Should we buy our dream house?

What happens when a great opportunity comes along, but you don't quite have the resources to take advantage of it? That's what Greg wants to know. He and his wife have found their Dream House. They think they can buy the place — but only if they're willing to take on some short-term debt in addition to the mortgage. Greg wants to know if this is a smart move. Here's his story:

My wife and I are in our late twenties, no kids (yet), both safely employed and living very comfortably with a combined monthly income of around $5,000 after taxes. We currently have about $28,000 in student loans, and plan to pay them all off within the year. The original amount was $37,000 six months ago, so we've been making quick progress with them. One loan is in deferment while my wife is in school, another requires $80 a month for the payments, and the one we are aggressively paying off has no monthly payment due until 2014 because of our extra payments. Basically, we only need $80 a month to satisfy our loans for the next two years. We have no car payments, credit card debt, or anything other than the student loans.

Everything was going as planned until two weeks ago we found a house we absolutely loved. We've checked it out, and aside from minor cosmetic things, its move-in ready. It's a foreclosure with an asking price around $136,000 (houses are cheap in the Houston area!). We'd plan to stay in the area a minimum of ten years, if not longer.

Given our situation, is it wise to scramble to get the minimum amount necessary to buy this house? We hadn't planned to begin saving up for a house for another six months. Last week, my dad offered us a monetary gift to cover the down payment. We have the ability to pay for inspections, closing costs, insurance and everything else (about $7,000 total, assuming the seller won't cover some of these costs), but it might mean wiping out our small savings and taking on some short-term debt. We'd also have to pay about $1,600 to break our apartment lease, but at least that can be spread out over three months.

Moving so quickly without any heavy financial preparation was not how we envisioned buying a house, but we don't want to risk losing what amounts to our Dream House. Since it only recently came on the market, we don't know if it will be something we can wait on or not.

Being the committed debt-haters that we are, the minor (non-mortgage) debts we'd have to incur to buy the house hopefully wouldn't last very long anyway. Worst case scenario puts our monthly house/tax/insurance payments well within the range of affordability for us too. Our current loans would go on hold for maybe six months while the minor debt is paid off, then proceed at a slower pace due to the $1200 a month we'd be paying for housing instead of the the $600 we currently pay.

If you were in my position, what would you do? Jump on the chance for a Dream House? Or take a more financially conservative approach and risk losing out on it? Any and all opinions would be much appreciated!

This is a tough call. Folks like Dave Ramsey would say, “Don't do it.” Ramsey would argue that Greg and his wife should first repay all of their student loan debt and then save enough for a substantial down payment. (Or even enough to pay for the house in cash.)

I'm not nearly that prescriptive. Absolutely, the prudent financial choice is to wait. Dream Homes are problematic — dreams change, and Dream Homes are often more common than buyers believe. Plus, when you have to scrape money together to buy a house, you leave yourself vulnerable to unexpected disasters. By exercising deferred gratification, Greg and his wife could reduce their debt and/or build enough savings to make a substantial down payment.

That said, personal finance is as much about emotions as it is about money. And heaven knows, Kris and I have made a pair of impulse home-buying decisions:

  • In 1994, we bought our first home. We didn't really have a reason for buying a house; it just seemed like the adult thing to do. A mortgage broker crunched the numbers, told us what we could afford, and we started shopping. We didn't shop for long. Within a week, we'd found a house we liked. Two days later, we'd made an offer and had it accepted. Looking back, we rushed things, but it turned out okay because we bought less home than we could afford.
  • In 2004, Kris and I bought our Dream House. We hadn't intended to move, but when one of Kris' co-workers brought in a sale flyer for an old farmhouse, we acted quickly. Within 48 hours, we'd made an offer (and had it accepted). In retrospect, this was a poor financial decision. On paper, we could afford the place, but in reality, my debt-load made things tough. If I could give my younger self advice, I'd say, “Don't do it!” Things have worked out for us, but they could easily have turned sour.

If Greg and his wife are willing to unwilling to pass up this opportunity, they should at least take steps to mitigate the possibility that things will go wrong.

