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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There are 213 comments to "Should we buy our dream house?".
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 extra cashflow.
Dream houses come and go – really, it’s just a box to put all your stuff in…
J.D.’s note: Alert: You’re bugging other GRS readers by plugging your blog all the time. I haven’t noticed (probably because you don’t include links to it, which I would just delete), but others have, and it makes them cranky. Just FYI.
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 before we even toured the house.
Our dream home was built about 4 feet off the ground to allow good ventilation and access to pluming and such- common in a Florida cracker home. We where the third set of owners with the first owners actually having build most of the home by hand. They even had pine trees on the property
made into flooring for the entire house. 8 years late we still love our dream
home.
But I do understand how one could think a home is there dream home. About 3 years ago someone told my husband about this home close to his work. It was a 5000sq foot home with 4 bedroom, formal dinning room, gourmet kitchen, greatroom, den, a huge pool on 3 acres. It was move in ready and just gorgous! We came do close to buying this new dream home, being caught up in the moment. We would have been able to afford the mortgage but it would have drained us and our savings. Luckly we really looked at what the new house would mean – higher cost of everything from furntiure to heat, and even more time cleaning and maintaining the home. We canceled our offer. We still feel we have our dream home, all 700 sq feet of it!
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 can you not scream “Don’t do it!”? This flies in the face of everything your wonderful site has tried to do for the past several years. Dream homes are a dime a dozen, but financial security and being able to sleep at night knowing you have not went into debt to support a future that you know absolutely nothing about is worth its weight in gold. Even if this is a “once in a lifetime opportunity”, which it is not, this young couple is setting a precedent of spending before acquiring to meet an emotional need. I know because I am the king of emotional spending and the master of all stupid financial decisions. Just ask my wife. That is why this is so ridiculously obvious to me, I have done it more times than I care to admit and have severely paid the price.
They could do this and come out smelling like roses or you-know-what. Hard to say. But with all kindness and respect I really hope they will reconsider. This advice comes from having 40 years (and six mortgages) of a painful financial education. God bless.
JD, forgive me if this sounds rude, but is it appropriate for the first poster from LifeAndMyFinances to plug his site every day in your comment section?
J.D.’s note: I’m not willing to shout, “Don’t do it!” for a few reasons. First, I feel like there’s some nuance here that we’re missing, which may make this work out. Second, Kris and I have done this twice in the past and it’s worked. Third, I don’t think there are any absolute rules in personal finance. Having said that, though, I agree that it probably does make sense to wait. If I were doing this again and were in their position, I’d probably pass on this chance.
“Dream Home?” Never understood the concept.
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.
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, life takes unexpected turns and you’re still quite young. You may believe you want to live in your area for the next 10 years, but any number of things might change that in the future. You should consider the worst case scenarios before you take a big leap like this.
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.
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 post. By doing so already, you’ve pretty much guaranteed I’ll never visit. I don’t even read your comments anymore.
I’m with Kris.
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.
Find someone to take over your lease. Try craigslist or other advertising avenue.
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. They were delighted but suddenly their “forever house” criteria had changed, their income has dropped considerably for a couple of years and their expenditures multiplied.
My point is that over the next few years, like me, like my friend, Greg and his wife are at the time of their lives where their “dream house” criteria might change soon. They might have planned for that but they might not.
I’d be wary about getting into non-mortgage debt on an impulse at this point.
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.
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 mortgage payments and look at how that will affect your cash flow. It may be 3 years away, but that’ll come sooner than you think.
My wife and I are in a position where we’ll be looking for a home in the near future. However, before we walk into a single house, we’re making sure we have the down payment in-hand, along with a house repair fund AND a personal emergency fund to hedge against job loss, car explosion etc.
I would urge you to wait. There will be other houses, and you’ll be in a much stronger position to weather any storms that may come.
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.
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 was our dream home for our family of four (three at the time), but we weren’t ready to move. So we watched as our dream home later dropped in price, became a short sale and eventually a foreclosure. Many times when I drove past it, I felt the urge to just make an offer and quickly try to sell our house, but I knew deep down we couldn’t really afford it even if it was perfect for our growing family.
We found out later that the couple (lucky bastards!) who bought it in foreclosure paid the same price for that home that we paid for ours in 2007. It’s still hard, but ultimately we had to realize that it was our emotions that were making us feel it was our dream home. In reality, such a 1920s brick home is a dime a dozen in this city.
I think already having a mortgage stopped us from making a rash decision. It is obviously much harder to buy when you have to sell. In your case, though, I still think you should wait. You’ll be surprised how much the little things add up when you first buy a home. You will end up spending hundreds, maybe even thousands, on paint, tools, ladders, trash cans, etc. – all those things that a renter usually doesn’t have to worry about. The reality is – you’re not ready yet, and unless this home is the only home of its kind, wait and buy your dream home later. Like us, you might end up paying more for your dream home, but it will still end up being a better deal if you have your financial ducks in a row.
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 funds available for such problems.
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 new home is much less of a risk.
My wife and I just went through this in 2008. Found our dream home (a foreclosure), weren’t planning to buy, but were in a good position financially. We went for it and don’t regret it looking back.
The key is that once you get in the house YOU MUST NOT FOCUS ON FILLING IT WITH STUFF. Create an aggressive budget to pay down those loans. We still have rooms in our house with no furniture in them, but we say, “Who cares!”.
J.D.’s note: Pat, I really like your point there at the end. When people buy a home, they often spend a small fortune to fill it with stuff — furniture, decorations, and so on. If Greg and his wife do buy this house, they need to avoid this trap — just live with what they have (or thrift-store furniture) — until they’ve stabilized financially.
I agree with retirebyforty.. its doable and some belt tightening mentioned by JD will need to be done.
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 place she preferred in a better neighborhood.
Seriously, don’t do it. It seems like a dream house right now but it really isn’t. Houston is a big town with a lot of inexpensive dream houses.
I also know someone in a similar situation in Durham, NC. They actually ended up breaking their contract for various reasons and were heart broken… but in the end they found a place that was less expensive that they liked better too. (They also got their downpayment from borrowing from family and are really regretting it as housing values have plunged.)
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 — about 3 weeks after my wife and i drained our savings and put basically everything we had into our down payment, we were both out of work.
bottom line, you can run across your dream house, your dream car, your dream xyz, etc. all the time. what happens if they run into the next dream thing the minute after they buy this house? it’s a slippery slope.
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 can deal with these questions, more power to them 🙂
I didn’t buy my “dream home” (a condo) last year because it would have been a financial stretch. This is my low risk tolerance speaking, but staying financially secure is my real dream. There will always be more condos.
Just my two cents!
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.
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.
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 $490 a month. Awesome right? I mean that’s about $200 per month less than my rent right now.
But you forgot about property taxes. On that $116k home, last year’s property taxes were $2878. That’s another $240 per month.
Then there’s insurance. I don’t know what exact rates are in all areas, but most calculators estimate $1,000 – $1,500/year for that. So tack on probably another $125/mo.
All of a sudden that $490/mo home jumped to $855/month with minimum mortgage payments for 30 years. At the end of it, I’m paying a good chunk more every year for the home over renting (I know there are tax benefits etc, but I’m talking about money I have to pay out at some point or another).
Now, I’m sure some will say “But you don’t have to pay taxes on a monthly basis!” and you’re right. But you have to come up with that money at some point, so the end-of-year effect is the same. Placing it in the context of monthly costs just makes it easier to compare to renting and puts all the costs in front of you (many would conveniently forget the tax bill until the end of the year).
Add to that your minimum $80 student loan payment, then whatever you’ll also owe on the short-term loan to secure the down payment, and factor in that $1600 lease breaking fee and you will have a lot of debt obligations over the next few years to take care of. $5,000 a month may seem like a lot of money, but when you have enough bills demanding a piece of it, it goes away very fast.
I’m not trying to rain on your parade here. It may be an amazing home and you could live in it happily for many years. I just feel it’s worth talking about the true cost of the home and not bite off more than you can chew.
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?
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 so lousy right now that most potential sellers are waiting to sell until they absolutely have to. This means that even if a house is better than all the ones currently on the market, that doesn’t make it better than the ones that will be on the market within the next year or two.
With love, I can understand believing in “the one” and doing crazy things to make sure you end up with the person of your dreams. With a house, though, I still say there’s a lot of fish in the sea.
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 any of this, mkae sure you can get a decent mortgage. Low interest, fixed, with little or no closing costs. You need as much for that downpayment as you can. Get a quote on the homeowners with your car insurance company. Take all of these figures and create a new budget, factoring in the $80 for your student loans. See how much you’ll have leftover, and if you are comfortable with that number for the amount you’ll be saving (it should be at least 15%) then why not go for it? Try getting the price down too.
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, there will be a home you like even better than this one.
4) Homes cost money, money, money. I have been a homeowner for 12 years. Here are some of the things that have cost us: storm damage,500.00, Natural gas leak in our home 1500.00, sewer line clogged 450.00 (had to be reutered several times), furnace broken 250.00, pipe leaks, 230.00, water heater died, 350.00…plus more. Yes, our house was “move in ready”. But stuff breaks. Don’t count on homeowner’s insurance to pay. My mom had a flood in her basement during a storm. It cost 700.00 for cleanup. Insurance didn’t cover it.
Not to mention, you will need a lawnmower, yard tools, weed wacker, tools, ladder, yard chemicals to keep the weeds from taking over…
Plus there are things that will just plain wear out and need to be replaced, like appliances, roof, fooring, furnace…
5) It might be nice house, but will you be able to rest well in it, worrying about finances?
I’m not against buying a home, but wait a year or two until the debt is paid. Peace of mind is sometimes worth more than real estate!
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.
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 interest government subsidized loans with valuable working capital. Let’s say the student loans are at 4% and they’re in a 15% marginal tax bracket. That means realized interest rate is about 3.4%. They have paid off an additional $9,000 in student loans instead of building a cash cushion like they should have. They could have put the money in a bank account earning about 1.3%. This means the true cost of having the flexibility to make this move would have been about 2.1% per year or 1.05% during the 6 month window of time we’re talking about. So by paying off student loans aggressively (and following Dave Ramsey’s bad advice in this case) they have managed to save about $94.50 and in doing so have potentially lost out on the ability to afford their dream home. To make up for their lack of planning they are now thinking about taking on what I can only guess is a signature or credit card loan to make up for the shortfall. This would mean they have paid off a loan effectivly charging 3.4% after the tax write off for a loan charging 8-16%. They don’t mention how much short term debt they are taking on but assuming they take on $9,000 in short term debt at 8% they will have cost themselves the $94.50 that they have saved by early loan repayment within the first three months of the new loan (8% they are paying – 3.4% they would have paid = 4.6% additional interest they would not have had to pay = $103.5 in additional expenses over 3 months). Let’s no try to fix a mistake with another mistake.
For the time being and without all the info it’s probably best to reduce the payments to the student loans to the minimum in order to build up flexibility and choices. Cross your fingers and hope that house prices go down while interest rates rise and no one buys the house for the next 6 months to year while you build up the cash to afford the house of your dreams. I know it feels good to pay off your debt but think through the next 5 years, do the math, and make the right decision instead of the easy feel good decision. Debt is a tool and if your not going to learn how to properly use the tool you’re well off listening to Dave Ramsey but the best of all worlds is to take the time to do the math and understand your finances planning ahead at all times. At worst it may lead you to the same actions but it may lead you somewhere better. I have heard Dave Ramsey give advice that was obviously wrong would be illegal if any government body categorized him as a financial professional, unfortunately none do (he’s an entertainer and can get away with anything with no personal liability for lives ruined). He simply does not completely understand what he is talking about and doesn’t care to learn. It’s time to think through your financial life instead of closing your eyes and following whoever is speaking the loudest in the void.
I agree with everything Craig (#3) said, even right down to calling out the comment-spammer.
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 than our rent, but we needed to buy A LOT of tools to get us to the point we’re at now where home home maintenance is almost a non existent budget item.
Finally, dream house? Count me among those who think they’re fairly easy to come by.
@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 a “dream home” that was on the market at a really good price. We knew the owners quite well, so they were willing to cut us an even better deal if we wanted it. After a lot of discussions and number crunching, both my husband and I realized that in this economy, we didn’t want to be stretched that thin. The house has since sold, and we are now finding out that the home had a few “quirks” that would have made us regret rushing into purchasing it. Nothing that would have been a deal-breaker per se, but stuff that would have been frustrating to come across after thinking we were getting a “dream” place.
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”.
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 20k in student loan debt, I have been doing nothing but saving since I found out and I am very excited. Many people are commenting that another “Dream Home” will come along or they just don’t exsist. In my case they do and it could be the same for others. I will never find another home built by my grandfather that means so much to me and in Gregs case maybe he will never find another home that is a old firestation or a castle with a 20′ dragon out front or whatever is his dream.
If you have truly found your dream home, go for it. If it is just a 4 Bedroom ranch, with a two car garage, big kitchen, and a pool you need to wait you will find one again.
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 worse school district, your taxes will be lower. But when it comes to selling your home (location, location, location), there may be some difficulty.
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 are very tied to our geographic area both personally and professionally and could actually see ourselves staying in the house for the life of the loan.
So for us, it made sense to stretch our dollars and temporarily stop paying off some other debt to buy our house ahead of schedule. Over the long run we will save a lot of money in interest (and hopefully more if we can eventually accelerate payments on that debt). But there were a lot of circumstances that had to come together for that to be a risk worth taking for us.
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 in a sea of cookie cutter condo buildings, but would the next round of buyers be so keen? I’m not saying I want to buy something purely based on the taste of the larger market, but it is a factor to consider.
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!
Don’t do it.
Dream houses will keep coming up. There will be better dream houses coming down the road.
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 dream home may delay other goals that you have set for yourself. If the sacrifices are worth it to you after thinking all that through, go for it.
definitely wait, that he’s even asking GRS suggests Greg has doubts, I agree with Nicole, there will be other dream houses.
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.
2. Make sure that the house can accomodate your future needs. If you want lots of kids, don’t buy a 2 bedroom cottage with no yard, etc.
I guess my philosophy on buying houses is like having kids – you are never going to be 100% truly prepared, but you can be in a better or worse situation going in. Greg and his wife are in a good situation to buy a house. Sure he could be in a better position, but he’s not in a bad position. I’d also hazard an assumption that if he’s that debt averse that he’s paying down those student loans so rapidly, that he’s probably well aware that there are additional expenses to homeownership and that he’s probably not going to overextend himself on the mortgage.
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!
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. Things happen. Some we are in control of and some not. I think since you are on the fast track to paying off your loan, do it. Create a cushion. I also think that since you are asking for advice you may have doubts, don’t dismiss them and don’t hurry.
Good luck with what ever you decide 🙂
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 increases (though taxes will go up)
Instead of a documented gift (which complicates the mortgage process, and has strict limits on where the gift is from and how much it’s for), consider a 97% FHA loan. Mortgage insurance will be required, but it’s now tax deductible.
Now – the closing costs. If this is bank owned and there are other offers, just go with your agent’s advice (you do have a real estate agent right?) I would bet that if there are items in need of repair, which is likely on a foreclosure, you could negotiate the bank to cover some closing costs to free your cash for repairs. You cant lose anything by asking. So, ask, ask for everything; closing costs, rate-reductions, closing cost reductions from the title company… anything they can charge for.
Compared to the rest of the country, $140k is dirt cheap. You’ll still be far ahead of like couples in more expensive areas of the US. The cheapest housing available period in my area is ‘studio’ apartments 30 miles out of DC for $1k/month.
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.
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 $200 per month, and I struggle keeping that fund positive.
Be debt free when you buy your house. Save the 20 percent down payment on your own – you will feel much better about yourselves, and not only that, dad would be proud of you, most likely….
