To buy or not to buy (appraisal, foreclosures, 5%, investment)

[BoredAndCurious]

I'm sure questions like this have been asked before, and in the end everybody decides for him/herself. But just out of curiosity, what do you all think about our situation?
Moved to another state (Colorado) in 2011, due to my job. We were targeting Colorado for a long time due to a lot of factors. Were able to relocate to the area of our dreams. My husband was able to find a local job within 2 months, so for almost a year now we have a steady combined income of 180K. We still own our house back "home", and will put it on a market very soon. The idea is to sell it this summer-fall no matter what, even if that means we will lose quite a bit and not get much cache out (we owe 131K on it, and recent appraisal was 166K). I think that we will start at 160K (broker's advice is 167K) and will come down as low as 150K to sell it. Comparables sold for anywhere between 145K and 170K recently. Anyway, we won't get much cache out of it, after broker's commission and other fees, so we are not counting on it.

Now, to my main question. We rent here now, and rent is 1650 a month. Prices seem to stabilize here, i.e. it doesn't look like they are going to come down much, but not likely to start growing tremendously anytime soon. The area really wasn't affected all that much, average prices dropped about 5% in the past 2-3 years. So, we would aim for a 400K (there is really not much cheaper than that in the area we want to live), but we don't have much cache on hand. 40K is the most we can put down, and that would clear our savings completely . I'm talking about plain savings account, there are also retirement accounts that lenders normally consider to be your securities, but I would avoid touching them at all costs.
The good news is that we were living with 1650 rent, 1000 mortgage on the house back "home" and were still able to put aside 1500-2000 a month. So, my mental math and mortgage calculators tell me that with 400K purchase and 40K down we will be paying around 2000 a month, which, if adjusted for tax benefits, would be around 1700, so very close to what we are paying in rent.
Our credit scores are high - mine is 801 (wow, I was impressed ), and my husbands is 780. It was never a problem for us to get a loan at the best rate, and I love when I can call my credit card company and ask to reset my APR to 0% for the next year and they just do it. In fact, I thought about financing some of our down payment through 0% APR credit card. We never carry a balance on a card that has APR > 0%, and only did it twice, when we had big purchases - paid both of them within a year and never incurred any interest.

I can't figure out if we should rent another year and have a bigger down payment, or buy now with 10%, have no savings left (but hopefully will rebuild them within a year and, once our house back "home" is sold, start putting some extra towards equity and get rid of PMI).
"Against" buying:
1) It's risky to put all our money into down payment.
2) We always kept our debt to income ratios low, so having 360K debt, plus 131k (even if the other one is just for another 6 months), with 180K gross income scares me.
3) I know what home ownership is - you have to figure out at least 1-2% of the house value into maintenance yearly plus lots of sweat equity.

"For" buying:
1) Monthly expenses won't change, but we will be putting something towards equity, instead of paying the whole amount to our landlord.
2) I don't think mortgage rates will be any lower, I want that "4.XX%" or even "3.9X%" on my mortgage statement
3) Emotional benefit of having your own home and being able to have things "your way". (I hate-hate-hate carpets, if you know what I mean)

Do you think our potential debt-to-income ratios are going to be too high? I know the mortgage broker we are working with telling me that even without selling our house back "home" we would still be OK, but what's OK for her, is not OK for me - we are much more conservative.

Potential scenario of one of us losing a job while we have no savings: are there "insurances" or similar options were you can go for several months without payments without ramifications? If yes, what are the costs of having such insurance, can you recommend one, and is it possible to have it, say, for a year, and then cancel once we have big enough emergency fund?
Having said that, my job is very stable, and my husband shouldn't have troubles finding another.

[MrRational]

1) until you sell the old house keep renting.
2) if/when you sell that property and by that you (and any lenders) can
KNOW EXACTLY where you stand financially... don't even look at properties for sale.

hth

[TimtheGuy]

You may want to look at 5% down and keep the other 5% in savings. Have the seller pay all your closing costs and pre-paid items.

[hueyeats]

Originally Posted by MrRational

1) until you sell the old house keep renting.
2) if/when you sell that property and by that you (and any lenders) can
KNOW EXACTLY where you stand financially... don't even look at properties for sale.

hth

^^^That.

[Squirl]

If I thought a change in home prices & mortgage rates were going to affect my purchasing power dramatically in the next 6 months, I'd start house shopping.....at least go ahead and get prequalified for a mortgage. Otherwise I would wait until I had the old house sold or rented out -- preferably sold.