  • Take out a small mortgage with a low interest rate. Banks will grant mortgages with housing-expense ratios of 33%. That is, they'll let borrowers spend up to 33% of their gross (pre-tax) income on housing, including taxes and insurance. But what's good for the bank isn't necessarily good for you. Greg and his wife can make things easier by trying to keep their monthly expenses below 25% of their gross income.
  • Make debt reduction a priority. If they buy this house, Greg and his wife have to be willing to make some short-term sacrifices: cheap vacations, a reduced restaurant budget, and so on. They have to give up a lot of the little everyday pleasures in order to attack their non-mortgage debt. All purchases require trade-offs, and big purchases require big trade-offs.
  • Build a big emergency fund — ASAP. Speaking from experience, owning a home is expensive. One rule of thumb is that it costs 1% of the home's value every year for maintenance and repair. This seems accurate to me. Greg and his wife should work hard to create a home repair fund, one that's separate from their everyday emergency fund.

What do you think? Should Greg and his wife jump at the chance to buy their Dream Home? Even if doing so means carrying more debt than they'd planned for a few years? Or should they wait until they know they're financially prepared? Share your personal experience so Greg and his wife can make an informed decision!

Note: Upon reading this post, Kris made an interesting observation. “You're missing an important point,” she said. “Are they looking at a one-of-a-kind home? That makes a difference. Maybe their Dream House is a converted fire station or an old farmhouse in a sea of cookie-cutter homes. If that's the case, they should take it. But if it's similar to a lot of other homes, they should wait.”

Update: This has been a great discussion. Thanks for contributing. Here's a response from Greg, answering many common questions. (And here's another.)

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LifeAndMyFinances
LifeAndMyFinances
9 years ago

I am also a Dave Ramsey advocate, and often write about his teachings on my website, but I do not necessarily agree with everything he says. Dave would say that you need to be debt free before taking on that home mortgage (if you can’t pay for the home in cash that is), and I actually agree with him here. My wife and I are currently paying down our debt and have decided to be debt-free before purchasing a house. There are just so many unexpected expenses that come with a house, it is best to be prepared with some… Read more »

Lindsay
Lindsay
9 years ago

I would say follow JDs tips and buy the dream house if you are sure it’s really your dream home. Do make sure you get a home inspection! Also keep in mind houses frequently have pricey repairs so an emergency fund would be key. I speak from experience as 8 years ago my husband and I bought our dream home. We live in Florida with many houses being block cookie cutters with no character, well in our price range. One day our realitor sent us a picture of this cute little cottage house with a huge porch. It was love… Read more »

Craig
Craig
9 years ago

A young couple with a relatively small combined income (that could quickly go to a single very small income if they are fertile) is asking whether it is prudent to borrow money (short term debt) so that they can borrow more money (long term mortgage) to buy a shelter that would cost them double what they are currently paying for shelter. And they have unsecured student loans and would have no emergency fund after closing on said “dream shelter”. Hope I read all this correctly. My question: Are you kidding me? J.D., how is this a tough call and how… Read more »

s
s
9 years ago

“Dream Home?” Never understood the concept.

Craig
Craig
9 years ago

P.S. And ask your dad to put that down payment gift money in a savings account for you so that when you are debt free, have a solid 6 month emergency fund, and know you can survive on a single income and still cover all expenses, you will then be able to buy your dream home. Best of luck to you both.

Daniel
Daniel
9 years ago

I think pushing to purchase here is a poor choice. I am not of the belief that you should have everything paid off before you take on the mortgage, however the “short term debt” is a concern. This likely mean credit card debt and I don’t think it is wise to finance any portion of your home purchase this way. You might decide to throttle your existing loan payments ia bit and start putting a portion of that into a “house fund”. This way if the opportunity arises again you will have the chance to take action. One final note,… Read more »

dotCOMreport
dotCOMreport
9 years ago

I think the dream house is a distraction that might come with its own challenges. The deal seems good on paper but may have alot of unforseen charges that may overwhelm them and drag them into more debts. Since this was not in their original plan, I’ll advise they clear the college loan before embarking on another project.