I read something lately that struck me on another site, and it is this (in relation to those that are building wealth, and those who are not):
“Whether innately or as the result of study, those on their way to wealth know the difference between income and principal. You not understanding this distinction offers the real prospect of your being more or less poor all your life.”
Think about it, but the choice is yours….
I would also think about the prospect of house prices falling even more in the next year….
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?
The warnings about the additional hidden costs of home ownership are valid. When we bought our home 10 years ago, we spent at least $500 per month for the first 2 years on something, mostly repairs and stuff that everyone would say needed to be done –
stuff like: the washer and dryer and fridge that we didn’t own before we moved in.
Surprise! the hot water heater in the house is rented from the gas company. Choose to not continue renting and buy a new one.
Water pressure valve fails – must repair in order to have water flow to the house
Turns out the gutters are failing (wasn’t raining during the house inspection), new gutters needed.
9 months after we bought the house the roof leaks. The company that had provided the “5 year roof guarantee” is no longer in business – new roof needed.
Dishwasher starts leaking water – new dishwasher needed.
Some months we made upgrades to the house or purchased furniture, but seriously, the amount of things we needed to fix or replace in that first two years was incredible.
And a house in foreclosure is likely to have accumulated some deferred maintenance, won’t have the declarations of the prior owners/tenants regarding known problems with the house so you’ll likely be discovering these things even in a home that seems “move-in ready”.
I’d wait. There are lots of dream homes out there. It’s possible that this one will still be out there when you are ready to buy!
Other houses will come along that are also wonderful. And although you said you “checked it out” I wouldn’t trust anything but a very thorough home inspection to make that decision.
That said, people often respond with their hearts instead of their heads. You can sit down and make a list of all the worst things that could go wrong if you buy this house now–loss of a job, needing to move suddenly, something major turns up wrong in the house.
Are you able and willing to take on the risk if you know the bad things that could happen? If so, then go for it. No one (that I know of) has ever died from an impulsive real estate deal. Just make sure you’re willing to live with the consequences if something goes wrong.
If not, wait.
Count me in the “wait” crowd.
Like @Louisa, you don’t address the issue of children. Can you afford the house on one salary? Even if you both planning on working after children, circumstances may change. When my second child was born, she had a medical issue which required either my husband or I to stay home for 6 months. Thankfully we were able to swing our mortgage on one salary for that time.
I’ve found that there’s always another great home out there, if you keep looking.
Good luck.
Do it! If you can afford it, why not? The interest rates have never been lower, and you won’t regret it. You guys can afford it. Plus, you can now itemize on your taxes which is great! Just run the #s and see what your real monthly payment will be and go from there. Home prices are pretty steady so you don’t really have a risk or losing money unless things get really really bad, but then we are all screwed. Oh, also, if you are religious, pray about it and see how you feel 🙂
As someone who bought a foreclosure a few years back because it screamed “dream house,” I can understand the emotions that go behind purchasing what seems like a dream house at that point. But, two years down the line and more the wiser, I can honestly say that even writing out all the expenses on paper, there are always surprises, and not to mention not only is your monthly rent the only thing doubling, but expenses too. AND a few months later, you could run into a much better foreclosure house with other things you now realize are lacking in your dream house and needing less cosmetic work and at a lower price.
If you can get your monthly all inclusive mortgage (with homeowners insurance, taxes, etc) closer to the $600 you are currently paying, then that would give you more free cash to sail through the other costs of owning a house. Plus you are also going to need to furnish the house, etc etc.
I think you are better off sticking to your original plan of saving for a house upfront and having a solid emergency fund, especially since it sounds like starting a family is in the works for you….that in itself should give you pause. Keep shopping, and with an open mind for something along the lines of what you are currently paying in rent.
I wouldn’t do it. I bought a house for basically zero down and regret not saving up at least 20% down. It’s crazy how much of my monthly payment goes to interest instead of principal or escrow. Sure, I get a tax deduction on that interest, but it doesn’t make up for all that money that is being thrown away (I’d have been much better off living in my apartment and “throwing away” a little money while saving up for my down payment).
Check out an amortization calculator for your prospective loan, then pick your jaw up off the floor once you see those interest payment.
As my dad said, ‘Never love anything that can’t love you back.”
Don’t be in a hurry! Never buy until you have done your homework. If the house is a great deal, then someone who has done their homework would have bought the house pronto, so if it’s on the market for more than a week, it’s a deal that can be had again soon.
The term ‘dream house’ is a bit loaded (as many have observed). Chances are that other houses will be available that meet the ‘dream house’ criteria unless it is truly a ‘one of a kind’ house.
Also, be sure to look at things like the school district and the specific schools (especially the elementary) you are zoned to. When we bought out house, I failed to research the particular elementary school we are zoned to. Now we have considered moving (among other things) to get to a better elementary. This site http://www.greatschools.org/ was helpful for that.
Having said that, I see no financial reason why you shouldn’t buy a house (if you have done your homework). The real estate climate is good. Chances are that we are near the bottom of the crash and buying now could very well be an excellent financial move.
But (and it’s a big butt)…one MUST do one’s homework!!!
Although it might be emotionally difficult, I would wait. You are only looking at the cost of buying the dream home, but inevitably owning that new home is going to have a bunch of short term expenses. Moving, painting, fixing things, maintaining the yard, utility bills. All these are expenses that could go up or cause unexpected expenses.
Another house will come along. You are in a major buyers market and that is not going to change for a few years. Give yourself the chance to start off right, taking on only your new mortgage as debt.
I would say no. I doubt that you would be unable to find a similar home 1 or 2 years from now for the same price.
Proceed with caution. Your situation can change at any moment, sometimes in ways you never could have anticipated. As a previous poster said, it’s rare to be 100% ready, but “scrambling” shouldn’t be part of the process either. And whenever you do buy – spend whatever you need to for a good home inspection. That’s one area you should absolutely not skimp on.
Wow. I just have to say that this post is uncanny. My fiance and I just faced a VERY similar decision. Difference is that we have a bit more in savings, and rent isn’t nearly so low in NH.
I have to ask, would you even be considering buying a house if you hadn’t peeked at the market? Part of avoiding impulse spending is avoiding exposure to temptation to begin with. We played around with the idea of a house before we could afford it, but didn’t go to any showings until we were pre-approved for financing.
If you DO decide to go for it here is what I would try: make an offer, but make it contingent on the seller covering 3-5% towards closing costs (whatever you need to close the gap). Ours was also a foreclosure and Freddie Mac did this for us. Banks don’t like to hold onto property.
Also, set your closing date for 2-3 months away (2 is standard, I think). The cost of purchasing a house is spread out over that time, and you will have $3000-$4500 to play with if you only make minimum loan payments in that time.
And if all heck breaks loose and you lose your job(s), break the agreement and let your deposit go (not to be confused with the down payment).
Going forward, I would suggest putting more of your paycheck towards savings. It’s hard to wait, I know. I hate my red ink with the passion of a thousand burning suns. But a solid emergency/savings fund is far more protective to your way of life than zero debt.
A “dream house” is just how you’ve described it–a dream.
The best decisions are made consciously; consciousness is the antithesis of dreaming.
In the book, The Paradox of Choice, author Barry Schwartz urges readers to “anticipate adaptation.”
Humans are adaptive creatures by nature. Within a few years, your happiness will be consumed as you discover things you don’t like about the new home; therefore you will develop the concept of a new “dream home” and begin the plans to find it, replacing the previous one.
If you can envision yourself growing tired of this dream home, and still want to buy it, go ahead. Just be sure that the purchase does not jeopardize your financial well-being, which can then erode at other areas of well-being (i.e. personal relationships, career).
Every decision is a new opportunity to learn about yourself…
For those who pointed out property taxes and insurance expenses, the writer is projecting a monthly housing expense of $1,200 on a $136,000 house with a down payment. He must be including taxes and other escrows … or making payments to a loan shark.
NO house is move-in ready. It may appear to be, but it’s not. Even brand new homes have issues (often times more than an old house). You will want and need to do things to make it “home”, and the cost of those things will always compete against other priorities (paying off debt, building savings, oh and kids!). Just be realistic about this, and be patient. There will always be a good house out there for you if this one doesn’t work out. Really, there will be. This is the voice of experience talking.
Many people have written that it is not wise to rush a purchase, whether it’s a house or a necktie. So find a way to turn off the feeling of being rushed.
You write that you don’t want to “risk losing what amounts to our Dream House.” Remember that that this purchase takes you from a position of less risk to more risk. So the risk is not in losing the house, the risk is in owning the house.
You are thinking about about doubling your housing costs ($600 to $1200), and that is just considering the payments. The cost of a roof or HVAC replacement, or repairs after a storm can eat through savings many times over, and you said you would be starting homeownership without savings.
“Safely employed” and “no kids (yet)” are two significant assumptions that can shake your positive financial outlook. Factors in your control (e.g., you or your wife may decide to stay home with a new child, or private education vs. public education) and factors out of your control (e.g., job loss) can have a tough impact on your monthly budget.
Finally, this decision is a good chance for you and your wife to evaluate how you communicate about money. There will be many times ahead when you will want to, or will have to, spend significant amounts of money. Financial stress takes a toll on a marriage that won’t be repaired by living in a great house.
Don’t do it!!!!
You aren’t going to look back in five years and say, man I really wish we bought that home.
You may in fact look back in five years and say, what on earth were we thinking jumping into home ownership with no savings and all that debt!
Dream homes are a myth. You will move in and realize there really isn’t enough closet space, or you would have preferred an east facing dining room.
Look ahead. When you are on firm financial ground, you will be much more sure about your decision to buy a home. You will be confident. You won’t have to ask a financial blogger if you should or shouldn’t pull the trigger. You will know its a good decision for your family. And at that point, when you are ready, I am positive another “Dream Home” will be there, and you will breathe a sigh of relief that you didn’t buy the first one you found.
There are lots of dream houses out there. It sounds like this decision is pure emotion for them right now. That’s a definite sign to wait!
One of the best pieces of advice I got when buying my house was “There’s no such thing as a dream home until it passes inspection.” Once upon a time my husband and I found what we thought was a perfect house for us – our first – and the inspection quickly revealed a crack in the foundation – which could only be repaired by ripping out the side yard and patio (about $20k extra later) – which happened to be the two things we loved most about the house. We realized that once you took off the patio and junked the yard, the house was pretty common looking and not what we wanted. This young couple hasn’t even had time to consider what about a house is really important to them. How could they know it’s a “dream house” yet?
Frankly, unless this house is something REALLY unique and special, this isn’t a dream home – it’s a temptation home. The one that makes you clarify whether you’re a risk-taker or an intelligent-planner in these matters. The one you walk away from and begin thinking “it was nice, but in truth, I’d really like a different size of kitchen now that I’ve had time to think about it”. If this were truly a “dream home”, the timing on purchase would be as right as everything else. The fact that the timing is all wrong for them personally when measured against their other goals should be the most weighing factor. They aren’t ready. They know they aren’t ready. They said they aren’t ready. And they’re trying to talk themselves into being ready.
Let it go. Continue planning intelligently and the right house will come along AT THE RIGHT TIME.
I live in Houston. There are no one-of-a-kind homes in this price range here, unless it really has some serious repair issues.
How do I know? I’ve looked at dozens of homes in the Houston area for “fix-up-flip” purposes and have done it exactly twice; this “one-of-a-kind” just doesn’t pass my experience or smell test.
Best of luck, but I would be very cautious in this environment, particularly given the low financial resources of the questioner.
I know what it feels like to think that you’re passing on something that is such a critical part of your future. However, getting out of debt is an even bigger part. The problem is that once you get the house, then the need to have kids comes on strong, a bigger, safer car for the kids comes next, and trying to get out of debt becomes even harder when the wish list keeps growing.
One of the first tenets of home-buying is to never let yourself fall in love with a house. It’s a recipe for paying too much.
It appears to me that the poster is being overly optimistic. They have a take-home income of $5,0000 – or $60k. They have paid off $9,000 in student debt in 6 months, but think that they can easily pay off the final $28,000 in one year? That’s half of their entire take-home pay just for the student loans. Plus, he notes that some of the loan is already in forebearance while his wife is in school.
They absolutely should not buy this home! What if his wife becomes pregnant and has to take maternity leave (unpaid)? What if one of them loses their job? Also, housing prices are expected to continue to fall so there should be no hurry to buy now.
If it’s a one-of-a-kind home, in a great location, buy it. $135K mortgage on $5000/month take home is very manageable, your payment will be around $1000/month. Also, you’ll be taking advantage of good interest rates now–it looks like they are still below 5%.
I would advise you to wait. Not only did I notice the maintenance expenses that several people have mentioned when I bought my first home, but there are also more spending temptations involved in buying a home. Not only are you buying things that you all of a sudden need to maintain your house and yard, but you are tempted to buy landscaping items, curtains, blinds, furniture, paint, lighting, fans, appliances, new accessories that match the house’s color scheme, and the list goes on. It is not worth adding the financial strain, even if it is only for 6 months to a year. My experience has been similar to what others have said in that you will find more than one dream home in your area.
My first reaction was re: “both safely employed”…WHO, in this day and age, is “safely employed”? You can lose your job in a heartbeat, you could get sick…Your monthly combined income isn’t that high either, although maybe it’s high for Houston.
You guys are young too—you should sock away as much money as you can now, before you have kids. You said your housing expenses would double. Shoot, if you think you can handle that, then put that $$ in savings for the next 6 months or more and then you’ll have emergency savings.
We bought what I thought was my dream house and then within 6 months, we were separated and now I’m handling this dream house’s mortgage on a single income. It ISN’T pretty or fun, esp with home values decreasing constantly.
What’s a dream house anyway, as people have already commented?
Also, having a house is a lot of work. I know someone who bought a house with her sister a year ago and this year she finds out she to replace the whole heating system, for like $10K. If something unforeseen happened, even if was something “minor” like having to replace the refrigerator, or whatever, would you be able to swing that once your belts are so tight?
Trust me: WAIT. Houses are great but are massive headaches. And now people talk about getting rid of the deduction for home mortgage interest some day? Property taxes go up every year. There is so much to think about.
Just Wait, guys.
I suspect they’ve already decided to buy it, they’re just looking for reinforcement for the already made decision. However, I will point out two things to keep in mind:
1.) I know many people who find the “perfect house” and the deal falls through for whatever reason. I know of no such case where they never find an equivalent (usually better) house later. Not once have I heard anyone lament a deal fallen through years later on a “dream house” that didn’t have some other special value (like a family history).
2.) The most unhappy people I know for long term (not just short downs like after a breakup or illness) are unhappy due to money. And every one of them has a mortgage on the very high side of acceptable for their income.
Especially now, when houses seem cheap, it’s easy to be rushed into buying. While a good deal is great, every time I’ve rushed into a decision because it was a good deal with a clock ticking I’ve regretted it. Every time I’ve gotten where I want to be, then said “Now I’ll sit tight and wait for the perfect deal” I’ve been much more satisfied and made better decisions.
The people saying “Do it! You can afford it!” have clearly never heard some of the disasters described on the Dave Ramsey Show. Even if this situation isn’t exactly a disaster waiting to happen, it could very easily be a “very tight budget” waiting to happen. I mean, just listen to what some of the other readers here have said. Like the woman who found out she was pregnant the day they moved in and that child had special needs. It can and does happen all the time.
Don’t buy unless …
Your monthly mortgage payment is the same or less than your rent.
You move in without having touched your emergency fund.
But better yet, ask the parents to gift the down payment money to you to help pay off your student loans and move toward future homeownership with a big monkey off your back.