[BoredAndCurious]

Thank you all for your answers so far.
Of course, selling the old house first would be the right way to do things. However, we already started looking and will most likely get pre-qualified this week. Whether or not we will actually buy before selling is another question. Mr. Rational, I think I know what you mean when you say "don't even look until you sell", but I hope that we are rational enough to start looking and not get carried away with emotional component.

I wish our life was so clear cut, that we can sell, start looking immediately and buy within several months, assuming there is the right house for sale. The reality is that our current lease ends July 31, 2012 and renting for another year = 20K (1650*12). Also, we live somewhat outside of town, and moving could get us closer to a bus line. We have a teenager, who is not driving yet, but would benefit tremendously from being closer to the public transportation. Luckily, schools are great where we live, and we are, in fact, looking to stay within the same attendance area, if possible. And finally, it's nice to make a good living with the jobs we love, but after moving from a very low-cost/low-salary area into middle-cost/middle-salary area, we are somewhat shocked at how all our tax breaks that we were used to (child tax credit we used to qualify for, to name the biggest) are gone. In fact, selling our old house and not having another mortgage for some time, will push us in the next tax bracket. (25% now, may end up in 28%).
So, no bus, 20K into the sand, higher taxes, and all this to live with an old carpet? Don't get me wrong, our rental is pretty nice, but we can own a much nicer home while paying the same amount a month.
Still, all the good points about our old home, which is a liability.

[399083453]

You have a 180k combined income, and $20k in annual rent, and only $40k in the bank. You should really take a close look at your spending habits. If you could drastically cut your spending, rent for another year, you could have a HUGE downpayment or emergency fund in the bank.

Personally, I would rent for another year. Banks have not unleashed the tsunami of foreclosures that will be coming and driving the prices of everyone down. Lets say you rent for a year and the house style you like drops from $400k to $275k or $125k drop. Now minus $20k rent from $125k and you just saved yourself $105k, about 10 years of mortgage payments.

After listening to this podcast it really changed my spending habits, hope it can help you too.
Dave Ramsey

You begin to realize whats really important and whats not.

[manderly6]

Maybe consider trying to find a short term lease closer to town.

[BoredAndCurious]

Originally Posted by 399083453

You have a 180k combined income, and $20k in annual rent, and only $40k in the bank. You should really take a close look at your spending habits. If you could drastically cut your spending, rent for another year, you could have a HUGE downpayment or emergency fund in the bank.

We've had 180K income for a year. Before that - more like 100K, and even that not for long. I began working full-time in 2008, after our younger son turned 4 and started pre-K. And let me tell you, we are immigrants, who came into the country 11 years ago with NOTHING, but our education, brains and willingness to work hard. So, yeah, our savings could be bigger, but honestly, I don't think we are doing so bad. It's not that easy to cut spending when you have kids. We don't go out at all (I love to cook, and family loves my meals better than restaurant food), we don't buy expensive clothing or cars. Our main spending are trips, including trips to see family overseas and kids' activities. My older one is a competitive swimmer and it's a lot of money, but we think it's well worth it, as it keeps him busy, physically fit and happy. He was able to find friends very quickly through swimming after our cross-country move, and this is very important at the age of 13.
Thanks for the link, though, I will definitely listen to podcasts. Although I don't think we are over-spenders, there is always room for improvement. I just think truth is always in a middle. Every spending cut costs you something, and there are cuts I'm not willing to make (see above).

Originally Posted by 399083453

Personally, I would rent for another year. Banks have not unleashed the tsunami of foreclosures that will be coming and driving the prices of everyone down. Lets say you rent for a year and the house style you like drops from $400k to $275k or $125k drop. Now minus $20k rent from $125k and you just saved yourself $105k, about 10 years of mortgage payments.

This scenario is very unlikely in our area. People keep moving into the area, and everything barely below market value goes under contract within a month. Like I said, I don't think the values will drop dramatically, but not likely to grow very much either.

[rjrcm]

Originally Posted by 399083453

You have a 180k combined income, and $20k in annual rent, and only $40k in the bank. You should really take a close look at your spending habits. If you could drastically cut your spending, rent for another year, you could have a HUGE downpayment or emergency fund in the bank....

While they may "only" have $40K in a savings account, the OP also said they have other investment accounts that may represent a significant savings from their income. I do agree that you should always maintain a reasonable emergency cash position to cover several months of living expenses.

...I'm talking about plain savings account, there are also retirement accounts that lenders normally consider to be your securities, but I would avoid touching them at all costs.

As for the "tsunami" of foreclosures you predict coming, I think that is mostly market specific. Sounds like their local area has been fairly stable if only a 5% decline in the last few years.