Dink
Dink
9 years ago

Don’t do it. You’re letting your emotions persuade you into something that could very well break you. If you have to go into debt just to go further into debt, you’re probably not even considering all the little things or emergencies that could pop up with the purchase of a house. And to top it all off, you’re going to throw away $1600 to break your current lease. The whole thing smells like a mistake. Another “Dream Home” will come along. Also, I agree with Craig (#3); LifeAndMyFinances, please stop plugging your site on the first comment of every GRS… Read more »

Kate
Kate
9 years ago

I’m with Kris.

retirebyforty
retirebyforty
9 years ago

GO FOR IT!
They make $5,000 AFTER TAX. If they can borrow 30k from the parent to make the down payment, they won’t have to pay mortgage insurance.
Get a 30 years mortgage for around 110k (account for closing cost) and they will pay around $525 a month.
How much are you paying for rent now? It can’t be much less than this.

retirebyforty
retirebyforty
9 years ago

Find someone to take over your lease. Try craigslist or other advertising avenue.

louisa @ TheReallyGoodLife
louisa @ TheReallyGoodLife
9 years ago

Someone in my extended life found their “dream home” last year – a gorgeous old 200 year old cottage in the perfect location. Small – just two bedrooms – like most old cottages but it hit every single one of their criteria. They couldn’t really afford it but decided to take out a loan to cover the shortfall on the understanding that it would be their “forever house” and buying that rather than a cheaper “for now house” would save them in legal costs etc in the long run. Just after they bought it, she got pregnant – with twins.… Read more »

Putts
Putts
9 years ago

No, no, absolutely not. This is essentially an impulse purchase. It’s not something you were planning to purchase, it’s just a pretty house that came along and started playing with your emotions. You said that this isn’t how you envisioned buying a house, and you should stick to that plan. Don’t worry, another dream house will come along when you’re in the right place financially to purchase one.

MikeTheRed
MikeTheRed
9 years ago

I’m leaning towards a Dave Ramsey answer here honestly. You have so much current debt, that it just doesn’t make sense to me to take on another massive pile. It’s especially dicey if you don’t have the cash on-hand for a down payment right now. That implies that you don’t have the cash reserves to handle an emergency like major repairs. It also makes things iffy if one of you loses your job. Another bit to consider is, what happens in 2014 when your student loans have to be paid at a higher rate again? Add that to your monthly… Read more »

brokeprofessionals.com
brokeprofessionals.com
9 years ago

My wife and I are also looking at to be honest the whole thing terrifies me. The only kind of debt we have is student loan debt, but there is a ton of it. The tough thing is, when your married, there are two opinions, as to these things and they are not always as uniform as we would like.

Jane
Jane
9 years ago

My first thought was, “Go for it!” But then I thought about it more and I agree with most of the posters here. Unless, like Kris says, the home is truly one of a kind, pass on it. About a year ago, a home came on the market near us that is essentially our home (a 1920s brick bungalow) but almost twice a big with an extra bedroom, two more bathrooms and a big extension on the back. When it started, it was around $50,000 more than our current home, which was still a good deal. In many respects it… Read more »

RT
RT
9 years ago

Particularly with a foreclosure, I would suggest having a sufficient emergency fund…say $10k. My fiance and I purchased our first home together about 6 months ago and it was a foreclosure….and while everything seemed to be great in the inspection…we ended up needing to replace the whole hvac system ($6k) and having to pay for bed bug extermination ($2500k). When you own a home the unforseen comes up, and with a foreclosure…you really just never know. We do not regret our decision though as we did purchase it at about a $40k discount to market value and we had sufficient… Read more »

Pat
Pat
9 years ago

Stable jobs – check Low debt load (sans student loans) – check Mortgage < 25% of gross income – check Foreclosure – check My guess is that something important that Greg left out is that the house can be purchased for less than it's worth, making this potentially a very solid long term investment. JD- Another question that you missed is about the age of the house. If this is a new home, repair costs are likely (not guaranteed) to be lower than an older home. If Greg and his wife are young, with minimal debt and stable incomes, a… Read more »

RV
RV
9 years ago

I agree with retirebyforty.. its doable and some belt tightening mentioned by JD will need to be done.