I would say the responsible thing to do would be to wait. However, that being said, I think that it really can depend on the neighborhood. It was said that houses are cheap in the Houston area at $136,000 for a foreclosure. Is that well under market value? If so, by how much? If it’s in an amazing, popular neighborhood where houses never go for less than $200,000 (just as an example), it may be worth it if you can put up with the stress of the extra debt load. And there will be stress, guaranteed.
That’s what my husband and I did. We bought our first house for $120,000 in a very popular neighborhood where a majority of the houses go for $200,000-$400,000, and the cheapest you can usually find is $160,000. It wasn’t a foreclose, but a fixer-upper, so we bought it and put some work into it. Now we can be almost complete assured (there’s always a chance) that we’ll never be underwater and will even have significant equity in the house.
But we were looking to buy, and had our finances ready for the move. I can say for certain that if we hadn’t been ready, we wouldn’t have bought that house. Neither one of use would have wanted to deal with the additional financial pressure.
Another vote for “Wait!”.
Greg, you have no down payment and no emergency fund. If 5K a month really is a lot of money, you will have no problem saving up a down payment and emergency fund in the next year or two while paying less aggressively on their student loans.
My parents are shopping for a “dream house” in Houston right now. They have fallen in love with a place many a time in the last 6 months. What’s the worst that can happen if you don’t buy this house? It’s not like it’s the last house that you’ll ever like. What makes it so unique?
Now think, what’s the worst that could happen if you bought this house? I have my home purchase horror stories (spent upwards of 10K on repairs my first year in my house, things have mellowed to ~4K a year now). What happens when your wife graduates? Is she staying with her current job? What happens when/if you have babies? These people going through foreclosures right now, don’t you think they started out with the same optimism?
I am a senior mortgage consultant with a small community bank in central Ohio with 22 years of home lending experience.
A foreclosure sale can be quite tricky, so be sure to interview your lender. That’s right, interview your lender! make sure the person who is handling your loan has experience in foreclosure sale transactions. I have seen this type of deal take months due to the current owner/lender being so overwhelmed with the amount of properties owned that they are grossly inefficient.
As far as whether or not you should try to purchase the property is your decision, but please put your emotions aside and look at this as a business deal. Would you do it if it was not your dream home?
Also, most banks that sell foreclosed homes will not do any repairs or pay for any portion of your closing costs, so start asking some questions if you are wanting any sales concessions from the seller.
Another pitfall of foreclosed properties is that the property itself my not qualify for certain loan types. If the property needs repairs prior to the lender approving the loan then you are in a no win situation with most loan types. The seller/bank will not usually make repairs or even allow you to go in and make repairs prior to you owning the home, and your lender will not close on the loan until the repairs are made.
Good luck to you, but please do a little more homework on the property, the owner, and your lender.
I am in the camp of waiting on the house.
Actually when we were buying our house we gave a pretty good offer but a builder came around and beat our price. After we reached the max ammount we wanted to spend on it we called it quits. Turned out the builder realized that he wouldn’t be able to make a profit on the deal and backed out (losing his 11k earnest money deposit) allowing the house to go back onto the market 6 months later. Since housing prices had fallen even lower we offered 50k under our original price. The better part was because of those 6 months we were able to save an even larger down payment.
So my advice is to wait on it, save up, and another oportunity will pop up, maybe even for the same house.
Someone earlier mentioned unexpected housing expenses, which reminded me of all the ones we were hit with. I normally keep these memories locked deep inside a deep dark place in my mind.
gas line to house: not under warranty
roof skylight leak: warrantied, but $50/copay
washer/dryer
2 water heaters
car accident
dishwasher and associated flooding
a/c and associated smoke
sprinkler system and associated resodding
sinks and toilets and associated water bills and water damage
weather and associated damaged fence
Just to annoy the folks who hate other people plugging their blogs, here’s a link: http://nicoleandmaggie.wordpress.com/2010/12/06/the-homebuying-can-be-expensive-post/
I like links and plugs, so long as they’re relevant. I can’t be the only one who does. If you don’t like folks plugging their stuff, then don’t click! Free disposal costs!
My vote is to wait. Your values and ideals in a house may change once you have children. I’ve really learned that location is far, far more important than the actual walls you live within. Walls can be moved, porches can be added, but sitting and praying for more kids to move onto your block doesn’t get you far. Having children and owning a house really invests you into a neighborhood far more than renting.
My husband and I never wanted to be house poor. We’ve always bought less than we could afford. And none of the houses we bought were love at first site but I grew to love every one. Our current house seems the most challenging to love right now but it was the only house in the neighborhood we wanted and we’re slowly making it ours and learning it’s quirks.
Waiting until you’re more financially secure will give you the flexibility to make a better choice, move towards a better school or better job, and survive a downturn.
If you decide to go for it, be sure to factor in what my husband and I call the “Home Depot bill.” Even brand new houses need regular maintenance and supplies. Move-in Ready is really just a prettier way of saying Not A Fixer-upper. It doesn’t mean there will be no expenses related to making the house your home.
Don’t buy this house now. You don’t have enough money put away for broken furnaces, leaky roofs, babies on the way, etc. An empty bedroom seems to draw pregnancy like a vacuum.
How about getting a second job and saving that money before buying a house. Hard work to make your dream come true is old-fashioned, but very sound advice.
Why not create a dream home folder or scrapbook? Put a lovely picture of this dream house on the first page, and continue adding pictures as you come across them.
Having bought a house before I could actually afford to do it, I would strongly recommend that they do not buy the house. In addition to the higher monthly housing expense, owning a home has a lot more small costs that constantly nibble away at your income, not to mention the big ones that you need to be saving for (new roof, furnace, a car etc.)Pay off your student loans and make sure that you have at least $5,000 in cash above and beyond what you’ll need for down payment and closing before you buy. You’ll be glad you did.
Folks, this is a great discussion. Thank you. Greg’s been reading, and I think he may post a some follow-ups later. I’m going to the gym now, though, and won’t be able to approve comments for a couple of hours. Please be patient!
Bad Move
These guys are young. We all were at some point, and I get the desire and urge. But a dream house at age “late 20’s” with no kids is likely different than a dream house at age 35-40 with kids.
And sorry to burst the bubble, but a $136K home isn’t a dream home. it’s a house. built by someone else.
So what they covet is to simply buy something someone else made. How is that a dream, and how is that coveted.
I get wanting something you made, or created. I get the pride and pleasure or crafting something, or designing something yourself. But simply buying something someone else made and then placing a “dream” label on it. Dumb. Like a car. People think nice cars are a symbol. They are. They symbolize that anyone with 40,50,80 or 100K can buy and drive the exact same thing.
Now if you built it yourself, restored a 1966 Mustang or a something that makes sense.
Keep renting at half the cost. Take the dad’s “generous gift” and apply it to debts. Take the additional $600 not spent buy conuing to rent and pay off the rest of the debts. Then look up in six months and be debt free, and realize there is another “dream” house, becasue there is always another one.
Second, $136k foreclosure in Houston is probably ~3,000+sf 3/2/2 in a good suburb with great schools. So if they have kids, they’re okay there, too. They’re looking at a mortgage payment of $1360 at the very worst. If their circumstances change significantly that they need to move, the house rental market in Houston is pretty good, they could use it as rental property. I seriously doubt it’s a one of a kind home, though, Houston isn’t exactly known for their alternative housing.
Those incidental costs associated with going from renting to buying (appliances, utility deposits, home & yard upkeep)would be in addition to their $7k saved up. If they’re only spending $80/month on debt repayment and they take home $5k, they could conceivably do it, they’d just be house poor for a few months until they get things stabilized again.
I have mixed feelings on this, and I actually changed my mind halfway through reading it, plus I agree with what Kris said.
My 51% says no. Life should be a little bit spontaneous and fun, sure, but it’s rarely wise to get caught up in the thinking that anything is a once-in-a-lifetime-opportunity, must act now.
I think the clincher for me is that, sure, they can afford it BUT, if I read it correctly, it basically doubles their monthly housing expense, more or less. That’s alot of money to be spending on something that, a week or so ago, they didn’t even know they wanted.
Keep living in the inexpensive apartment, get rid of that debt, save aggressively while you are comfortable with your dual incomes and little expenses. As you mention, you “don’t have kids (YET)” [caps mine], and speaking from a similar experience (I’m hardly older than you), if/when you do have children, your needs and outlook will likely change. Maybe one or both of you will need to be closer to work (or daycare) than you previously anticipated, maybe you’ll want a different school district, maybe you’ll want a more family-oriented community, maybe one of you will be surprised that you want to stay home, or you’ll be surprised that you want to keep working. You just don’t know yet; you CAN’T know yet.
Considering this, the downside here is two-fold: 1)You’re spending more, saving less, when you don’t really need to and while there’s a clear advantage to building up more resources at this point in your lives; and 2) You don’t realize that you’d be running the risk of having to move all over again, unexpectedly, in a couple of years.
And for what? There will be other houses, trust me. You’re doing great right now, stick with it.
For the record, my wife and I were almost in your exact situation–DINK, no kids, renting a very cheap apartment–everyone told us we were crazy, throwing away our money, ought to buy a house. Our incomes were basically similar, a little bit higher, but the same idea.
And a few years later, after our first child was born, we did buy our house. In the community and school area of our choosing. With a 75% down-payment. The 30-year mortgage we used for the remaining 25%(rates weren’t all that different) only took us about six years to pay off. And the flexibility now is amazing.
Keep your costs low now. If you can pay off $38k in debt in a year, you can save, what $76k two years later to put down on a new dream house, right? That’s a full HALF of the cost of the house–50% down. On a 30-year-loan, your monthly payment would be something like $400–less than the current rent on your cheap apartment.
Wait a little bit, and you’ll have your dream house soon, and you’ll feel even wealthier and more secure when you’re living in it.
It’s very easy to get wrapped up in the emotion of buying a house. But it’s only a “dream home” for your current state in life. What looks like a great house now may be different in five or ten years from now. Perhaps one of you will change jobs and now the commute is too long. Or perhaps you have kids and it now feels too small or the flow doesn’t work.
I would side with the Dave Ramsey side of things here. Pay off your debt and save up a good size down payment. You’re going to want a good chunk of cash when you move in to pay for things like moving expenses, painting a room, having the carpets cleaned, tools and materials for the upkeep of the yard and house.
Nothing ever goes as smoothly as you expect, it’s always nice to have some extra cash laying around to help even out the bumps along the way.
Totally agree that it is the long term horizon that counts, along with low fee investment vehicles. Demographic trends have benefited the baby boomers in the equity markets, and now we are entering a new tipping point phase in their demographic needs which will affect all of us during the next 20 years.
Don’t do it. My husband and I did something similar in 2004, and I had a blog for several years called “Nightmare on Elm St” about everything that we found wrong with our “dream” house (yes, it is actually on Elm St.). Probably another $100k in personal savings and ill-advised HELOC later, it is more the house of our dreams, but we’ve had two kids since then and our needs have really changed. If I could do it all over again, I would not have bought this house. Wait until you can afford something and then shop. There will be plenty more dream houses, I promise.
A (not “The”) dream house is a function of how long you’ve been looking.
Kris and @27 nailed it. Kris noted the exception: when the supply may really be 1. Otherwise, as you see more houses while seriously looking, your standard will go up.
I’ve owned three houses (currently living in the 3rd), and the “Dream Home” is a myth, sort of like Prince Charming for grownups. There will always be another house out there to fit your needs. If you’re not financially ready, that dream will quickly turn into a nightmare. Take your time.
My husband and I were in a very similar situation about three and a half years ago. We jumped on a house that we fell in love with, a 90 year old Craftsman bungalow, built by hand by an architect who went on to do great things in our city. We loved it, and even though we weren’t planning on it, we bought it.
Huge mistake. Medical bills came up, we still had debt from the past, we didn’t have the full down payment so we had to take on extra debt beyond the mortgage. It took us over two full years to get out of the hole, a very stressful two years.
If I could go back in time, I’d slap the younger version of my husband and myself right in the face. Tell them to snap out of it and be patient. No house is worth the amount of stress that comes with pulling the trigger too early.
Most if not all of you home owners may agree that your first home is never your Dream Home. Regardless what you may think or feel prior to buying your first home.
I would think you may want to consider buying with the notion that you are investing in a home not buying your dream house.
I would probably say “don’t buy it.” It’s seems like a quick, emotional decision is being made here (see comment #35). Were they in the market for a home at the time or was it a something they just happened across? If it’s the latter case, they really need to think about whether or not this is really the right time for them to purchase.
I’m also curious about Kris’ point of whether or not it’s a one-of-a-kind home, but it doesn’t sound like it from the post. All things considered, it seems like making the home purchase might severely hamper their ability to deal with debt.
I’m nowhere close to being a financial expert, but here’s my two cents…
It sounds like you’d probably be fine if you bought the house, so long as there aren’t any big life changes in your near future.
That being said, personally I don’t think I’d take on such huge stress, risk and responsibility for a dream home at this point. Why not? Because there will ALWAYS… ALWAYS… be a bigger, better and cheaper dream home down the line.
I say wait until you can afford it with minimal stress, extra savings and no debt, then find something even better than this home. You’ll enjoy it so much more.
As someone who works in this field and frequently sees first time buyers jump into properties, I can only say: think lonnnnng and hard about this choice. As Kris recommends, unless this is ONE of a kind home, there will be other properties. There always are, especially in this market.
There’s no rush usually. Even a sharp increase in mortgage rates wouldn’t raise their payments much – assuming 20% on the property, their monthly PITI would only go up $60 if rates went from 5% to 6%.
That said, I don’t believe all debts need to be paid off. If they can put down 20%, then they’ll avoid Private Mortgage Insurance. They could increase the sales price by $7,000 to cover all their closing costs and keep their emergency fund safe and avoid taking on short term debt. They’d pay interest on the financed closing costs, but it’s an option that often is great for first time buyers.
Not to make this overly complicated, but the robo-signer debacle could also come back and bite them if the person who was foreclosed on somehow gets the keys to the house back through a legal action similar to what’s been happening in MA. Slim chances of that and I hope it doesn’t start happening too frequently.
I’m pretty sure the OP knows they shouldn’t do this, but I think they’re fishing for SOME justification in these comments.
I think they should do what will give them the least amount of stress.
I would say beef up some savings and then buy
Any chance to do a lease with option to purchase? Most likely it is not an option, but it doesn’t cost to ask. That way you could “test drive” it. If, after 6 months or a year, it is still your dream home, go for it!
Debt = risk
should you take on more risk to have your dreams? well, if you can have your dreams a year later with less risk, then that is the easy answer.
I think Kris made the point I was probably most concerned about. For instance, our home – while in many ways not a “dream” due to its needs of a roof and a new heat pump in the time we’ve lived here! – was a slam-dunk for us because it’s two blocks from the place my husband and I both work.
This allowed us to be a one-car family, but more importantly, it allowed us to spend a LOT more time at home, doing things like dinners with our daughter, etc.
It also is “bigger” than we need, but we were able to immediately recoup some cost and help a friend by renting her and her infant son the finished basement for close to two years. Now, we’re happy that we have that space, because it’s become home to a profitable side business for my husband.
If we’d looked 100% at short-term economics, we probably shouldn’t have bought it. But now, five years later, it’s paid off quite well, both economically and personally.
Stop. Breath. Make the rational choice. I promise that you’ll find dozens of other “dream” homes if you keep looking. A $136K home can’t be that special or unique. When you’re ready to buy (meaning you’re out of debt and it’s not a stretch), the right house will make itself known to you. And by then, your definition of “dream” may have changed.
I agree with Joan and Kris. Unless this house is a truly one of a kind vintage or conversion property, its qualities are likely to be very common.
