Liveafinanciallybalancedlife-noRealJobrequired
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PurchasingahomeintheSanDiegoareahasbeenadecade-plus-longdreamforus.Mybiggestlong-termmotivatorforstayingontopofmypersonalfinanceswasnotdebtfreedom,notfinancialindependenceorearlyretirement,notlifestylespending,butratherbeingabletobuyahomeinsouthernCaliforniaandliveafinanciallystablelifewithchildren.
Iknowthatmystory,especiallytheendwhenIstartgivingyounumbers,willfeelquiteunrelatabletothoseofyouwhoarestillingradschoolorwholiveinlow-ormedium-cost-of-livingareasintheUS.TheycertainlywereformewhenIwasagradstudentinDurham.Yet,multipleyearsoutfromfinishingmyPhD,hereIamlivingit.Ifeventuallybuyingahomeinahighcostoflivingareaissomethingyouwant,Ihopeyouwillfindourstoryinspirational.Ifyourgoalistobuyahomesoon,Ihopeyouwillfinditeducational.
Incaseyouareanewlistener,hereissomebriefbiographicalinfosoyoucanfollowalongwiththeepisode:
Thesixnecessaryelementstobuyahomeare:
Inhindsight,Ilearnedthewronglessonfromthesubprimemortgagecrisis,oratleastIappliedagoodlessoninthewrongway.
Thatbringsustothepresent,moreorless.Homeownershipwasnotsuperdesirableforusinthepastbasedonourlocationandmindset,butnowitis.Wehavetwobigreasonsforwantingtobehomeownersatthisstageinourlife:1)Asafinancially-mindedperson,Ilovetheideaof,asRicEdelmenputsit,carryingabiglongmortgage.Doublysowithinterestratesbeingaslowastheyare.2)We,ideally,wanttoprovideourchildrenwithageographicallystablehomethroughouttheirschoolyears,whichbothofoursetsofparentsdidforus.Ourolderchildisenteringkindergarteninfall2021,soweknewwewantedtobuyin2021ifnotsooner.
WhatIwantyoutotakeawayfromthissectionregardingwhetherornotyoudesiretobecomeahomeowneristhatyounotshouldgoonyourfeelingsonly.Yourfeelingsmatter,butpurchasingahomeornotpurchasingahomeisabigdecisionthatshouldbewellthoughtthrough.WhatareyourmotivationsforhomeownershipWhatareyourexitstrategiesifyoudecidetobuyHowcanyouuseyourhometoincreaseyournetworth,asidefrompassiveappreciationWhatareyourotherfinancialgoals,andhowdotheyrankagainsthomeownership
Yourincomeasanindividualorhouseholdisoneofthefactorsthatdeterminestheupperlimitofthepurchasepriceofyourhome.Incomeisthemainstickingpointkeepinggraduatestudentsandpostdocsfrombeingabletobuyincitiesthattheirage-mateswithRealJobscouldbuyin,andthatisduetotherelativelylowamountofincomeandsometimesthetypeofincome.
KylehasW-2incomethroughhisjob,soweknewthatwouldbeaneasysell.
Self-employmentincomeisalsocommonforlenderstoworkwith,buttheyaskforatleasttwoyearsoftaxreturnsandprofitandlossstatementstoascertainwhethertheincomeisstable.Also,self-employmentincomewillnotqualifyyouforaslargeofamortgageasanequivalentamountofW-2incomewould.
Regardingourownhomebuyingjourney,obviouslyrealestateintheSanDiegoareaisveryexpensive.Wehadtodecidehowmuchwewerecomfortablespendingonamortgage,regardlessoftheamountwequalifiedfor,andmatchthatupagainstthepricesofsingle-familyhomes.TherearealotofcitiesandareasinSanDiegoCountythatweabsolutelycouldnotandwouldnotbuyin,andevenintheremainingareaswewereonlylookingatprettymodesthomes.
Asidefromyourhousingexpense,theotherdebtsandobligationsincludedintheback-enddebt-to-incomeratioaretheminimumpaymentsyouarerequiredtomakeoncreditcards,carloans,medicaldebt,personalloans,andchildsupport.Ifyourstudentloansareinrepayment,thoseminimumpaymentsgointothecalculationaswell.Ifyourstudentloansareindeferment,yourlendermayconsider1%oftheoutstandingstudentloanbalanceasastand-inforthemonthlypayment.
YourFICOcreditscoreandthethreemajorcreditreportsitisbasedonarethemajorwaysthatyourlenderwilldeterminehowcredit-worthyyouare.Basically,yourcreditreportsandscorecommunicatehowresponsibleyouhavebeenwithdebtinthepast.