Nicole
Nicole
9 years ago

You’re in Houston? There will be OTHER DREAM HOUSES. Wait. I know someone in Houston who was in this exact situation. Not only was the house she wanted still on the market at a lower price when she had enough money, but she found one she liked BETTER. She actually made the offer she could afford at the time, and it was rejected. By the time she had enough money, the realtor on the house had called her realtor and asked if she would be willing to submit the initial offer again. But she wasn’t because she’d found a gorgeous… Read more »

aggressive saver
aggressive saver
9 years ago

no way. no one is really ever prepared when they buy their first home — it’s not just the p&i and taxes, and insurance, but what about the other incidental expenses that come with owning a home? your utility bills go up, you have maintenance costs, hoa fees, unexpected repairs that you are on the hook for. these guys already know they can’t afford it to begin with. when we purchased our first home, we thought we could afford it, and were surprised by all the other costs. another thing, when we bought our first house 10 years ago —… Read more »

Elizabeth
Elizabeth
9 years ago

Hard to say. While I understand wanting to take advantage of a dream home, this could be a nightmare if anything changes. What happens if one of them loses their job? Or they’re soon expecting a child? What happens when interest rates finally go up again? Or property taxes?What if there’s a major problem that the inspector misses (as has happened to more than one person I know)? Will they be able to resist buying stuff for their new home — like decor and furniture — while they build up an emergency fund and pay down student debt? If they… Read more »

Everyday Tips
Everyday Tips
9 years ago

If the house cost 300k, I would be screaming ‘don’t do it’. But 136,000 is reasonable. They are obviously financially responsible people. Our homes have all kind of found us and things have worked out great.

If I put in an offer, I would ask the sellers to cover some closing costs. That way they won’t wear down the emergency fund as much.

Kim
Kim
9 years ago

There is so much more cost to owning a home besides a mortgage payment. Does the house have a yard? Prepare to buy a lawnmower – and soon. And all the other things that go with maintaining a yard. All those necessities add up to big $$$. Think about furnishings. Window coverings will need to be purchased ASAP. All those necessities add up to big $$$. Wait until you can afford it. You are in your 20’s and there will be many more dream houses.

MikeTheRed
MikeTheRed
9 years ago

Another thing that you may not have looked at is the true monthly cost of home ownership. Honestly, until this morning as I ran around trying to crunch some numbers from your story, I hadn’t put together all of the bits myself. It’s not just the base mortgage payment that you have to consider. Property taxes and homeowners insurance have a huge impact as well. As an example, there’s a home in my area selling for about $116,000. With current 30yr fixed rates around 5%, that would mean with a 20% down payment, my monthly mortgage payment would be about… Read more »

Crystal@BFS
9 years ago

I live in the Houston area too and can vouch for the fact that a ton of awesome homes are on fire sales right now. I personally am leaning towards suggesting that they hold off since “dream homes” will be around no matter when they can afford to buy, but I will admit that my husband and I bought our place as a foreclosure in Houston in 2007 for $114,000 despite the fact we were only left with about $5000 in savings for emergencies. We got lucky. He could get lucky. But is the “dream home” worth the stress?

Joe
Joe
9 years ago

I also have to echo Kris’ point, but with an emphasis on the fact that most “dream houses” really aren’t unique. After looking for a year and missing out on a bunch of houses that each seemed like they were “the one”, my wife and I are now in the process of buying a house that is significantly better (bigger, better condition, and better located) than each of our previous “dream houses”. As it turns out, we weren’t missing out at all, because there was a better house that just hadn’t come on the market yet. The housing market is… Read more »

Jessica
Jessica
9 years ago

I’m with Pat, above. I don’t even see, with the info given, why they even need to worry about short-term debt. As someone else mentioned, see if they can sublet the apartment, or, if it’s not much more, keep the apartment until the lease runs out and use the time to do any work to the house, moving stuff over bit by bit (save on movers!). Since it’s a foreclosure, MAKE SURE everything looks good. Get it inspected, ask a friend who has handyman experience to look, use the internet to learn how to check things yourself, etc. But before… Read more »