Given that the LW and his wife have significant debt (even taking into account the low monthly commitment thereon) and haven’t yet started a family as it is clear they intend to, my advice would be to stay put, save like crazy people while paying off those student loans, and possibly even wait until a first child joins the family.
An awful lot of people buy a house (before kids) that’s “perfect” for a young married couple, and then realize it doesn’t work for married + children.
The housing market isn’t exactly booming. There will be other houses, and there will be a time when all the financial ducks are in a row and this question doesn’t even arise.
I’m falling firmly in the “don’t do it” camp. I’ve always felt that if a home buyer needed family assistance to purchase a home, especially in the form of a loan (instead of a gift), then they probably weren’t really ready to buy.
Perhaps this is a revealing event, though, and now you know you both want to focus on getting down payment money in the bank. That way when DREAM HOUSE: THE SEQUEL appears on your radar, you’ll be ready. I’m looking forward to an update!
If it’s really that great a deal, someone has probably already snapped it up in a big city like Houston. If they haven’t… well, that should tell you something.
No, no no. If you had an emergency fund of 6 months and no student loans, I’d say maybe (still hesitant because of the breaking of the lease–that’s throwing money away). If you disregard the advice of this blog (as most do) then at least wait until you don’t have to break your lease. If it’s still for sale, then fine go ahead and buy it if you still “love” it–at least it won’t be an impulse buy then.
Actually, I would say they shouldn’t do it.
I was in nearly the same situation about a year ago. Same age, similar income, married (no kids), same lease situation and similar priced house.
The differences were:
1) We had enough of our own savings for a down payment, but not much left for anything else.
2) We had no student/short term debt.
I kept thinking “We’re not going to find anything else like this. Plus there’s no sense in ‘throwing away’ money on rent”.
We were getting pressured to make an offer. That’s when it dawned on me that I would be tying up $25K that I’ve spent several years saving, into a house. This was practically all of our savings. I finally decided that I didn’t want to deal with the stress of not having a large savings pile, so we backed out. My stress was lifted.
I think they have a different perspective than we did because they’re getting their down payment as a gift (which is fine). But because they’re not risking their own savings, they have no reason to feel anxious to separate from their hard-earned money. So it looks like they see this as a way to get out of renting an apartment and get their “dream home”. I think this is a mistake because houses are just things and there are plenty of them.
My recommendation would be to try and rent a HOUSE as close as possible to the price they’re paying for their apartment. My wife and I did that. It’s certainly not our dream home, but it’s better than the apartment. We’ve learned a lot about home-ownership costs with little risk since the landlord has to take care of big problems.
I say absolutely go for it, with the following very important caveats:
1) Others are correct that there is no such thing as a dream house. You will change your mind over time, even if your DINK status never changes. That doesn’t mean you can’t buy a house based on your current needs and preferences, just keep in mind that it is your starter home and not your forever home.
2) Houses are a money-suck. That doesn’t mean don’t do it, just keep it in mind.
3) In all likelihood, a foreclosure isn’t going to finance. If there is even a speck of dry rot, your lender won’t proceed, and the selling bank is unlikely to do repairs. Even if it will only cost $100 to fix, doesn’t matter. Maybe you’ll get lucky, but try not to get your hopes up.
I guess I can sum it all up by saying that yes you can afford it, and yes it may be a good decision, but there are a myriad of things that can go wrong, so try not to get your hopes up. If a house is what you want, buy a house. If THIS house and only THIS is what you want, you’re setting yourself up for disappointment.
J.D.’s note: I’m not highlighting this comment because I think Greg should buy the house, but because Des makes some interesting points.
Don’t do it !!!
Get Rich Slowly philosophy is you get rich in right way. You don’t want to keep yourself in debt for rest of your life if something unforseen happens. You are taking a big risk, if you go for it. And you might many have years to pay back.
Wealthy people take calculated risk but do not drown themselves in debts if anything goes wrong.
Like others have done, I have to ask what makes this house a “dream house”? I was recently in Phoenix. It’s full of a lot of houses that just a few years ago, people all thought were “dream homes”. There are tons of them, they’re all basically identical, and now half of them are vacant and banks and developers essentially can’t give them away.
What makes this house special? Are there 100 houses just like it nearby? You don’t need to rush unless it’s really one-of-a-kind.
On the other hand, my uncle has his dream house. It’s just outside Zion National Park, and he hired an architect to design it specifically to blend into the landscape. It’s all made of glass and locally-sourced slate, and it’s really rather amazing. The home is designed specifically for the property that it’s on, and to my uncle’s specs. If you’re looking at something like this, maybe it *is* worth rushing. My uncle’s house: http://www.flickr.com/photos/tylerkaraszewski/4634640120/
So, what is it that you’re trying to buy, and is it really worth the effort?
Since the ratio is not a concern (2x yearly earnings) & if you’re handy and can make repairs that always seem to pop up at the worst times, I say offer $125K with earnest money attached subject to inpection & see what happens. Is it the best & largest house on the block, smaller where others will pull the price up later, etc? You might be surprised. NO PRICE in this economy is firm. Take a clue from retail this past shopping season. The same applies. The worst they might do is to counter mid way & there you are. Play hard ball with multiple counters if necessary (in 2000, we settled on the $ on the 5th back and forth) Hold off on kids for 2 years to settle in – things come up in the first year. Good Luck
I totally agree with Kris. If it is not a unique one-of-a-kind house, I wouldn’t fall for a dream house. If it really is a unique house and/or a great deal that you cannot get anywhere else, then go for it. I would just add a couple of points.
1) Do they have an emergency fund? What if one of them loses their job? Can they manage? What happens if they have a kid and one parent choose to stay home. Can they still manage with a kid and one lost income?
2) What about home repairs? That can get expensive.
3) What about future needs? If this is their dream house, will it change when they have a kid? Will it still be a dream house?
4) This is not a question, more of a caution. If they do end up buying a house that is bigger than they have now, they should make cautious effort to not furnish/decorate all the rooms. This is a big chunk of money.
5) They don’t have to lose the deposit. Craigslist – sublease it. Or post it in other forums and just transfer the lease to someone else.
6) Finally, if they do end up NOT buying the house, I think they should really look into their student loan. From the letter, it looks like they are just prepaying the loan (loan not due until 2014…). They should be paying the principal off, not just prepaying the whole thing. They should give the lender a call and set up to apply the extra money to the principal. If their loan is not set up that way, then I think they should stop the payments for a couple of years and save that money to build up a nice emergency fund and a healthy down payment.
My first impulse is to tell you to not buy the house.
As many others have stated, “dream home” may not be as rare as it seems at this moment. Even if Kris is right, and there is something special about this particular house, your needs may change. You are a young couple and while right now you think your jobs are stable and you want to stay in Houston for the foreseeable future. You may even be buying a house thinking you’ll have kids, and then change your mind or not be able to. Or maybe the opposite, you are looking at buying a small place with no room to grow as your life circumstances change.
I am speaking to you as another 20-something, granted I’m single so our situations are a little different, but we are still young and aren’t necessarily very good at objectively determining what we really want. Anyway, I bought a house a year and a half ago after getting caught up in what I thought I should be doing, making a very emotionally based decision. I was spending a lot of time with families that owned homes, and I found myself wanting my “dream home” based on someone else’s dream. My plan was to wait at least another year. I should have stuck to the plan. My house is now the single biggest burden I have, and not strictly for financial reasons. While I can afford the house, I do not like the freedom it has taken from my life. I can no longer move to a different neighborhood in the city if I feel like it. I can’t look at taking a different job that might be more satisfying, but would drastically reduce my salary. And the biggest reason the mortgage is a burden is that it limits spending on things that are truly important to me, like extensive travel, because I am putting so much into a house that is not that important to me. Flexibility at such a young age is something not to be lightly tossed away.
Ultimately you know your situation and need to make your own decision, but I would sit down with your wife and ask yourselves tough questions about what makes this your dream home, why you want it, and what cost it is worth (in term of what you will truly be giving up in your life – all aspects).
One other note, if you do decide to go forward with the purchase with the gift from your father, be aware that some loans limit the amount of the downpayment (I seem to remember it being around 10k, but it might be percentage based) that can be a gift. Basically the reason behind it is that the higher the downpayment you bring, the less risk you present to the lender, i.e., you’ve got more skin in the game so you are less likely to walk away and foreclose. But if the money is gift money, this changes how the bank views you from a risk assessment point of view. I would recommend scheduling an appointment with a mortgage broker or talk to someone at your local credit union to see if that might be an issue for you.
Good luck!
DON’T DO IT!!! I read where the OP said “the minor debts we will incur to buy the house hopefully won’t last very long” and that immediatly went up as a read flag. Any time you are basing your financial life on a ‘hopefully’ you are in trouble. What happens if you extend yourself to buy the house and it is washed away by a flood/needs a new furnace/is determined to have some other major problem that requires lots of money to fix? Houses are notorious for needing (expensive) upkeep and in this market you really never know if your job is as secure as you think it is. Pay off all your debt then save the money you need for the house. You will be way better off that way.
p.s. Dream houses come along often so this isn’t your last chance to buy an amazing house.
This sounds like a really, really expensive impulse purchase. Two weeks ago, you weren’t interested in buying a house. Now you want to jump on one.
I say don’t do it! There will be other houses. Get yourself in a much better financial position.
You don’t want to be foreclosed on yourself if things go sour (and it really can happen to anyone with a mortgage!)
$1200/month for a $136k house seems pretty high to me.
JD,
You should put a poll in the blog posts that have clear “yes” “no” choices. I would be interesting to see the percentage that is tracking.
But for the record, my vote is NO! This story is the prelude to my own financial disaster. We got out from underneath the house payment before it killed us and before we had to shell out anymore in unforeseen expenses.
J.D.’s note: Interesting, Chett. I’ve never thought of that. I’ll bet I could find a plug-in that would let me do this. Or maybe even some embeddable app from an external site. You may have to prod me again once or twice in the future before I remember, but then you’re used to that. You know how I operate! 🙂
Oh, and since this is a foreclosure, don’t expect the “seller” to cover any of the costs. The bank might sell it to you for less than list price, but I don’t think you can have them cover closing costs. Double-check me on that.
If they have a very strong expectation that they will live in that home for a minimum of 5 years and their jobs are fairly stable then I would say that they should go ahead and do it.
My key reasons that I think its OK is :
Their combined income is $5000 a month and the payment is $1200 so thats about 24% of their income. Thats reasonable expense for a house and they can afford it.
They also say they have $28,000 in student loans and they expect to pay them off within a year. If I’m reading between the lines correctly then they have $60k in income and plan to pay off $28k in debt within a year. That should mean they are able to live on $32k a year or less currently and run at least a $28k annual surplus above their expenses. If right then these people are quite frugal and living well within their means. They could actually afford to buy 2 such houses.
Short term they will have low savings. But if they cut back to minimum payments on student loans then they can replenish their savings account within a few months.
Yes, I am a huge Dave Ramsey fan. I do ask myself ‘What would Dave say/do?’ when it comes to purchases. But I have also done many things Dave would frown upon.
At this point in my life, I’d say don’t do it. You guys are carrying way too much debt already. I mean if you had $5000 worth of debt, I’d be singing a different tune.
I guess I’m just playing it safe. Renting is one thing. But homeownership is a completely different breed. Just because you can handle the payments doesn’t mean nothing else will go wrong. As mentioned the house needs some TLC. And even if it didn’t, things just go wrong. Don’t forget about property tax, home insurance, etc etc.
You’re still young. Keep chugging away at your debt. The perfect home will be there when you’re ready.
Do it! You prob aren’t going to be able to take advantage of the low interest rates and low prices forever, so you have to strike while the iron is hot. Sometimes leverage is a good thing and a key to building long-term wealth. And it seems like you’re in a great position to use it. You both like your jobs and have no plans to move, which is key, you have supportive relatives with the down payment, and your debt load is minimal. This is a risk that you can bear and is not speculative, and housing is something you need. Sure you could wait a year or two and pay off $28,000, but if you end up paying more then for a home then you may not really be coming out ahead. Credit isn’t always a bad thing if used prudently, it can allow you to take advantage of good deals on things you need (emphasis on need) when they’re available instead of paying more later. Locking in the low interest rate will actually probably save you the most long-term. So do it!
With prices like that I need to move back home to Texas!
Dream house for $136,000!?! I’m moving to Huston!
What do “dream houses” and “soul mates” have in common? Neither of them exist…
When we get married, we are making a conscious decision based on a feeling. The feeling is infatuation. LOVE, however, is a decision. Our spouse becomes our “soul mate” over time as we choose to love them… even when we’re not feeling loving and they’re not particularly lovable.
Much in the same way, we don’t, while driving around with a realtor, discover our dream house. We feel a (legitimate) emotional draw to a house (infatuation), we buy it, and then we make it a home. Eventually, it becomes our dream house.
It wouldn’t necessarily be financial suicide for Greg and his wife to buy this house, but I’d encourage them to avoid falling into the self-deceptive trap of believing THIS house is their destiny. With the proper amount of TLC, they’ll make whatever house they buy, whenever they buy it, their dream house.
I agree with Kris: if it’s unique, or even just rare, buy it now. Otherwise, wait for another “really good deal.” My husband and I bought our current house 12 years ago, and still love it. At the time, we had moved 1,000 miles back to near my hometown, but Steve only had a visiting professor gig (with a strong chance of going permanent). I always want to live within walking distance of work for one of us, and the options near the university were limited; student rental slums or really big historic houses, and we also wanted to keep it small. In addition, he didn’t want the potential toxic chemicals of an older house, and I really wanted a modern-design house, if at all possible. The only modern-style house, and one of only a handful of moderate-sized houses came on the market in the fall–he would not even know if he would be permanent until well into the spring. We bought it, and since until a couple of years ago the local housing market was solid and had been, we figured we’d most likely be able to sell if worst came to worst. We were not stretched financially, and could have returned to his previous job and rented out the house until it sold and rented somewhere to live ourselves, so there was a failsafe. It all worked out wonderfully.
If you have a backup in the short term, like parental finances, say, and if and only if this is truly a rare property, buy it!
No-because it’s an impulse buy, they weren’t even looking for a house
No-because they’re throwing away $1600 to break the lease
No-because they still have high stduent loan debt- wait until it’s under 5K.
No- because they are renting an apt. and have no idea the “real” costs of home ownership-maintenance(is there a yard?…)
No-because they are young(fertile?) and kids are right around the corner$$$
Dream house? maybe, but have you ever bought a unique car/or colored car, only to drive it off the lot, and see 3 others just like it on the way home!
Just Wait!
“We’ve checked it out, and aside from minor cosmetic things, its move-in ready.”
No such animal. Something always happens to burst that bubble. We have owned four homes including one in Houston. All were good deals and contingent on a thorough inspection prior to purchase, but no home is truly move-in ready or needs only minor cosmetic changes. I love home ownership and I would say go for it, but don’t delude yourself. Homes have a way of needing expensive repairs right at the worst moment and I would be especially wary of a foreclosure as maintenance probably was an issue preceeding relinquishment. Still that sounds like an awesome price. I would be tempted too, especially if it was not just a dream house but a dream location. We found that location was especially important in Houston due to the lack of zoning. Strong homeowners association, well developed neighborhood, and location close to work all imperative.
Great Post.
I purchased my house 2 years ago. You should NEVER buy your dream house up front.
Rather I took these steps:
1. Bought my house in a good, working class area with amazing neighbors.
2. Did not spend all my money I had saved
Why?
1. I know I can rent this house in the future. The neighborhood has renters already and I can turn a profit in a few years when renting prices go up.
2. I had enough money left over to fix up the house. All houses when bought incur expenses, no matter how new.
*I call your first house your “work horse” house. Use it for the future, not your immediate gratification.
Look at properties that will make you money in the future, not drain your wallet.