Themiddlegroundwithdebtisoptimalforcultivatingahighcreditscore,whichistakingoutsmallamountsofdebtandprovingthatyoucanpayitbackconsistently.Asyourageofcreditgrowsolder,yourscoreimprovesaswellbecausethattrackrecordofon-time,in-fullpaymentsgetslonger.
ExactlyhowaFICOcreditscoreiscalculatedisproprietary,butthebroadstrokesarethat35%isbasedonyourpaymenthistory,30%isyouramountsowed,15%isthelengthofyourcredithistory,10%isyourcreditmix,and10%isnewcreditinquiries.
Ifyourcreditscoreis760orhigher,youshouldqualifyforthebestinterestratesonamortgage.Theminimumcreditscoretogetamortgageisaround620.
Savingupmoneyforadownpaymentonahouseandtheclosingcostsonthepurchasewasthebiggest,longest,andmostintentionalprocesswewentthroughinpreparingtobuyahome.Iwilltellyouallaboutitindetailaftergoingoverwhatthismoneyisforandhowmuchyoushouldtarget.
First,thedownpayment.
Second,theclosingcosts.
Theironyisthat,nineyearslater,KyleandIputdownwellover$100,000onourhousepurchase.AndIwilltellyouhowwegotthere.BeforeIdo,pleaserecallfromthebeginningoftheepisodethatIamacutelyawareoftheprivilegethatyouwillsoonseeatplayinthisprocessandthatIamsimplytellingyouwhathappenedforus,notsuggestingthatyouwillorcouldtakethesamepath.
In2016,afterthebirthofourfirstchild,wecommittedtocontributingacertainpercentageofmyirregularatthattimeincometotheaccount,whichamountedtotensoforacoupleofhundreddollarspermonth.Thebalanceintheaccountattheendof2016was$31k.
Wecontinuedthatsavingsplaninto2017,andIevenstartedpayingmyselfaregularsalaryfromthebusiness.Whenwegotpregnantwithoursecondchildthatfall,weswitchedoursavingsgoalaswedidforourfirstpregnancyandtemporarilystoppedcontributingtotheaccount.Thebalanceintheaccountattheendof2017was$40k.
Through2019,wecontinuedtosaveacertainpercentageofmyincomeintotheaccount,andwelayeredinanadditionalfixed$250permonth.Again,aroundtaxtimewecontributedtotheaccountaportionofadistributionfrommybusinessandourself-taxrefund,whichamountedtoapproximately$10,000.(Sidebar:Wesaveagenerousamountfromeachofmypaychecksintoaseparatesavingsaccountearmarkedforincomeandself-employmenttax.Wepayquarterlyestimatedtaxandalsomorealongwithourtaxreturn.Ourself-taxrefundiswhateverisleftoverinoursavingsaccountafterallthetaxesarepaid,whichwethenincorporateintotherestofourfinances.)Thebalanceintheaccountattheendof2019was$56k.
2020,asyouallknow,startedoutnormally.Weagainweresavingacoupleofhundreddollarseachmonth,plusabolusaroundtaxtime.Then,thepandemichit.Westoppedpayingforchildcare,whichwascertainlyastrainonourtimeandstresslevels,butdidallowustoincreaseourmonthlysavingsratetothedownpaymentfundto$1,500.Wealsoputmostofthefirststimuluscheckintotheaccount.
Beforewemoveonfromthissection,Iwanttopointoutsomeadviceorobservations:
1)Ithinkitwaspsychologicallyimportanttousthatwehadanamedsavingsaccountopenforourdownpayment.Havingacertainplacetohousemoneyforanyparticulargoalkeepsitfrontofmindandpreventsyoufrommixingmoneyintendedforthatgoalwithyourothermoney.
2)Itwasagoodsteptohaveasetsavingsrategoingintothataccountonamonthlybasis,whenwedid,andalsotoknowthatwewouldputanyfinancialwindfalls,likeourself-taxrefund,intothataccount.
YoucanseewhyIsaidatthebeginningthatthisisadescriptiveratherthanprescriptivetale,rightGeneratingdownpaymentmoneybyreceivinggiftsfromfamily,puttingawaythousandsofdollarssentbythefederalgovernmentforaid,movinginwithyourparents,andforgoingchildcareisnotexactlyreplicable.