ChrisM
ChrisM
9 years ago

Why is Greg even looking at homes? If it’s not in his plan, why is he looking? It’s easy to get excited about something like this, but one has to pull back and see it’s not neccessarily the best decision. 1) Stick to your plan. Plans were made for a purpose. 2) Don’t deplete your emergency fund/savings. You never know what life is going to throw you. Medical issues, job, loss, emergencies… 3) Looks like this recession is going to be around for a while. There will be good deals on homes after your debt is paid off. Trust me,… Read more »

AC
AC
9 years ago

I would put some earnest money down and have it inspected to see if this is in fact a “dream home.” I wish they said something about how much homes are valued at in the neighborhood. $136K seems awfully cheap for a “dream home.” This seems more like an impulse decision rather than something well thought through.

josh
josh
9 years ago

So it sounds like they are not really thinking through their financial future at all. This is evident not only in the decisions they have made so far but in the way the case is presented. Finance is math heavy and there are many missing numbers in the data they provided. It’s time to step back and do some actual financial planning instead of just using mental shortcuts guided by whims along the way. They are at a time in their lives that working capital is at premium and they are paying off likely (no details on student loans) low… Read more »

Kevin
Kevin
9 years ago

I agree with everything Craig (#3) said, even right down to calling out the comment-spammer.

Mom of five
Mom of five
9 years ago

I have a couple of questions. How much of a downpayment will you have? Will you be paying PMI? Is the Houston market still going down? If you lived in my area (Philly), I’d tell you to wait, because the market is still dropping. Also, the biggest one – How handy are you? My husband and I do nearly all of our own repairs, although now that we’re more comfortable financially we do pay someone to mow our lawn. And if you are handy, can you easily borrow tools? Our initial mortgage plus escrow was actually a few dollars less… Read more »

Nancy L.
Nancy L.
9 years ago

@MikeTheRed and @aggressive_saver said what was on my mind. When we bought our house, we ran numbers and were confident that we could afford a $225K house. The home we ended up purchasing was only $160K. Even buying that much lower than our initial budget, we were stretched ridiculously thin by all sorts of expenses we were not expecting, having rented apartments for our entire adult lives. Given how tight our finances have been at $160K, I shudder to think what would have happened if we’d gone for a $225K home. Just this past year, we were sorely tempted by… Read more »

Money Smarts Blog
Money Smarts Blog
9 years ago
Tough call – with $5k net each month, I think they can easily afford the house.

On the other hand, it sounds like Houston is saturated with houses (from the other commenters), so it’s unlikely that you won’t find another dream home next week or next month.

I’d like to refer to the first guest post I did on this blog – 11 tips for first time home buyers.

https://www.getrichslowly.org/11-tips-for-first-time-homebuyers/

“Don’t fall in love with a house”.

Kim
Kim
9 years ago

Personally, I am in the exact situation and I am going for it. I am with Kris though, make sure it is truly your “Dream Home” and a once in a life time opportunity. I am buying my grandmothers home that my grandfather built with is own hands. It is out in the country and only place I can call home. My grandmother decided a few months ago that it was time to sell it and I jumped at the opportunity. Since my husband and I are literally in our late 20’s, renting a apartment, make 5k a months, with… Read more »

Annie
Annie
9 years ago

My aunt and uncle live in the Houston area. As I understand it, there are some unique characteristics to the Houston real estate market because the State of Texas does not collect income tax. Houses might be cheap, but if you want to live in an area with good public schools, but burden of financing those schools falls entirely on local property taxes. I believe my aunt and uncle’s house is valued somewhere around $350k/450k. They live in the best school district in Houston, and their annual property taxes are something like $25,000 per year. If you live in a… Read more »

Stephanie
Stephanie
9 years ago

As some other posters have said, “dream home” is subjective. I’d like to hear what makes this home a dream home to Greg and his wife. My husband and I did something similar to Greg this fall. We were planning on buying a house in 2011 or 2012, but started casually looking due to the falling housing prices and interest rates. We found a home that was the worst home in a great neighborhood/school district, and had enough space that we wouldn’t feel like it was too small even if we added a few kids to our family. We also… Read more »

Kaitlin
Kaitlin
9 years ago

I think house fever is dangerous and dream houses come and go. Everything looks good on paper, but what happens when they buy the home, move in and one of them gets very ill, laid-off, etc.? Sorry, but I just think buying this home would be impulsive and short-sighted. What if it “truly” is one-of-a-kind? Well, I hate cookie cutter homes as much as Kris clearly does, but it might also be a good idea to consider how easy/difficult it would be to sell, should the need arise. I would dig living in a converted fire station or a dome-home… Read more »

Brian B
Brian B
9 years ago

Do it!

