home Buyer Affordability Feedback (round 2)

Post by TravelSaver »

KlangFool wrote: Fri Jan 15, 2021 9:07 am OP,

Let's start with the basic:

KlangFool

Thanks, everyone for the great feedback.

KlangFool, please see some responses to your questions.

A) Your current annual expense. ~$75,000 (rent, monthly expenses, travel)
B) Your current annual savings. ~18%-20% of total gross income highlighted above
C) Your current rent. $2800/ month + $500 month-to-month penalty (unless we re-sign for a year)
D) What is the PITI (Mortgage Principal + Mortgage Interest + Property Tax + Insurance) of this house? You could find out from Zillow.
PITI: ~$2500 - $3500 depending on the house (low end/high range)

E) How are the public school in the area? Do you plan to send your kid to private school? Do not end up having to move again due to the school issue.
Relatively good, but hard to predict given large county and frequent re-districting in a large metro county.

F) What if the school goes bad just when your kid started school? Aka, 4 to 5 years from now.
This is a good question. How does one reconcile "Not ending up needing to move again" vs. "What if the school goes bad"? These are things that I've thought of, but the only answer seems to be waiting 4-5 years, or making an educated guess at what schools will be. Moving farther out into a less dynamic,. the good school system would also likely give more certainty.


G) Then, why are you in a rush to buy a house?
We are not, and this thread has been somewhat of a reality check for us. We would like more space, but we can get some of this (3 vs. 2 bedroom) for ~$550K in the areas that we like, and don't need to shoot for the roof. The near-term "rush" would be to pull the trigger before late pregnancy/baby arrives. But we can easily wait. Ideally, having another bedroom would help with Childcare (parents coming over, potentially nanny, etc)

H) And, why moving now is a good idea?
-We would like more space (see thoughts above), and do not entirely like the high level of rent we are paying currently. We understand moving to another lower cost rental property is an option, though that involves costs on its own

i) It is harder to raise a baby/toddler in a bigger house. I assume that you are a first-time parent.
---This is a very good point that I don't think we have fully appreciated.

ii) In some cultures, it is a bad idea to move while the spouse is pregnant.
--We either will buy a house now, or wait until next year, is your strategy. So there is a "rush" if we want to buy now, but not imperative.
KlangFool
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Re: First Time Home Buyer Affordability Feedback (round 2)

Post by KlangFool »

TravelSaver wrote: Fri Jan 15, 2021 11:44 am
B) Your current annual savings. ~18%-20% of total gross income highlighted above
TravelSaver,

Which gross incomes? There are 4 numbers here: 205K, 320K, 230K 370K.

<<Gross Income (2020 no bonus): $205K
Gross Income (2020 w/ bonus): $320K (includes $70K yet to be paid in March, not reflected in cash balance below)
Gross Income (2021 no bonus): $230K
Gross Income (2021 w/ bonus target): $370K>>


KlangFool
KlangFool
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Re: First Time Home Buyer Affordability Feedback (round 2)

Post by KlangFool »

TravelSaver wrote: Fri Jan 15, 2021 11:44 am
KlangFool wrote: Fri Jan 15, 2021 9:07 am OP,

Let's start with the basic:

KlangFool

Thanks, everyone for the great feedback.

KlangFool, please see some responses to your questions.

A) Your current annual expense. ~$75,000 (rent, monthly expenses, travel)
B) Your current annual savings. ~18%-20% of total gross income highlighted above
TravelSaver,

<<Gross Income (2020 no bonus): $205K
Gross Income (2020 w/ bonus): $320K (includes $70K yet to be paid in March, not reflected in cash balance below)
Gross Income (2021 no bonus): $230K
Gross Income (2021 w/ bonus target): $370K>>


Your numbers do not seem to add up. Either (A) or (B) could be wrong.

Let's assume that 205K is the gross income and you save 45K.


Gross income = annual expense + taxes + annual savings


Taxes = 205K - 75K - 45K = 85K. This does not make sense.

Please check your 2020 end of year payslip for your Federal + State + Social Security + Medicare taxes.


KlangFool
JuniorBH
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Re: First Time Home Buyer Affordability Feedback (round 2)

Post by JuniorBH »

N1CKV wrote: Fri Jan 15, 2021 9:09 am Do the above while you are getting a taste of childcare costs, while your spouse is not working and I think you should be even better prepared within a year.
I haven't seen it mentioned (maybe I missed it), but if DW is going to continue working (which keeps income levels consistent), what are the plans for childcare? Depending on your location and options, that could be a meaningful monthly amount (on top of all the other things a child requires).

Also, I think given your income levels, another year of savings would make a meaningful difference. I think it's reasonable to wait to buy a house, especially if you're ok having the baby in an apartment for a while. FWIW, we bought a house when we had child #1 on the way bc we didn't want a baby in an apartment; it's all worked out, but had we waited, we likely would have had a higher budget for a house and wouldn't be in our current situation of looking to upgrade.
Topic Author
TravelSaver
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Re: First Time Home Buyer Affordability Feedback (round 2)

Post by TravelSaver »

JuniorBH wrote: Fri Jan 15, 2021 12:03 pm
N1CKV wrote: Fri Jan 15, 2021 9:09 am Do the above while you are getting a taste of childcare costs, while your spouse is not working and I think you should be even better prepared within a year.
I haven't seen it mentioned (maybe I missed it), but if DW is going to continue working (which keeps income levels consistent), what are the plans for childcare? Depending on your location and options, that could be a meaningful monthly amount (on top of all the other things a child requires).

Also, I think given your income levels, another year of savings would make a meaningful difference. I think it's reasonable to wait to buy a house, especially if you're ok having the baby in an apartment for a while. FWIW, we bought a house when we had child #1 on the way bc we didn't want a baby in an apartment; it's all worked out, but had we waited, we likely would have had a higher budget for a house and wouldn't be in our current situation of looking to upgrade.
This is a very good point. There are 3 bedroom houses in the $550K range that we have no problem affording a 20% down payment, and our PITI would be ~$800 below our current rent. However, we may be in your shoes down the road, looking to upsize. That said, we would be saving a significant chunk of change in the meantime by buying smaller. We are leaning towards this option after this lengthy discussion.
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Nate79
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Re: First Time Home Buyer Affordability Feedback (round 2)

Post by Nate79 »

I would first pay off all debt before even considering buying a house. And I would exclude all bonus income in the 2.5x calculation for home affordability.
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