On the home(buying) front: making the numbers work
May 8, 2017
[Part 3] I’ve been crunching the numbers constantly and noisily. And I do mean constantly. It’s a morning, noon, and night sort of hobby.
Taking on a new mortgage when we were within 5-7 years of paying off this one was not in the list of dreams I held for 2017. Not even close!
Buying in the Bay Area is a stiff proposition. Competition is fierce, people are making all cash or no contingency offers right and left, it’s easy to get caught up in the fervor. But not I!
Even ignoring the desire to retire early, which is quite a bit further away once the new mortgage happens, there are serious constraints on our ability to buy. Which is to say, I refuse to stretch ourselves beyond our means.
Budget considerations
First things first. Ignore what the bank tells you that you can “afford”. We all know that the bank only cares about the money it’s going to earn off your loan.
This is what I did:
- Set my top comfort level limit. There’s a number that would just make me run for the corner, gibbering. I absolutely won’t buy a home at that price.
- Ran the numbers based on that limit: 20% down payment, loan amount, possible monthly payments and total loan cost.
- Looked at how much the new mortgage would cut into our monthly and annual savings, assuming all other costs stay the same: investing, utilities, daycare, food, gas, travel.
- Then I looked at how that total number stacks up against the regional comps. This was a bad comparison – our number was not competitive at all. Instead of increasing our number, I adjusted our expectations of what we could get. Adjusted = dropped the bar to the floor.
- I had a moment of madness where we checked to see if we could increase our pre-approved loan limit but then I came back to my senses. It wasn’t worth it.
- I asked our prospective loan officer 30 questions: what products they offered, the loan terms, and how much they charged to recast the loan, if anything. After deciding which of the lenders was the best fit for our needs, I gathered all our paperwork – oh so much paperwork! – and started the loan process.
We now have a somewhat reasonable range for making offers and I’ve got a fleshed out spreadsheet to work our numbers in for each time we plan to make an offer. I also asked our insurance provider to give me a quote for coverage based on an equivalent property to what we’re hoping to find.
This means I can quickly calculate our monthly, annual and life of loan costs, taxes and insurance, and see right away if we’re making a totally unrealistic commitment. This also means I can see that our “reasonable offers” are laughable in this market. But I do NOT care. We’re going to make this work.
Helpful tip 1: Even when they say you’re fully underwritten and you can proceed with making an offer, you might still want a loan contingency because the early underwriting process isn’t the final process. Things can still change.
Helpful tip 2: Be careful about what you do with cash and your accounts that they’ve already assessed. It’s a huge pain to have to explain pretty much every transaction that you make between the time they approved your loan and when you get to closing.
Helpful tip 3: It should go without saying that you shouldn’t be running out to spend a whole lot of money after an offer is accepted and before closing. Not that you should spent a boatload after closing, unless you’re so flush with cash that there’s literally no use for that money but spending. But before closing, the important thing is that the lender can decline to fund your loan if your assets drop enough before closing.
These updates stress me out for you! But I’m glad you have a good handle on expectations and really hope you find something you like
Sorry to pass on the stress 🙂 Thanks for the hope.
I feel for you regarding house hunting with a limited budget. I went the opposite direction and shot for the moon. Still manageable mortgage, but way out of I wanted to spend. Most importantly, the house is amazing, and I’m very happy I stepped out of my comfort zone to achieve this. Sometimes you really do get what you pay for…
Congrats on getting the better end of the bargain!
I’ve got my fingers, toes, limbs and anything else that is crossable crossed for you. You’re going to need all the luck you can get in this crazy market. May the Gods of Bay Are Housing smile favourably upon you.
Thank you!!
What a nightmare!
Are you sure you can’t outlast the jerk neighbor? If he hasn’t done anything else since the last incident, maybe he’ll subside if you just stay away from him and leave him completely alone.
The premise of Funny about Money, when it started up, was based on an incident similar to yours — my home was vandalized by a neighbor who, when we took him to court, threatened a judge and frightened my lawyers so violently they urged me — in the direst terms — to sell my house right away and to move out immediately, even before the sale when through. There was no way I could afford to move, and so I had to take my chances.
Can’t find the original posts…they’ve been lost in the various server migrations that have occurred over the years. But basically what I did was create a kind of diagram (called it “the poison poppy”) to visualize each of the several problems that presented themselves and then designed a set of strategies to address each problem — one or two at a time, not all at once. In 2008, I wrote a retrospective post (http://funny-about-money.com/taking-stock-money-stress-and-funny-about-money/) that reviewed many of the issues and what strategies had worked.
I’m glad I didn’t allow myself to be stampeded into selling. Eventually, the neighborhood nemesis stood down: the cops had pointed out to him that if he were arrested he could be deported, which seems to have gotten his attention, and apparently over time he just let it go. In fact, I actually became friendly with one of his daughters. The money situation improved with time; the light-rail construction fiascos did less damage to the ‘hood than expected (or rather, a different kind of damage); and property values recovered, despite the Bush recession.
Things work out. Sometimes we exaggerate risk, and if we just stand up to it, over time it fades.
He’s not the only reason we’re moving but also as importantly as our other reasons for moving, we have the safety of small children and pets to consider. I felt rushed at first but over time I’ve come to realize our decision is the right one.
[…] to look up an antique post here at Funny, by way of suggesting to Revanche at A Gai Shan Life that staying the course might yet be an option. Then I got mildly curious about other posts I’d published Back in the […]
Oh gosh. You make me so freaked out to ever consider buying a home! What a process, man. Ugh.