It’s better to regret something you did, than something you didn’t do.

edit: It’s only money, you’ll make more!

Raghu Bilhana
Raghu Bilhana
9 years ago

Don’t do it.

Dream houses will keep coming up. There will be better dream houses coming down the road.

Jeannine
Jeannine
9 years ago

The monthly note will definitely be more than they are anticipating. If you are taking out a loan, most mortgage companies will require you to pay into an escrow account for taxes and insurance (which as previously stated are high because they fund education). Additionally, it would be wise to have flood insurance if you are living in an area that has seen its fair share of hurricanes – although it should be inexpensive, it’s another expense. The bottom line is, you can do it, but you must go in with your eyes wide open and realize that owning your… Read more »

Patrick
Patrick
9 years ago

definitely wait, that he’s even asking GRS suggests Greg has doubts, I agree with Nicole, there will be other dream houses.

Sara
Sara
9 years ago

Given the figured above, they clearly have their finances in order to be able to pay for the house. They have an extra $1400 a month to pay ahead on the loans, so they should be able to cover an additional $600 a month housing increase plus have plenty left to rebuild some savings. My only cautions on the house would be: 1. Look at other houses, too. Even if this is your “dream house” look at a whole bunch of others. You can learn a lot this way rather than falling in love with the first house you see.… Read more »

Rosie
Rosie
9 years ago

No additional advice to offer, but I’m curious to know if there are follow ups to ask the reader posts? I’m interested to know what they decide to do and why.

J.D.’s note: There’s no regular follow-up feature, though maybe there should be. Once in a while, a reader will write in to share what happened, but not often. Maybe I should create a calendar to e-mail people after they ask questions!

Jenn
Jenn
9 years ago

Ha! This sounds like my husband and I 7 years ago. No kids, two secure jobs, quickly paying down small debt. We decided to buy a home. Here’s how it played out: We found out we were pregnant the day we moved in, the house ended up needing repairs (more expensive then expected), when the baby came we had a beautiful bundle of joy, whom also happened to have special needs. I ended up leaving my job to care for him. All this and we still had the debt, plus more expense, plus now we were down to one income.… Read more »

Dave
Dave
9 years ago

Simple answer – Buy the house. Consider the following however: Compared to rent in your area, will the payment be acceptable? No matter what the situation is, get a 30-year fixed mortgage. Rates couldn’t be much lower than they are now & any adjustable mortgage will surely trend upwards in the future. Your debt-to-income will still be very low. With the possibility of kids, aim for less than 50% take home pay to be committed to debts and other obligations (cable, paper, phones, internet, etc). A 30 year mortgage will keep your debt under control & predictable. No more rent… Read more »

Kim
Kim
9 years ago

I’m probably not the best to be chipping in my 2 cents, seeing as how I’m far from Getting Rich Slowly. My husband and I are in a similar situation, 5K take home monthly payment, but we are in Northern Virginia where our dream house (modest townhomes) are 400k, not 136k. I would lead with my emotions and just dive right in if we had a the chance to get a home for $136k. Debt or no debt. That is a steal.

Spedie
Spedie
9 years ago

I would not do it. This is why: 1. There is no such thing as a stable job. Job situations can change in an instant. I have experienced this twice, first hand, in the past 3 years. 2. I have owned two homes: one brand new, and one that is now about 37 years old. Both were maintenance nightmares. Just because a house is new, does not mean you don’t have expenses for stuff that went wrong and the builder either won’t cover, or fights tooth and nail to get out of his responsibility. My current house maintenance fund is… Read more »

ali
ali
9 years ago

You also have to think about these things – what will you need to maintain your home? Things like: ladder (to access the roof/clean the gutters), rake, shovel, lawn mower , etc.

Can you get these at a good price used or can you borrow from your parents or a friend?

Will you be able to save for unexpected expsenes? What happens if in a year the stove needs repair/replacing?

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