Great article!
“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.”
So what happens in the next 2 years? Provided you take out a 15 year mortgage, you have 13 more years of paying the mysterious “loan in deferment”. The size and payment schedule of that loan are your main determiner here.
You’re thinking dangerously short-term by fixating in your current $80 payment. I say dangerously because it’s wrong. Think long term for a clearer view of things and you’ll know if you can afford the house or not. It’s 2014… how much will the loan payments be? Will there be kids on the way? What will be your income?
Common sense would dictate not to count your chickens until they hatch. People fail to account for the unexpected and that’s usually how they get slammed. Magic eightball says “ask again later”.
I’ve done a similar thing and the added stress wasn’t worth it. Unless it is truly a one-of-a-kind home like Kris mentioned, I would wait and do it “right”. 20% down, no other debt and a savings account to cover maintenance and repairs. What if you get into the place and a month later the furnace goes out? You’ll have no cash to pay for repairs and have to take on more debt.
^ I can’t edit my post above but I meant potentially 13 years of paying the mortgage *concurrent* with your loan. Maybe more, maybe less, only you know.
Man, I can’t believe how pessimistic most of the comments are. I guess I should be thanking my lucky stars that I didn’t become pregnant with twins, both DH and I laid off, and a leaky roof within 2 minutes of closing on our house.
3.5 years ago, we found our dream house. While the house was somewhat unique, the property itself was gorgeous, exactly what we were looking for, and very, very rare for our area. The problem? We couldn’t sell our other house. And worse, we were buying it on a land contract, so it couldn’t be used as collateral. We ended up purchasing the dream home on a contract as well with multiple loans (one to the seller, a bridge loan and our original land contract). Two very stressful years passed before we sold our other house. We made it. Barely.
Oh, and our dream home needed a new roof, septic system, new windows, new siding, a new well, a new barn foundation…you get the idea.
It was both the worst (because it was stupid, of course) and best decision (because it forced us to be frugal and hopefully not so stupid in the future) we’ve made.
I would love to hear why this home is a dream home. Very close to work, neighborhood, size for the money, unique architectual style.
What I associate with dream home is something that if one passes it up and waits, one is unlikely to find again. If it truly is a dream home that should figure in the calculations.
The house we bought I didn’t think of it as a dream home, but it was our dream home because it was a house we could afford, in a neighborhood we wanted to live in (we are 5 min driving distance away from our respective jobs and in walking distance of our child’s school). So sometimes particular houses do only come up every once in awhile that fulfil certain criteria.
I disagree with a lot of what’s been said here, but I guess I am in a different situation.
I am single with take home pay around 6k a month (but only recently, used to be around 4k a month not too long ago).
I purchased a house last year with the 8,000 home buyer credit since it really is a once in a lifetime opportunity. I think if these folks were buying last year around this time, I’d definitely tell them to go for it since 8k is nothing to scoff at and can really take the burden off of taking the plunge.
My house is around 185k. My only debt at the time of purchase was my car and a small balance on a 0% card. It was a bit stressful for about a year since I had some unplanned circumstances of ending up in the hospital 2 years in a row (one was a freak incident with Guillain-Brasse, the other a broken collar bone and 2 fractured ribs.)
Anyway, long story short, it was the best decision I ever made imo. Owning a home is the american dream. Sure, you can ALWAYS wait and just save and save and save until you can buy a house outright, but why live your life like that? If you died tomorrow some good that did you!
Don’t get me wrong, I’m not telling anybody to make unwise decisions, but this couple, with 28k in student loan debt (isn’t that much in the grand scheme of things), good take home pay, and are looking at a house they can easily afford (I imagine they are approved up to 185-200k range), this seems like a no-brainer.
There are a lot of tax benefits as well so owning a home isn’t as expensive as some might think. If you are already paying 6-700+ in rent a month (which is literally going down the drain), instead of putting it into some equity/taking a deduction on your taxes, I’d definitely say it is wiser to enjoy life now and buy this house.
My 2c.
This house sounds like something you cannot afford. Make a final-best lowball offer at a price you can afford (or preferably, less than you can afford). They’ll either accept or they won’t. Either way you win.
I’m going to assume this is a unique house in the perfect neighborhood, with plenty of room for expanding a family if that is what they plan to do, the jobs are stable and they aren’t expecting a decrease in pay or demotion, etc etc… all those being true, it might be a good deal for them.
I think it’s feasible to believe they are financially smart and not living paycheck to paycheck. THey have almost enough in savings to pay for $7000 in closing costs and home inspections with only a small portion of that unaccounted for (consumer debt = cc debt?). They are paying more than $1500/month on student loans that probably aren’t even 1/3 of that for the regular monthly payment. They just don’t have a down payment yet.
If they buy this house and wipe out their savings and use their cc a bit, one year of making $200/month student loan payments and saving the other $1300/month will pay off the consumer debt and build back their savings pretty quickly and allow them to buy some of the things they will need for the upkeep of the house.
If this is a foreclosure where it takes a long time to complete, they may be able to by-pass the consumer debt and the broken lease fee. I’ve heard it taking several months to complete a purchase, and if they could postpone the $1500/month student loan payments or drop them to $500, they could cover the expenses they are missing. $500 is still a very aggressive payment on a loan with a balance of $28k, and if it takes 3 months to finish everything up before the first mortgage payment, there’s an additional $3000 for those closing costs and home inspections and such.
If this were me (I wish!), I would start making smaller loan payments until I decided. Something that’s more than what the original minimum payment was way back when, but significantly less than $1500 or whatever now. Put that extra into savings for house expenses, and then if I were to change my mind, I could just make a huge loan payment one month and go back to the super aggressive payments. If I decide to go through with it, I’ve avoided (possibly) using my credit card.
Another thing to consider is, if you DON’T do this now, how much longer will it be? Paying off the student loans in 1 year, and then saving up the down payment in the other, then house hunting for possibly a 3rd. Do you want to rent for another 3 years?
My two cents:
Keep in mind that the housing market still contains significant downside risk. I know someone who bought a house in Arizona for $110,000 – they thought they were getting a steal because it went for $250k a few years earlier.
Well, guess what – now similar houses on the same street are going for $50-$70k (and oh yeah, there are YEARS worth of unsold housing inventory in many areas, and it will only get worse once banks are actually able to start processing foreclosures more quickly again). Most experts agree that it is highly unlikely that housing prices will start going back up significantly anytime soon.
Under certain circumstances, now is a great time to buy in this market. But there is also significant downside risk as well, so you have to ask yourself if you’re willing to accept those risks before taking the plunge.
In your situation, I would absolutely NOT buy right now. Get out of debt, and hoard cash for a larger down payment – there will be many more “dream houses” available at bargain prices in the coming months and years. This is not a buyer’s market, it is a down payment saver’s market.
I have also heard people spend 1% a year on maintenance, but we have been running 2-3% since we bought a 1989 house in 2007. Our inspection went perfectly, but shortly after our sump pump was clogged by a tree root, our windows needed replacing, our chimney cap blew off ($1000 deductible for a $1200 job), our screens on the screen porch were falling out, the house needed to be restained last summer, and so on. We could probably have spent less to repair things, but since we planned to live here longterm, we decided to do it well instead of cheap. Some of these appeared to have been done cheap the first time (eg, the screens).
With a foreclosure, there’s a good chance that standard maintenance has been ignored in recent years too – first they avoid it as a cost-cutting measure, then they avoid it because they know they will lose the house anyway. That could lead to big headaches soon that aren’t necessarily there at inspection.
So I also vote No.
Jenn
I’m a Realtor, and I say wait until you have extra savings (maybe $10,000) that won’t be spent on closings, downpayment, etc. Like others have said, you will always have to fix something in the house, no matter how old or new.
Judging on the numbers, it sounds like the dad is helping out with a 3.5% down payment on an FHA loan and they will have PMI built into their monthly payment. This makes me immediately say no way.
If dad was helping out with a 20% down payment that eliminated the PMI I would say go for it because they’d be going into this purchase with equity, and their monthly payment on a $136,000 would be relatively close to what they’re paying for rent now. The PMI and larger loan amount blows that out of the water.
In addition, I’d point out that over the past 6 months they managed to pay about $1500 a month towards their student loans, so they might be being a little optimistic about paying off those student loans in the next year.
Regarding the house I’d ask what he means by foreclosure. Is it already owned by the bank? Is it facing foreclosure and currently listed as a short sale? If it’s a short sale that could greatly affect the reality of them actually being able to purchase the house right now.
And finally, I’d say a $136,000 foreclosure in Houston has got to be a dime a dozen…so to speak 🙂 Keep paying off the debt and saving up more money to put towards the down payment of the house. I’d even consider paying less to the student loans in order to save up the rest of a 20% down payment (assuming dad will still be willing to help a year from now). As long as they can nix that PMI I’d say purchasing a house in that price range and then continuing to pay down their student loans as quickly as possible is a fine place to be.
I am in my late twenties, and I can sympathize with the idea of buying a dream home. However, isn’t it this line of “dream home” thinking exactly what got us into the current real estate mess?
From an outsider perspective, this sounds like another couple buying something they “have to have” but can’t really afford.
I agree with Kris that you need to figure out how unique this place is. But to the people that are saying that nothing for $136k could be a “dream house” – not everyone is focused on the same things.
My husband and I have been tempted lately by a “dream house” ourselves. Priced at $265k, it’s 250k cheaper than any other single family home in the neighborhood. These commenters would surely think this house can’t be a dream since it’s so cheap and run-down, but in fact we want a yard (so no condo) but a tiny house (so no victorian), and that is really hard to find where we live.
Some things are unique. If you’re set on that neighborhood (preferably you live there already so you know it) and you know that this is one of the only houses like this in the area, then maybe.
Personally, we aren’t buying our dream house even though I’ve walked every street of the neighborhood and I know that it’s one-of-a-kind and priced amazingly low. If we were sure we wanted to stay in the area for a long time though, we might.
I wonder about some of comments posted that says, “Do it”. Don’t the readers of Get Rich Slowly know about DEBT. JD often talks about getting out of DEBT, living frugally.
It’s obvious that this guy has huge student loan in first place. He needs to have discipline to pay that first, and then to save for emergency fund, and then max out retirement. Does he not think about this.
Everyone has dream house, dream car, dream vacation…..etc. The wise and wealthy saves first and then go for it. “DELAY GRATIFICATION” is the wisdom. Poor and middle class go for it now and many regret later.
This guy is in his 20’s. There will be many houses he can choose to buy once he has enough saving. Doing right is the key. otherwise, DEBT IS ALWAYS A SLAVERY. A lot of ugly things happen due to financial problems. Most importantly, divorce, relationship break up.. stress… and others.
It seems like most commenters consider student loan debt to be just as bad as credit card debt. Is that really the case? My gut feeling has always been that it’s OK to buy a house if I’m still carrying my student loans (which have interest rates between 4.5%-6.8%) but have no credit card debt. I would apply this to the OP, too. Should we be distinguishing between the two types of debt, or is debt just debt?
I completely understand your position and how strong your desire is to buy this house. All that I can offer is my experience.
My husband and I bought both of our homes on a whim, while carrying some debt and without a proper emergency fund. Nothing catastrophic happened; we both still have our jobs and have since paid down our debt and are building an emergency fund. However, I have now realized that there are several “dream homes” that I have seen since we purchased our last house. And homes come with so many expenses that pop up at the last minute. It is very easy to get caught up in becoming emotionally attached to a particular home.
If I could do it all over again, I would have waited until we were more financially secure to make the purchase. I know that we would have found another dream home, because there are plenty out there for the right price.
As JD says, do what works best for you and remember that you will be making a very long term commitment.
One thing is sure. Whether it’s a dream house or not, your primary residence will never make you richer. It’s a cash drainer that makes your family happy.
My advice is to hold off on buying. You don’t sound ready, and this is the BIGGEST purchase you’ll likely ever make!!
Are you THRILLED with your job? Your career prospects in your location? Your location in general? Have you looked at houses in your area until you were cross-eyed? Can you say with confidence that this house is a gem? Remember, it’s just a building – and there’s a TON of ’em out there.
My husband and I are similar to you in that we are young (31 and 27) and do not have children. However, we have been through two home purchases and have acquired (somewhat painfully) some wisdom to share with you!
My husband bought a small condo in IL when he was 26 at the peak of the housing boom – July 2006 – and he met me a week later. We fell in love and became engaged some ~1.5 years later. However, I had big dreams of moving to the west coast to find better work in our field. We secured jobs out west in Dec ’08 and moved to an apartment in WA. We put the IL house on the market. It took us 9 months to sell it as the market crashed and we sold it at a huge loss. We wrote a check for $14k to close the “underwater” gap, and we lost all our equity (including the 20% down payment).
The lesson here? Your needs may change. You can’t predict whether they will, or in what ways they may change, but you can hedge your bets by being super, extra sure that you are: 1. working where you want to be working 2. there are other places to work if your current job falls through and 3. you are living where you want to be living.
My husband bought into the housing hype during the boom and had the cash for it, so he thought, why not? I don’t blame him at ALL! I wanted a house *badly* at that time too, but I was fresh out of school with very little savings. But our industry was near-dead in IL and job prospects were grim. That alone was reason not to buy. When things went south at the company we both worked at, we found there was nowhere else to work while still living in that same house. We looked to other cities for a stable place to grow our careers (we are both video game developers) and decided Seattle, WA was our favorite.
After we moved to WA at the end of ’08, we lived in an apartment for 2 years while we explored the new area and made sure it was where we wanted to tie ourselves down. During that time we socked away money like mad. We are both debt-free and considerable savers, but we knew home-buying was on our 2-4 year radar and that every dime would help.
After 7 months of working with a realtor and after looking at a good 50+ properties, we bought a house Nov ’10. We knew it was a good one because we had looked at enough to be able to make comparisons. Houses we liked in June were eclipsed by houses we saw in August, and some houses that went on the market in October were even better yet! We even learned a lot about what we wanted (and what we could live without) in a house by looking at so many properties. Four offers went in ours, and we won because: 1. we were putting 20% down and 2. we offered 5k more than everyone else (they came in at list, we went 5k above list).
We didn’t buy the best house on the block – far from it. The front door didn’t even lock. The furnace was on its last legs. The carpet was more filth than fiber. But the house has “good bones” and it was priced 25% less than its comparables. My husband and I are quite handy, and we’ve already built considerable “sweat equity” with both minor and major upgrades. Are YOU handy? Can you replace a broken toilet? A leaking faucet? A broken light fixture? If not, are you willing to spend the weekends and evenings it takes to learn? And if not, are you willing to pay contractors for it? (They’re not cheap!)
We budgeted $15k for upfront costs (and that was after the $62k we put down), and within a week of having the place it became apparent that we’d need to up our upfront budget to $20k when we discovered the furnace was leaking poisonous fumes! And THAT was just to get the place to the point where we could use it as a shelter – there is still a lot of work to do to beautify it and make it our “own”. Odds are your home will need some upfront purchases, too. All in all, this purchase cost us HALF of our liquid assets. We’re fine, but the gravity of it hits us every now and then. If it had taken ALL of our assets to buy this place, I don’t know how I could sleep at night.
This is probably the biggest purchase of your LIFE! Pay down your debt, save for your down payment, save for your upfront expenses, and then go look at 30-100+ houses. THEN you’ll be ready.
I tend to agree with most of the readers and Kris. There will be other “Dream Homes” and you really need to eliminate all doubt of being able to shoulder the debt before entering the world of home ownership (which is exactly why I don’t own one myself). Pay off the student loans, set aside 15K for the move or double what you think you’ll need and find another dream house in 2 year.