OncewemovedtoCAinAugust2020,wesavedafewsearchesonrealestatewebsitesthatpullfromtheMultipleListingsServiceandstartedpassivelyfiguringoutinwhatareasofNorthSanDiegoCountywecouldbuyasinglefamilyhomeinourpricerange.Wenarroweddownoursearchtoabout5cities/areas.Wealsocompiledashortlistofmust-haveandnice-to-havefeaturesofourfuturehomeandproperty.Thatfall,weworkedonmakingsurethatthefinancialitemsItalkedaboutearlierintheepisodewereallinorder.
IreadHomeBuyingforDummiesthatfalltoputtogetheragameplanforgettingarealestateagentandlenderandsoforth.Becauseatthattimewethoughtwemightneedmyincometoqualifyforamortgageofthesizewewanted,weagreedtofileour2020taxreturnASAPinJanuary2021sothatwecouldgivethattoourlender.InDecemberandJanuary,wealsostartedcontactinglocalrealestateagentswiththeplantointerviewseveralbeforechoosingone.
Now,itisapparentlypossibleinsomecasesforthelendertogivethebuyerthego-aheadtowaivetheappraisalcontingencywiththeagreementthatthelenderwillstillputuptheiragreed-uponpercentageofthesaleprice,nomatterhowhighthepricegoes.Ourlenderdidnotagreetothat.
Thethirdhouseweputinanofferonwaslistedat$675,000.Ourofferwasfor$746,000withanescalationclauseupto$756,000.Thewinningofferwasallcashfor$730,000.
Atthatpoint,weweretotallyemotionallyexhausted.Wehadtoured13homesandmade3offers.Eachonewascompletelywrenchingforus.Quickdecisionmakingisnotourstrongsuit,butitisnecessaryinafast-movingmarket.TypicallyhomeswouldbelistedbetweenTuesdayandFriday.WewouldtourthemonSaturday,usually,andthenhavetosubmitanofferbySundayorMonday.Eachtourdayinvolvedatleast90minutesofdrivingeachwaybetweenLAandSDplusmoredrivingtoeachofthehomes.Everyweekandweekendwereconsumedwiththisprocess,andweweregettingtired.
Rememberthatlistofmust-havesandnice-to-havesfrombeforewestartedthesearchprocessIthadabouttripledinlengthbythatpoint.Touringhousesandmakingdecisionsaboutwhetherornottomakeoffersreallyhelpedusclarifywhatwewerelookingfor.Wewereabletobecomemuchmorespecificaboutoursearchparametersandcouldbetterdecidebasedonalistingwhetheritwasworthittotourahome.Wehadalsoincreasedthetopendofourpricerangebyabout$150,000.
Onourlastweekendoftouring,wesawsixhousesonSaturday!Eventhoughwehadgottenalotmorespecificaboutwhatwewanted,thosesixallmadethecut.Wenoticedwhilewewereoutthattherewerewayfewerbuyersaroundthantherehadbeenonotherweekends.Usually,wewouldshowupfora15-or30-minuteappointmentandtherewouldbesomeonefinishinguptheirappointmentjustasourswasstartingorwouldbewaitingforourstofinish,oftenboth.Sometimes,houseswouldbe100%bookedforshowings.However,thatweekend,wehadseveralappointmentswherenoonewasseeingthehouseimmediatelybeforeorafterus.Itwasaverynoticeableaberration.
KyleandIhavespeculatedaboutwhywegotthishouseforaskingprice,whichthehousealsoappraisedfor,whenvirtuallyalltheotheroneswewereinterestedsoldforsofaraboveaskingandappraisal.Iknowwegotlucky,butmaybeourluckcouldbestrategyforsomeoneelse.Thefollowingaresomepiecesofmaybeadviceforahotmarket.
2)Becausewewereouttherejustabouteveryweekend,werecognizedthatweirdlow-volumeweekendasanoutlierandourchancetowinabidwithlesscompetitionthanusual.
Myadviceforyouonfindingsomeonewillingtosellyouahouseis:
1)Startearlyfiguringoutwhereyouwanttolive.Researchyourmarketthoroughlymonthsoryearsinadvanceofwhenyouactuallywanttostarthousehunting.Youcandothisthroughtrackingprices,visitingthevarioustargetareas,andtalkingwithpeoplewholivethere.Ideally,youwouldactuallylivethereforawhilebeforebuying.Wewishwehadbeenabletodothis.
6)Trustyouragent,orratherfindanagentthatyoucantrust.Ouragentwasnotsuperdirectiveintellingushowmuchweshouldbidonaparticularhouse,butshedidprovideuswithinformationandmarketinsightsandtohelpusmakethedecisions.Shehelpedusrespondtoshiftingmarketconditions,likestartingtousetheappraisalcontingencywaiver.
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