JD,
I just discovered if you use wordpress (I think you do) you can create a poll very easily. There is a circle near the editing tools and when you mouse over it, it says, “add a poll.” I just tried it out on the most recent post on my site and it was pretty easy. (WordPress was way ahead of us).
My husband and I are also in our late twenties and are in a similar situation. We just saw a house we LOVE and want to buy. We have enough for a 10% down payment, which would leave us with about $10,000 in savings. We have no debt (cars paid for, student loans gone!) but we still wonder if we should wait until we have a 20% down payment?? We REALLY want this house!
Lighten up folks. This couple is basically responsible and this house is inexpensive. I’d run Kris’ criteria by them and then make the stretch if they still feel it is something unique and absolutely what they want – and that it can handle a changing family situation, should that happen. Occasionally people have to take modest risks to get where they want to be.
When I think of a “dream home” I think of a home I will spend the rest of my life in, not just the next ten years. Is this more of a really great starter home? Regardless, if you do decide to buy maybe you could rent out a room to make some extra cash. That is what we do and I end up paying less than I did renting.
I would walk away. We are on our second home. Anytime the payments are a stretch you should think twice and then again. We were young and not as smart with money as we are now. Who would have thought that my hubby had an undiscovered illness that is now life long. I scramble every month to pay off bills in prep for the next complication. We were young invincible. It was a stretch but we could swing it. Hind site is 20/20.
This young man says both he and his wife are safely employeed in Houston. I also live in Houston and wonder if anyone else has noticed that the recession did not hit us when it hit most of the rest of the nation? It took a little more than a year later for it for us. We will be more than a year behind other places to recoup even though the economy is starting to pick up.
Yes, we are still considered a “boom town” due to all the oil and gas companies located here. That does not recession proof anyone’s employment here. We have layoffs and downsizing like every other city in our nation and no one has safe employment no matter how safe they feel.
Houston is also a town that is constantly building skyscrapers, malls, apartments, lofts and numerous homes inside and on the outskirts all around the city. Surely there will be at least ONE more house that will meet and even exceed the their dreams.
Please advise your reader to rethink their position on purchasing the home right now. Assure them that they are on the right track with their present plans and will be able to buy a newer home of their dreams in just a few short years if they set up a savings with a downpayment in mind.
He said they have paid over $11,000 on student loans in six months and expect to pay them off in another year. Imagine what they could save for a downpayment once the loans are paid off. Then too, they may not say here longer than the 10 years he stated and could take the savings to purcase a home in the new city where they locate.
Scrambling for a minimum downpayment and borrowing from anyone to “just make it” on a downpayment is no way to start a morgage. They would stay strapped for money for several years before getting to an “even” point. By then, they might be ready to relocate and want to sell.
Greg here.
Thanks for the advice and opinions everyone! I’m working on reading them all and taking what they say to heart. If I tried to respond to them all, I’d definitely be out of a job, so I’ll just add a few more details for now!
1. The house is unique for this area. These houses are more common in the north-east, but not so much down here. I’ve lived in this area most my life and even I was surprised to find a house like this one here. Its a breath of fresh air amidst a sea of boxes.
2. At least 50% of our income each month is free income. It can go to whatever we want it to go to.
3. $5,000/month is the guaranteed minimum. I’m a Registered Nurse with PRN jobs and regular overtime on the side, but I don’t count that because its not always regular. Take home pay was $6,500 last month, for example. My job is also more stable than others (but I’m well aware that things can always go wrong quickly).
4. Short term debt in this situation will not be from credit cards or loans. Gifts, with the good-faith option to pay back if and when we are able to (which we certainly will).
5. All offers made will attempt to have closing costs paid for by the seller. If they are paid, the majority of my immediate concerns go with those fees.
6. Projected $1,200/month mortgage payment assumes loan is for asking price of the house over 30 years at a fixed rate. It also includes taxes, insurance, and PMI.
7. We have our own Buyer’s agent with a solid reputation from friends we trust.
8. We plan on having several inspections done prior to any purchase, if it happens. I want to know everything about this house before jumping into it.
9. House was built in the first half of the 80’s, and is younger than I am.
10. We’re fine living in an empty house for as long as it takes to reboot our finances safely. We have all we need now, and don’t have much need for anything else in regards to furniture.
I’ll be back to perhaps comment more over the weekend! Thanks again everyone!
One thing that nobody else has questioned of Greg and his wife (and I did read through all the comments) is what else they’re doing to ensure a stable financial future.
One commenter did mention maxing out retirement, but we don’t know whether Greg has made *any* retirement contributions, let alone significant ones.
I’m less concerned with the student loan debt (which seems serviceable) than with this couple’s eagerness to sink their entire net worth (now, and for the foreseeable future), into a single residential property. Nobody’s making money off real-estate anymore, and with the slow re-working of the entire credit model, we have no idea how house values are going to change in the future.
If we know one thing about the current economy, it’s that nothing is stable and everything we think we know can change in an instant.
In case it’s not plainly clear by now, I’m on the ‘NO’ side. I’d suggest they hold off, keep plugging away on those loans, ensure they’re contributing between 10-20% of their take-home pay into retirement savings (and can continue to do that with their shiny new mortgage payments once the time is right), and buy the home that’s right for them – lifestyle and financial life-wise – once they’re more financially ready.
I’ve been a real estate investor for going on 16 years. I’m also a real estate agent, and I would not recommend it to a client. The reason is because I would not like to see someone loss a home I help sell them. I buy great deals on a regular bases, and I have learned that a dream home can turn in to a nightmare when you have no money set back. I also seen many times the hurt it causes when money is given from the parents to purchase a home that is later forclosed on they fill like they enabled you to fail which is the last thing they want to do. If you are patient you will be able to enjoy your life with the ones you love without the debt hammer hanging over your head. Please don’t do it for you marriage and your kids. I am 38 years old and semiretired because we never jump in over our heads for the home of our dream we waited and them built the home of our dreams when we could afford to do so. Anything done in a hurry will usually go wrong. If you are suppose to have it you will be able to afford it with out doing alot of creative finacing
Sounds risky. I tend to think that you shouldn’t buy a house unless you can comfortably pay enough down to avoid PMI. Also would your dad triple the amount he’s offering you when you have to make repairs in the first few years? Unless it’s brand new construction you WILL need that extra money.
Lastly I don’t know anyone who passed on a dream house that didn’t find one better within a few years (or had their dreams change and be really glad that they didn’t buy a house). On the other hand I know quite a few ppl who lost their dream home because they couldn’t quite afford it. I also know at least one divorce directly due to the stress of not being able to pay the bills for a year before the house got foreclosed on.
At first I would agree with most of the other posts on here. It probably isn’t the best time for this couple, their situation will change, and there will be plenty of future “dream homes”, but on the other side I think when you are purchasing a home to live in, it isn’t all about the money. My wife and I have moved 3 times in six years and purchased three homes. We lost a couple thousand dollars on each of the first two purchases, but my wife loves owning a home. She loves being able to do what she wants in terms of changing the house, being able to get a dog without having to worry about what the landowner thinks, and the feeling of being a homeowner. I would still say don’t do it, but my wife would say go for it and even though we could have a couple more thousand dollars saved for the future, the enjoyment we have had from the homes has been more than worth it.
Hmmm….
2. At least 50% of our income each month is free income. It can go to whatever we want it to go to.
Currently not whatever, but to pay down debt – I hope. It’s not just being spent I assume.
@158 Greg
It sounds like you’re convinced. Just note: from what I’ve seen in the previous 150-odd comments, nobody who has actually bought a house and lived in it any length of time is recommending that you do this. And nobody who has let a “dream house” go has said they’ve regretted doing so.
Maybe you’ll get very lucky and nothing will happen, but chances are something will and with no emergency fund, a small emergency can blow up into a lot of stress. Do you really want to use your family as your back-up if that happens, especially after they’ve provided the down-payment?
I’d do it.
I think $136k is very inexpensive. You can buy a WWII vintage small and ugly cinder block house in my area for $225k or more. I bought my house in 1989 for $149k when I was only making $36k a year and it was not a hardship. We all get raises in salary every year, right? 🙂
As to the upkeep, since 1989, I have replaced my washer machine twice, the dishwasher once, 3 years ago, the dryer last year and now the cook top this year. I don’t think the costs are as high as I’m reading in the comments.
Also my BF and I replaced the roof about 10 years ago. It cost about $2k for the materials and was easy to do ourselves.
If you are handy at all, you can do a lot of the maintenance yourselves.
STOP!! DON’T DO IT!!!
Before you go any further go to another realtor, give them parameters similar to the house you want and ask to see a minimum of six other houses. Look at them realistically. Then take the time to go to yet another area (or a nearby town) and another realtor and repeat. When you have ACTUALLY LOOKED at a dozen other homes, and taken good notes and photos, you will be better equipped to evaluate the deal you already unfortunately fell in love with. Then ask yourself how you would feel if you found a house similar to The Dream Home for $30,000 less.
Also when you look at other homes consider what it would cost to bring them up to the level of The Dream Home. Consider how long it would take you to earn the money you are talking about spending so carelessly. Run the numbers v.e.r.y carefully on this. If you stay where you are for three years saving and paying off debt where will you be financially? If you buy The Dream Home where will you be in three years? Then take that second estimate and subtract from your assets at least 10% of the cost of the house — in case you overlook something or have a major problem during those three years. Now how does it look? Still worth it?
NOW at last you are in a position to evaluate your purchase. NEVER purchase a home quickly or on impulse. NEVER purchase a home via mortgage unless you are certain beyond a shadow of a doubt that you can pay for it. What if one or both of you lose your job? How long can you continue to pay that mortgage? How would it feel to lose all that equity (money!)? It would hurt. A lot.
Slow down and think carefully. There is always another nicer home waiting down the road. Maybe what you really need is to move from your $600 apartment into a $1200 rental home for a year and see whether you really need/want a house and all of the maintenance that it entails.
You haven’t even mentioned the character of the neighborhood the home is in, which will be critical to your happiness after you move in. Have you studied the local market enough to know whether this is a bargain or a dog price-wise? Do you know the neighborhoods of your city well enough to be sure you want to live in this one? Does it impact your commute to work? Visit the area on weekends and after dark. Take a walk there. Do you feel safe? Is it too noisy? Go there right after work and drive around observing other resident’s vehicles to get a better idea of the character of the neighborhood. If a busybody starts staring at you stop and talk to them.
Research this thing like a major term paper, because you are investing major bucks.
Good luck.
As others have said, I think you have to try very hard to carefully separate emotions from facts. You can easily convince yourself that THIS is the one and only house by calling it “the dream house.” When my husband and I first got married, one of the first things we did was try to buy a house, because we really wanted a renovation project, and we really wanted a place to call home after a year of constant travel. From a financial perspective, we had no business buying a house– even the incredibly cheap houses that we were looking at. But we were operating on our emotions. So we found a small house (with a small price tag) in a pretty nice old neighborhood, and we put an offer in on it. We didn’t get the house, as the sellers took a different offer, and I cried for DAYS. I blubbered on the phone to anyone who would listen about how this was the only house we could possibly afford in a nice neighborhood, and on and on and on. I was REALLY upset because I’d convinced myself that this was the only place for us, and my emotions took over from there. The second house that we put an offer on was basically the same story. At the end of the day, we bought the third house when the seller accepted our offer. I’ll spare you the details, but the point is that I completely understand how easy it is to convince yourself that something is a “dream house”– believe me, these were some pretty crappy houses we were looking at, yet we somehow convinced ourselves that there is a shortage of crappy houses out there. We would have saved ourselves a lot of grief if we had been able to step back and look at the situation a bit more objectively.
On the other hand, we went on a buy a crappy house of our dreams, and we proceeded to gut it and get ourselves into a huge renovation project. Sometimes we wish we hadn’t done this, and sometimes we think that it’s a pretty great way to build ourselves a lot of equity. But as JD said, if you make the “wrong” decision, as long as you’re responsible with your money, you’ll deal with it and move on with your lives. You can’t do everything perfectly the first time, and as long as you keep your wits about you, and carefully assess the situation, you’ll probably come out fine in the end.
Also, I’d encourage you to ignore all the fear-mongers who say that the second you purchase a home,you’ll be spending thousands of dollars on ladders and lawn mowers. Instead, assess what sort of homeowner YOU will be. If you’re the type of person who is going to be calling a plumber if you faucet develops a drip, then you ought to have a rotund emergency fund. If you’re the type of person who replaces the 50 cent washer in the faucet yourself (even if you have to do a little googling to figure out how to do it), then you’ll do just fine with a much more modest budget for home maintenance & repair. Yes, you still have to pay property taxes & insurance, but you don’t have to buy into the idea that a house is a scary black hole into which you will helplessly watch all your money disappear. You can use your intelligence and resourcefulness to avoid solving every problem by throwing a lot of money at it.
Purchasing your first home is always an incredibly emotional event, and it’s easy to convince yourself that you must have that particular house before it gets away!
Housing prices are going to continue to fall, and won’t rebound for a few years. Interest rates will stay low. There are a lot of wonderful homes on the market at a good purchase and there will continue to be.
Buying a house is more than a down payment and mortgage/escrow. The initial expenditures, utilities, furnishings, maintenance, etc. can be shocking in their costs for the first year. I felt like I had taken a vow of poverty during my first year of home ownership. I hadn’t fully taken into consideration all of the expenses involved.
As far as a `safe’ job, there isn’t one. I’ve been at mine for 15 years, it’s union, and I’ve got the highest seniority among my peers. I never fool myself into thinking I’m safe. We’re all self employed and expendable in reality.
Good luck whatever you decide to do!
It strikes me as interesting that you “found” a house you absolutely love, even though you aren’t in the market for a house and supposedly aren’t looking. It sounds to me as though you were actually looking at houses, maybe just out of the corner of your eye, but you were acting on the desire despite your plan to put off even saving up for a house for another six months.
Perhaps what makes this house seem like a “dream house” is that buying a house is out of your reach right now. I wonder if it would be as attractive if there wasn’t the sense of deprivation created by a budget and the debt you still owe, and the knowledge that it will be a while before it’s paid off. And maybe the question isn’t whether or not you should buy the house, but whether you would want the same house if you weren’t feeling limited by debt, and if there wasn’t the pressure to buy before someone else gets to it.
What I’ve noticed for myself is that things that I want badly tend to pop up at inconvenient times, when I don’t have the money or I need to put my resources elsewhere. And what I’ve found is that it’s often just a diversion created by my mind – the desire is greater only because there is a perceived lack of freedom to spend my money where I want. I believe I don’t have enough money, so suddenly the perfect thing shows up that I can’t afford, creating an irreconcilable dilemma like the one you’ve described. The dilemma perceived: financial stability vs. financial freedom. In other words, do I waste away pinching pennies and be unhappy, but safe and stable, or possibly go broke buying something I really want (but at least I’m happy). Neither of these things are actually true – I won’t be unhappy if I don’t buy the thing, and I won’t be deliriously happy if I do have it.
Desires change, like many others have said, and your dream home today is determined by today’s mind-set, which is a mind-set heavy with debt. If you make your decision from that place, you’ll just be perpetuating the dilemma, not resolving it.
I think the resolution lies in understanding that there is no such thing as a “dream home” in the first place. I don’t mean you can’t love your house. I mean that the whole idea that there is a perfect house that you must have now is an illusion.
We were in almost the exact same boat as this couple (28y/o,). $42K in student loans, but No “bad” debt (credit cards, lines of credit, etc). Beginning to build an emergency fund (had around $7k) and we decided it was time for me to buy a home. Got preapproved for a mortgage, met with realtors, toured properties, even put out 2 offers to 2 homes we thought were great investments and “dream homes” when… *Surprise!* My wife became pregnant with out 1st child. All the sudden I was crunching new numbers: $1k/ month childcare, health insurance to increase $300+/ month through my work plan. This is when we decided to pull out of the market and continue renting and to live below our means.
I’m now prepared to wait 2 more years and want to have $20K + in savings before I make that sort of commitment. I would reccomend they factor in the cost of kids before making this major purchase , because you just never know what surprises may come and when they do come, you have new bills to pay!
I’m around the same age as Greg and his wife and bought my first house at the age of 25. I didn’t put the pressure on the search of a “dream home” because I’m in the camp of believing one doesn’t really exist. And most houses on the market are not one, or even some of a kind.
I also wasn’t searching for a dream home because:
1) Although I had no student loans, car loans, or any other debt, I was buying on a single (somewhat meager) income and could not afford a house that would come close to amounting to a “dream home”
2) I felt personally that I was too young to know what the future holds so I didn’t want to put all my savings and eggs in one basket.
I believe in climbing the property ladder if you are young and buying a home (vs. older, and having been able to save a bit for a dream house).
Ironically I feel that I ended up with my “dream house” for this time in my life, knowing full well that it will not be my last residence. And I turned it into my dream house. Yes, I spent a little bit to do that, but it was still significantly cheaper than the houses I looked at that were done up already and I got to customize it myself.
To give you an idea of unexpected expenses. I bought a house that was almost half of what I could “afford” (and by afford I mean what I would be able to pay for it but would be stretched and not able to save). I put 20% down (was going to put 30% but decided to save the 10% because I knew I wanted to do some work), my mortgage AND taxes AND insurance was less than your current rent and I am still not able to hit my savings goals yet. Halfway into my second year of home ownership, I still need to get a dishwasher, better stove, outdoor shed, lawnmower, update the electricity (5k) do the roof (4-6k), get a new HVAC (4-6k).
“We hadn’t planned to begin saving up for a house for another six months.”
– I’m taking this to mean that you guys haven’t yet began the serious saving for a house. As a young homeowner I can tell you it is INFINITELY harder to save after you buy a house. Your paying off of the student loans will slow, and the two years before the $80/month will go up will fly and you will likely still be buying things for the house. Budgets, after buying a house, don’t tend to settle down for several years after.
Also, as people moving from an apartment to a house you cannot even imagine the things that you will need to have on hand that you never thought twice about (or never heard of) living in an apartment.
Honestly, buying a house should not be some sort of an ordeal that includes scrambling around for sources of extra cash and extra debt and then some. Not only should you have an e-fund going into homeowning, you actually need a BIGGER e-fund as a homeowner. Right now you only have your health, job and car to worry about. If you buy a house and have kids you’ll need to add those to your list of things that can have emergencies and it is MUCH easier to build that e-fund, or at least a majority of it BEFORE the added cost of a house.
Ideally buying a house is something you go in prepared for and then some because the actual purchasing of the house only takes you to the base of the mountain. But if you don’t have the proper tools before the journey it can be a rocky climb that could end in financial death. Not to be dramatic or anything! lol!
Also– don’t forget your utilities are going to skyrocket if you’re living in an apartment now. If this house has a lawn, the summer months are going to be nasty on your water bill. If you’re used to insulation from apartments in the rest of the building, your a/c bill is going to come as a nasty shock in August. Are you currently paying $300/month or more for utilities in the summer? (Little House in the Valley has a recent blog post on what happened to her utilities in LA… and Houston summers are way more brutal than those in Los Angeles.)
My friend who bought in Houston ended up getting a brownstone townhouse in Montrose that would not have looked out of place in Harvard Square (except that the inside is WAY nicer than anything East Coast). During the year she was looking she sent plenty of pictures of adorable cottages and other homes that are not your stereotypical Houston home. By the time she was done looking she realized she didn’t even want to live in the neighborhood of her first dream home because she valued walkability too much. She learned a lot about what she really wanted by looking.
She also got a big raise at work and saved a much larger downpayment than she had initially, which allowed her more freedom to say no to imperfection. (She was also smart and didn’t buy all the house she could afford, but she did spend more than she would have been able to originally.)
There’s no deadline for you to buy. The longer you wait, the more you will have saved up and the better financial position you will be in to buy a true dream home or to turn another home into a dream home. You can even wait for this home to come on the market again if it gets sold out from under you, each month saving $600 in housing costs and some unknown $X in utilities and other housing related expenses.
As for people who say that suggesting things go wrong is fear-mongering… Something WILL go wrong. It may not be something major, but if you have ZERO EMERGENCY FUND and debt… well, even small things can become big problems and will cause a lot more stress than you would have had if you waited.
Check out how long it takes foreclosures to settle in your area. You may be looking at six months before a move anyway. My son is still (two months) waiting to see if his offer has even been accepted. Sure takes the impulse out of the mix! Short sales in Phoenix are about 6-8 months before close!
I would buy.
Housing prices are at bottom in most areas of the country (unless congress goes with a flat tax and mortgage interest deductions disappear). I think those who think they will drop lower are wishing on a star….but that is me. Sort of like waiting for the stock market to get lower to get back in.
Intrest rates are incredibly low- which our government will not be able to do tooo much longer.
As an RN you are very stable. If you have a position- I doubt you will lose it. I have a number of single mom RNs who handle that kind of house payment without hardship or debt. You didn’t mention what your wife does- but it sounds like you are the primary wage earner and could make it on your salary.
It also sounds like you are from Houston and plan on staying put. I know this is a foreign concept to many GRS people- but MOST people in the US do not move constantly for a better job. We did- but my brother in law has five children. Four went to school and returned to buy houses within miles of their parents. My sister in law has a day care center- with all of her grandchildren!
And last- as a parent- dad may be able to give you the money now- but in five years he may not be able to. Personally, while I was working I was willing to gift my kids a downpayment- but now that I am retired—not so much.
I would NOT give them the money for paying off debt. It is very different in my mind.
I say go for it…and there is nothing wrong with having emotions about your dream home…that’s what makes it a home vs. just a house. you’re young. enjoy your life. buy a house that you can make into a home together and fill with kids…that’s what i did 15 years ago and I’m the happiest person I know.
I am in no position to buy a house, but do I look anyway? Why, yes I do! Someday I will buy a home. And, guess what? Because I am continually looking at houses, home design, shelter mags, etc. the idea of my dream house morphs on a constant basis. The point: “dream” houses can be dreamy– but you never really know how that dream house will look a year or two from now depending on you, how your life changes, how your needs change, if building design improves, how you view that particular type of building design (for example, energy vs. non-energy efficient, green vs. non-green) etc., etc.
The comments on this post have been really great (yay, GRS!) Among them, many homeowners have been checking in to share their experience and give you a more realistic picture of owning a home and the expenses that come with that. Fear-mongering? I don’t think so. I would rather have more information to make me a smarter consumer than less.
I’m with Nicole, I do think you’ve made up your mind, but I hope that you do take a second look (or maybe ten or 20 more) at it. You are young, you have time on your side and there will probably be other dream homes (other fish in the sea? yes!). That being said, much, much luck to you on your final decision.
I found a dream bed frame once in an antique shop which was handmade and very unique. I can’t remember how much it cost, but I couldn’t just whip out the checkbook at the time. It would have been something to have that bed… sigh
$136k home on a minimum of $5k monthly net income? Go for it. You can lick that mortgage in 3 years with an aggressive plan. I paid mine off in less than 4 and my mortgage was considerably higher.
As for the commenters who say no one is ever prepared to own a home with its increased expenses, that’s an insulting generalization.
As a side note, I can’t get over that price tag. $136k in my area MIGHT get you an empty lot in the shadiest neighborhood. Some days I’m tempted to request a transfer to Houston…but the heat and humidity would probably kill me.
Here is another thing to consider…
I bought my first house by myself at age 23. I put 10% cash down, took out an 80% first mortgage and a 10% 2nd mortgage to avoid PMI. My goal was to throw everything I could toward the 2nd mortgage and get it paid off within 2 years of buying the home, a goal that I was able to accomplish.
Sometimes I feel it is easier to focus intensely on paying off debt, way more so than on just accumulating cash.
I got married about a year after buying that house to my longtime girlfriend. After about almost 3 years total in the house, we decided to sell and move to a better neighborhood, bigger house, long term house, etc.
I did feel like I stretched a bit when buying that first house. After putting my 10% down and setting aside funds for repairs/stuff I knew I would immediately need, I had about $5k remaining for an emergency fund. To me at the time, that felt tight, but it all turned out OK.
When we sold the house, we had a nice chunk of equity due to being heavily focused on paying that 2nd mortgage, plus a small bit of appreciation in the neighborhood where the house was.
If you buy the house now, just commit to being heavily focused on paying down debts. In 3-5 years you’ll be in a good position.
Texas is booming right now. I wouldn’t expect prices there to fall much more, that is, if they have ever fallen at all. I’m sure there are good deals here and there, such as the foreclosure you are currently looking at.
Bogey
You know, I usually err on the side of caution. But we’re talking a dream home for $136,000. I live in Vancouver, Canada, where an entry-level house costs 10x that. A 2BR condo is around $600k.
So, just what makes this your dream home? Are you really certain you couldn’t get anything this good in 6 months or a year? Is this really somwhere you can live for 10 years?
Does the house have a basement you could rent out? Could you set this up so that you could be actually having someone else pay many of the costs?
You make $5,000 a month and you’re looking at a mortgage of under $1,000-$1,200 once you pay property taxes and so on. In the US, you can write off some of the interest on that home (unlike here in Canada). Your student loans aren’t horrible things to have.
I dunno. I’d say go for it, but make a plan first. For example, get some renters for the basement or maybe even the spare bedroom. Or at least have that as a back-up plan. Could you move in with family and rent out the house if you ran into trouble? Or rent out part of it? Because you’d be paying $600 to rent somewhere else, no matter what.
Also, could you do some things to bring down your other costs? Are you willing to live a barebones existence for a few months?
Can you stretch the closing date? Maybe you could stretch the closing date for a few months, so that you could save like crazy.
Also, can you negotiate the purchase price? And how does the net rate on the mortgage compare to the net rate on your loans?
Look, I know $136k sounds huge to a lot of people here. But you can’t even break into a 1BR condo in my market for under $300-$350k and that’s without the tax incentives you have in the US. I think that, if this is absolutely your dream home and somewhere you can live long term, you should do it if you can work out a safety net. Usually, I’d say don’t do anything without 8 months of expenses in the bank, but it sounds like you guys have financial savvy and perhaps you can work out a plan, like renting out the basement or the attic. One of my friends even rented out her dream home for an entire year before moving in. Then, when the clients left on Nov 30, she did renovations/upgrades in December to make up for “wear and tear” from the tenants. And she thus wrote off a huge amount of that income. Then she and her husband moved in on January 1 to a nice, clean, upgraded home….
My husband and I are also in our late twenties, still rent, have $0 debt of any sort but our monthly take home is double Greg’s and we live off 1 salary, we have over $50K saved for a home; however, we are waiting for our dream home until we can confidently buy any home we want in cash. Houston markets do not fluctuate as drastically as other parts of the country due to steady employment and economy healthily powered by the energy and health businesses (Oil capital of the world and cancer treatment capital of the world) Our home base will be Houston as well. Suggestion for Greg: get rid of debt and save more than 20% for the dream home. Your dream home now will not be your dream home when kids come into play.
The couple seems to have thought out their plan very clearly. They mentioned not having kids yet but will likely plan to. I would suggest saving more and finding a place that has a great kitchen -> play area view (can safely watch the kids while prepping food) and some good separation between bedrooms. Those are the long term details since they do not have a downpayment to use on their own. Also, they probably need a serious baby fund, if they are this emotional over a home, I cannot imagine how much they are willing to spend to outfit a nursery, etc.
Impossible – 180 comments and no other typo police?!
What a great set of comments.
The thing I’d like to add here is that most people’s first home purchase has a lot of emotion tied to it — even if you convince yourself it doesn’t. It is a huge purchase and it really does feel like there is only ONE dream house for you and if you don’t act, it will be gone and you’ll never forgive yourself.
Once you own a home, even if it is your dream home, you realize all of the costs and chores and problems that come with home ownership. That’s not to say it’s a bad choice (I own), but you become more realistic about it. What if you move in to your dream house and realize your neighbors are a nightmare? There are lots of things you just don’t think about until you actually take on the mortgage and move in.
I learned so much from purchasing my first home. I can’t say I avoided making any mistakes the second time, but I learned a whole host of new things. I think when/if I buy again, I will be even calmer and more pragmatic about the process. I have seen many dream homes over the years, and gone as far as running numbers on them, but never took the leap. I can tell you that I don’t regret not buying any of them, and I can’t even remember all of them at this point. 🙂 There is ALWAYS going to be another dream home waiting for you. Just keep that in mind.
Hey everyone, again, thanks for taking the time to write!
Perhaps I used the term “dream home” too casually, as much of the advice here seems to revolve around that idea and what dream homes are traditionally perceived to be.
To better explain our perception of this house, it satisfies our requirements both practically and aesthetically, both now and the foreseeable future. There’s room to grow as a family, and its design leaves it open for expansions. This is important to us as the needs of our extended family change.
Whether that qualifies as a bonafide dream house I don’t know, but considering how picky and exact my wife and I are, its a pretty unique find. If we made a checklist of needs and wants before house searching, this house would check them all off. In fact, it even has some features that I’ve always wanted in a house, but never imagined actually finding in one without building it myself!
This is one reason why, despite the risk, I’ve given this endeavor any thought at all.
And, as of right now, we’ve decided to move on the house. Negotiations are going well, and it looks like we will not have to take out any short-term debt or scramble terribly to close. If both sides agreed tomorrow, we’d have at least 45 days to save what we need, and that’s more than enough time for us.
To answer a few posters’ questions, the house jumped out to us initially because of its design and layout. Most houses in the Houston area are boring square or rectangular cookie-cutter/assembly line-like products. This house appears to be originally designed, as there are no others like it in the neighborhood. It’s also more roundish, with a Victorian-style to it. You just don’t see that in this area.
Think the cold efficiency of Walmart vs. the warmth and homeyness of a mom-and-pop general store, and you’d have one good idea why this appeals to us.
It has several spacious porches, whereas most homes here don’t even have one, and it sits on almost half an acre of land. The garage is detached and massive, about 1/3 the square footage of the house itself. While the house doesn’t have a basement (not a common feature in Houston), it wouldn’t take much, in my opinion, to convert the garage into a livable space. This could prove valuable in the future if a parent or sibling needs a place to live. The area is also very easy on the zoning laws too.
I’m a do-it-yourselfer type of person, so I’m very excited about the prospect of doing my own repairs and modifications (as cash-flow allows). I can also mow a lawn on a regular basis too!
Debt wise, its not as daunting as it looked a week ago. Like I said, negotiations are going really well, so even though my family has offered to help financially, it looks like we won’t need it after all aside from the down-payment. (Also, family members helping each other is not frowned upon in my family. While I know many highly value independence, its not something that’s so valued by us that we’d let it get in the way of anything important. We look out for each other and take care of each other when needed. My wife and I may need help getting a house now, but the family knows they’d always have a non-rented place to live if they need it.)
Here is a general summary of our financial position. This may not have made it in the original post, but it’s been important in assessing our risk:
We are several years ahead on our student loans and we’ve only been paying on them for 6 months. That attitude towards debt will always be with us until all our debts are decimated without mercy and with extreme prejudice. If you take the amount we’ve been paying on them each month and reduce it by 75%, we’d still pay them all off in 5 years, or almost 7 years ahead of schedule. When most people take 10-15 years to pay these things off, that’s not bad at all.
Risk related to the loans still isn’t bad, even in full repayment. As I said, it’d only take $80 a month to keep our creditors happy for the next two years, and only $300 to do so while making minimum payments on all the loans. That’s 6% of our take home pay.
My job is stable and pays very well. I was sought out by my current employer, which is an actively growing facility. Quarterly bonuses generally add $6,000 – $10,000+ in income a year, as will opportunities for overtime and PRN positions elsewhere. This extra income is on top of our $5,000/month take home pay. I don’t count it because I don’t want to grow to rely on it. I love surprises too!
Our general plan for the next few months is this:
If an offer is accepted by both parties, we will do inspections. If inspections are bad, we’re prepared to walk away from the deal if no reasonable concessions are made. If they are good, then all the better. Reduces our risk for unexpected costly repairs, as does the home warranty we will be purchasing upon closing.
If seller covers closing costs, then we won’t have many out of pocket costs due at closing. If the current negotiation is the best we get, we’d need about $3,000 to close, and we can get that easily on our own. No new debt, just cash.
As soon as that hurdle is crossed, we’re planning to quickly put away three months of mortgage payments. Taking all things into consideration, we can have that in a month or two, maybe sooner. We will continue to build on that, more slowly though.
From there we’ll adjust our monthly mortgage and utility savings a bit to account for the change, and then go about rebooting our finances to viciously take on our loans again. Furnishing the house is not a priority now, and won’t be for some time. Living cheaply is a priority and is also easy for us to do, thanks to our frugal college years!
If nothing major goes wrong, this can probably be done in 4-7 months.
If something major goes wrong, we’ll do what we can to get past it as best we can. We can never eliminate all risk, just minimize the most likely ones. Things can go wrong, but things can also go right.
The house appears to be within your price range. Unfortunately, you have some other debt that’s weighing you down. I’d go for paying down the debt, and then look at getting the home. Imagine how much you could put toward your home without this debt. You could easily pay off the house in 10 years with your income and that home price. House prices are very unlikely to spring up so I’m sure you can find a similar deal in a year or two, but you’ll be in a much better position to do so.
I’d love to know how many of the people saying” don’t do it” are underwater in their houses…
I still say – do it:>)
Whoa, whoa, whoa. Something seriously does not add up here. $136,000 for the home, minus a tiny 3.5% down payment of $4,760 at today’s mortgage rates of 4.76%…
Plugging all that along with the Houston property tax rate into my affordability calculator comes out to a total monthly PITI payment of just $1,021.
So where is the extra $200 a month cost coming from?
Aside from the mystery $2,400 a year extra expense, I agree with the other commenters that this does not seem like a good idea. Getting overly emotionally attached to a home is practically a guaranteed way to make a horrible financial decision.
Tim, The PMI rate could add $100-$150 to that loan. Also home insurance in Texas is the most expensive in the nation so their insurance may run them more than you would think. Average policy is over $1400 and thats even with their relatively low cost housing.
speaking as someone with significant debt myself, and renting, I would be for buying the home as means to build equity, versus leasing an apartment. i have been told time and time myself that while renting is okay for the time being, you want to get out of an apartment sooner rather than later. being that the debt is student loans rather than credit card debt, i thin the better bet is to buy the house, considering you will probably spend the same amount on the mortgage versus rent.
You mention you’re planning to have kids? Ideally get them close to school age before settling on a long-term home. 1) Pregnancy/early child care costs can be enormous especially if (heaven forbid) you have complications. 2) Income potential while starting a family can be a ‘wild card’ at best. 3) You may have no idea what school district you’re going to want until you meet your kids and know their specific needs.
We bought a starter home only after we spent two years in the school in our neighborhood. Dream home? Well, the housing stock in our preferred school district is upwards of $450K. That dream home isn’t the priority anymore. We’ve got four of us in a two-bedroom townhouse BUT we have a superb public elementary program for special needs kids.
Oh how priorities change.
I say DO IT! I am a big Dave Ramsey fan, but I think you are not going to get side tracked too long if you buy it. Clearly, you are not jumping the gun. This sounds like a fantastic opportunity – I live in TX too, and yes, what you describe is very unique, as it is a sea of boxes even here in the Dallas area.
You seem ontop of your finances, and definitely planning ahead. You plan on living there for at least 10 years. Sure, sure – something may change, but if you think this house is going to give you a lot of value in terms of assisting you in living the life you want (and can afford), I say go for it.
Greg,
Congrats to you and your wife on your choice. I would love to hear how it all goes. Thanks for sharing your journey with us.
Looking at your most recent update, it sounds like you know what you are doing. It strikes me as good balance between calculated reasoning and going for something that truly makes you happy.
Going with what feels right after taking reasonable precautions seems to be exactly what you are doing. I can only wish you luck!
I think you should wait to buy. Going from renters to homeowners costs more than you may think. I’m not talking about the closing costs, mortgage payments and insurance, I’m talking about the extra stuff you buy when you get a house. Such as garden tools, window treatments, paint for the walls in every room, maybe some new light fixtures. These are things that add up really fast. You don’t think that you will spend a lot, but you will. It happened to me and my husband. And if anything breaks (a major appliance) you have to repair or replace it yourself. I think it is best to get out of all of the student loan debt first. And then buy. There are always great houses for sale. And maybe in a year or so, you will find another house that is also your “dream house” and you won’t feel guilty about buying some nice things for it.
With all due respect sir, I would advise waiting, for the following reasons:
1 – Since we we bought our home last year, we have paid probably 5% of value in repairs (to a new home). The icemaker breaks, your dishwasher breaks, your assessed tax value increases (tripled, in our case), you paint, etc. I had never spent more than $300 (PS3) in a single store in my entire life. We spent $800 at Home Depot our first month (painting supplies, garden hose, shovel, etc.).
2 – You are committing yourself to 5 years of paying off your extra debt (too much of a lifestyle hit, imho).
3 – You are committing to 30 years of house payments (you cannot afford to pay at the 15 year rate)
4 – You are paying ‘bank donation’ PMI. This is the opposite of wealth building.
5 – you are paying taxes on something you do not own. This is not wealth building.
6 – Your income will go down. It is a life goal of mine for my wife to stay at home for at least the first year with our first child. This is a loss of 40% of our income for that year.
7 – You will find another home like this. You will have to look for it, but then you can put 20% down onto a 15 year mortgage.
8 – You are setting yourself up for a disaster. You will incur a significant amount of debt the first time your roof starts leaking because you have no emergency fund.
Finally – You are missing out on the FUN. The fun part of personal finance is when you are debt free, in a high-cash saving position, with an emergency fund. At that point you get to invest(house downpayment)/give/FUN. I would hate to see someone sacrifice the _point_ of personal finance in order to have a larger-than-currently-needed place to stay, coupled with debt.
I get the impression that the income you and your wife have are only from your job, since in the original letter to JD you mentioned one loan was in deferment because she was in school still/again?
I would vote to go for it either way, but if my impression that its a single income house right now, that tips it even more in the favor of going for it. It seems that you have ample income and saving ability to be able to handle most emergencies that might come up and a good support system in place to get extra help if you get stretched a bit to far if something goes wrong within in the first year or so when you aren’t prepared completely for it. It seems like you two have pretty great habits already as well. Life isn’t always about not taking risks, but making sure you are aware of the risks you are taking and comfortable with them. It sounds like you are aware and that you can handle them. Enjoy the house!
I haven’t read all the comments but my take on this is: do it. You can afford the repayments, and the house is what you’re looking for. Your explanation of why it’s your dream home makes a lot of sense. Sure it’d be nice to wait until your other debts are paid off but it’s a fairly unique house in foreclosure. It’s not going to be around in six months or whenever you’re “ready” to buy “safely”. From what you’ve said the risks you’re taking on are quite low so if you’re happy with that, do it!
I think you should wait. In life nothing happens just once, there are many beautiful homes that were built and are being built. I think you should wait until you are more financially prepared.
You don’t want to end up like those people who got foreclosed on because they thought they could make it. I’m sure they too thought that it wouldn’t happen to them, no one thinks its going to happen to them.
Student loan debt is not a big deal, sorry Ramseyans. The guy has a great income, and the house is cheap. Buy the house.
‘A house is made of bricks and beams; a home is made of love and dreams’
The OP said that IF they were to make a list, this house would tick all the boxes. Please, do make that list. Before we started looking at houses (not ‘homes’), we made a ‘needs’ list and a ‘wants’ list, and they came in very handy.
The bank gave us an indication of the mortgage they would be willing to give us; we took about 2/3 of that amount as our guideline and we found something that ticked all the boxes at that price. We could have moved in after a thorough cleaning, but we wanted to have central heating, rather than the 4 gas heaters there were. This led to opening up the false ceilings, stripping the walls, finding very bad walls, redoing them, renewing the electric wiring (since everything was easily accessible), etc. for 45,000 USD…….(and that’s with cheap, though legal, labour).
We are still happy we bought this house, and confident we will at least break-even when we sell, and we’ll have enjoyed the added comfort, but it’s a lot of money to spend in 6 weeks!
One more piece of advice: if you do buy, try to do all major repairs/decorating/etc before you have kids. We have a 2.5 yr old and I’m 5 months pregnant; I can’t do much and my dh does not know how to. We have no friends or family in the neighbourhood and are obliged to hire someone, sometimes for work I could have done or we could have done if there hadn’t been a little girl around wanting to ‘help’.
Last year, we bought our “dream house” about 5-7 years too early for our dreams, but we haven’t looked back and love the house. Here’s why:
1) Used the first-time homebuyer to our advantage, selling our “starter home”. It netted enough and using other funds to get us around 30% equity on the new house the day we moved in.
2) Rates are terribly low, and we had enough to pay enough extra to cut our mortgage by 1/3.
3) We are fully into sweat equity.
5) We bought low. House was built in 2008 with no landscaping, no driveway and only an attached one-car garage. We are doing #4 to fix those items.
6) This is our “addiction.”
7) We were done with having more kids. Guaranteed.
In the end, we thought we had our dream house at a reduced price, with low rates and enough equity to make it worthwhile. We just thought that increased rates and housing market 5-7 years from now would have put us out of the running for such a house. We had to move now.
Before diving into the deep end. Make sure you research what you are getting into in the long run. if you are planning to have kids, is the school district a good one. This will have a significant impact on future money. Because life happens, literally and kids come when planned or unplanned. The house itself maybe a dream for your current life, but will it be with the “dream family” you’ll have 10 years from now. Maybe one of you decides not to work while raising the kids. will you have enough on one income and school loans still in play. Plus, you’ll likely need a new (new to you) vehicle that make you feel like your family is safe. Something to think about….
#167 “Maybe what you really need is to move from your $600 apartment into a $1200 rental home for a year and see whether you really need/want a house and all of the maintenance that it entails.”
I totally agree with this suggestion. This is just what I did last year after spending a few years pining for a house.
I moved from an apartment to rent a really lovely (and relatively small – 3 bedrooms (master, office, and guestroom) but maybe 1500sqft) newly renovated century townhouse to ‘try out’ living in a house. I am young (ish) and live alone.
After a year I’m moving again to rent a much smaller (but much nicer than my original apartment) one-bedroom. It turns out what I really wanted was a nicer place, not a larger place.
I grew up in a house, I really like gardening and don’t mind housework, but even still, I found just running the household (cleaning all that space, doing daily maintenance, a few container gardens outside, etc) was too much. And since I’m renting I don’t even need to worry about all the ‘real’ maintenance. Very eye-opening.
I am glad that I didn’t give into impulse and buy a house, as now I’d be stuck with one I don’t want. I’m just not the homeowner-type, even though I thought I was.
I would say don’t do it for all the reasons the other posters have brought up: dreams and priorities change over time. However, I have a different question/concern that caught my attention when I first read the original post. It deals with the following quote: “…and the one we are aggressively paying off has no monthly payment due until 2014 because of our extra payments.” When I read this, alarm bells go off because it sounds as if the bank/lender is NOT applying your monthly overpayment toward the principal of your loan. This is a common practice and something I have learned the hard way. By applying the extra payments as prepayments for future months, the banks make more money because it does nothing to reduce the amount of interest you pay. Long story short: make sure any amount above your monthly payment is denoted as principal only; for my bank, I need to do separate “regular payment” and “principal only” transactions. This is especially important if you do decide to buy the house and try to pay it off early. If an extra or overpayment is applied correctly, the amount you owe each month should not change since you are on an amortization schedule. It will, however, reduce the number of payments required in the long run as your interest burden will be reduced. Just my $0.02 on something that has burned me in the past.
I say DON’T DO IT.
I think that a $5000 per month income is relatively small when it is coming from two places. Your house is relatively inexpensive as are most houses in TX, but are you considering how much your property taxes will be. Property taxes in TX are expensive due to the school taxes being a part of the property taxes. You say that you do not have a car note, but cars don’t last forever, Do you have savings for that. I would say wait until you can truly afford it before you jump in.
I remember shopping for my first house. Every week I found a new house that was my ‘Dream House’. For now, i suggest you focus on eliminating your debt. YOu will be happier in the long run when you do not have to pay for a mortgage coupled with you other debts
Good Luck
NO!!!!!!!! I say DON’T DO IT.
I think that a $5000 per month income is relatively small when it is coming from two places. Your house is relatively inexpensive as are most houses in TX, but are you considering how much your property taxes will be. Property taxes in TX are expensive due to the school taxes being a part of the property taxes. You say that you do not have a car note, but cars don’t last forever, Do you have savings for that. I would say wait until you can truly afford it before you jump in.
I remember shopping for my first house. Every week I found a new house that was my ‘Dream House’. For now, i suggest you focus on eliminating your debt. YOu will be happier in the long run when you do not have to pay for a mortgage coupled with you other debts
Good Luck
I think this is totally do-able.
Currently you are paying $600/mo toward housing and, in the last six months, you’ve been able to pay $1,500 per month toward your student loan debt. The total of these two is $2,100/mo.
If you purchase this dream home, you could reallocate the $2,100/mo to go toward Housing ($1,200/mo), Student Loans ($80/mo for two years while you build up savings), Savings ($320/mo), and Down Payment payback ($500/mo which, depending on how much interest your parents are charging you, would have it paid back in about 5 years).
There would also be some tax savings due to having a mortgage. You also say that both of your jobs are secure.
On the down side, I don’t like that you’d have to pay $1,600 to break your lease. As a previous poster suggested, maybe there’s a creative way around that.
I think it comes down to how unique this home truly is…and whether you are certain it will fit your needs for the next 10 years.
Vicki
http://search.har.com/engine/4808-Comal-St-Pearland-TX-77581_HAR82243747.htm
That’s the home in case anyone is curious!
How much are you currently paying in rent? What do you expect your mortgage+insurance+taxes to come out to monthly? Also consider repairs and big ticket items to save for (a roof, for example, many years down the road)
Something else to consider is that if you get a fixed rate mortgage, your monthly payments probably won’t increase as quickly as rents do.
If you think you will be in the house for a long time I say go for it if you can make it work.
But beware- “dream” anything can change.
I agree that you should not jump into buying your dream home, because your dream home will always be there for you. Owning a house comes with more responsibility of payment than just being able to afford the house. Just as ali stated, you have unexpected things that will come up that you must buy.
Waiting and paying your loans off, or at least almost off, would be the smart choice. Why increase debt when the reasons for increasing it is just because you want better, not need.
I say wait and pay off your student loans for a while. Your dream home will always be there for when you are really financially ready, but don’t rush into it.
Why increase debt when you don’t need the home right now, you just want it. Wanting is what gets people in trouble with debt!!
Agree with what Sir Dave Ramsey would say.
Greg you already got your student loan to pay and at this level such a big step can take you guys way behind.
Although I know how bad it’d feel to let your dream house go but think about your financial management. Pay up all your loans and debts, then go for your dream house. If you don’t find one, then you can make one, right?