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First off, I know there have been many posts addressing this issue but I wouldn't mind some insight as to my specific situation without spending long hours digging through hundreds of forum posts.
Anyways, I have recently moved to San Diego with my fiance and have been contemplating how we should go about (if it is even an option) purchasing real estate in the future. I am currently 23, and we have a combined taxable income of around 70,000-give or take. We make about another 10k in cash for miscellaneous projects. My truck is paid for, I have no student loans and I pay off my credit card at the end of each month. The both of us are very frugal, and are very good with money management. My credit is excellent but my credit history only spans for about two years.
Having said that, we would like to purchase a house at some point in the future (a minimum of three years or so). I am very aware that you will get a dump for around 300,000 in any decent part of the city and that million dollar homes are not uncommon. My question is to whether we would be able to get a loan large enough that we could purchase a home? Is it feasible? We're budgeting for having about $50,000 for a down payment if we were to purchase in three years. Currently we are paying 1760 in rent before utilities-which would be somewhere around what a decent mortgage would be. We also are not looking for a large multi bedroom home in La Jolla. Ideally, we would like a place around 1,200-1,500 square feet with two bedrooms in an area like Imperial Beach. I have seemed to find places we both like for around 500-600k. Obviously, a 30 year loan is optimal.
Are banks willing to loan more money in California, since the average price of real estate is higher?
How does the down payment affect loan amount and interest in California compared to other states, say Washington?
Will you be able to receive a loan, but pay very high interest?
Is the only road to a home buying a condo, and slowly moving up?
Any advice or suggestions? I think it goes without saying that I have no experience with this kind of thing. I've had presumptive qualifications for around 380k without a fixed rate for 30 years, with a fixed at 300k. Should we wait and save up till we have a higher down payment?
You question hits on a pretty contentious question around here. I tend toward the more cautious side.
Keep in mind, with owning a home there are additional costs you need to budget and save for. You need to plan on spending around 1% of the property's value on basic upkeep and maintenance every year. On a $300K place, that 1% works out to $250/mo. On a $550K place it's around $460/mo. You also will have periodic bigger ticket items like appliances that die, roof issues, furnance/A.C., et cetera.
I think you are wise to keep to no more than around 30% of gross income for your mortgage payment (principal, interest, taxes & insurance -- collectively PITI). Using $80K gross puts you in the $1800-$2000/mo range which is pretty close to your current rent. That will get you into the $300-$350K range depending on down payment and where rates happen to be.
Getting up into the 500's is not advisable based on your current income. It would push you past 40% of gross income and I'm not sure you would be able to get a loan. Even if you could, I think it would leave you "house poor" and at high risk of problems when the inevitable unexpected happens.
Do you and your wife-to-be plan to start a family, especially in the next 5 or 6 years? That is a major consideration on a number of fronts. You didn't mention the breakdown of the $80K income, but you should consider that in a having kids scenario, you'll almost surely either have one of your incomes gone or reduced substantially, or have daycare costs which can pretty easily be $1,000/mo per child.
The other thing I urge you to consider is job stability and emergency savings. I advise having at least 3 months' expenses in an emergency account that is separate from any down payment savings. More than 3 if someone's job is more at risk of loss and/or would be harder than normal to replace.
I believe higher payment to income ratios are expected and tolerated in CA. If you find a lender that services their own loans, they might be willing to extend more credit in exchange for a higher down payment (say 20% or more). I think there are small regional variations in mortgage rates but effectively they are similar everywhere.
To summarize, right now the market is on the high side. Around $300-350K is as high as I'd consider on your current income and I think you've correctly identified that right now all that's available in that range would require a lot of work (= time and cash) and probably be in a crappy area. I suggest you save as much as possible, keep an eye on the market and rates, and also work hard to increase one or both your incomes. Hopefully those line up in a happy way down the road and you could jump on a starter condo type situation and trade up over time. I'm sure GuyinSD will chime in as he did that with success.
If you don't have the down payment now, then it might be rough.
If I were you, I'd ditch the $1700 rent if possible, especially if you don't have kids or pets. Try to save an extra $500 each month for your down payment fund. A $50,000 down payment is not enough on a $300,000 home, and that's at the extreme low end of what you might find now even if you search the suburbs (which I recommend, by the way, at least for a starter home). You'll want to be over 20% to get out of paying sucker insurance (i.e., PMI). No good reason to pay that.
The old saying holds that you should look for the worst house in a good area rather than the best house in a bad area, and I agree with it. I absolutely adore North County, especially the San Marcos and Escondido areas, and areas like that still have houses that are available within your budget. Mira Mesa might run you closer to $400k. Clairmont Mesa and Kearny Mesa are nice, too, and they're a little cheaper. I don't care for the other options, which are either aimed at people with a lot more money or more established equity (you can't afford Poway yet) or are either a bit more sketchy (City Heights) or geared toward young people (North Park) or renters.
The hardest part about building equity in a condo instead of the cheapest SFH you can buy is that you flush your condo fees down the drain.
There's more than one way to make everything work, but what I did was to look for the cheapest decent-looking house I could find in a pretty area of one of the suburbs. I got something small, but it's functional, and it's good enough for me. I saved up by living extremely cheaply for a while, and I kept about half a year of living expenses in the bank after making my down payment. Now my monthly payments are affordable (less than you're paying for rent now), I'm building equity, and I have a cushion in case something bad happens. I happen to adore the area I chose (North County inland is heaven for people who like to hike but are kind of lazy about finding new trails, and it's great for those of us who love majestic peaks reflecting the light of the sunset on the way home from work), and you might prefer something slightly different.
Since you mentioned Imperial Beach in particular, I'll comment that that is a really lovely area, and it's one of the places where you can be close to the ocean without paying through the nose. The main downside is that the commute into town from there is really nasty, so be prepared for that. Be prepared for the long term, since you'll probably keep your house a lot longer than you'll keep your job. (Apparently, people tend to sell houses after just a few years, but that seems really dumb to me. Why would I want to guarantee that I'm always paying the most interest-heavy portion of my mortgage and minimzing the equity I'm building? Also, I hate the hassle of moving.) If I wanted to be closer to the beach than I am now, I'd be sure to check Vista and Oceanside, as well.
I love visiting Imperial Beach, though. When I want to spend a weekend morning on the beach, that's where I go, even if it isn't closest.
You probably have a couple of things to consider. First, there's the fact that prices are rising pretty quickly. That was part of why I rushed in when I bought a home. I don't regret it at all, but I suspect it's a little harder now than when I bought my house. I got a deal and didn't have to fight anyone for it, since demand was really low at the time. Finding deals like that in areas you like might get harder and harder. You also might need to hunt to find something with no HOA and no Mello-Roos.
The other consideration, though, is that buying a house is really a better thing to do if you're thinking long-term. That's my plan. I wanted security, and I got it. Now I plan to live in the same house until I die. I'll pay the mortgage off early and then sit on low property taxes forever. This might not technically be the most aggressive plan for the long term, but it's safe. It's very predictable. Everyone I know who has managed this has ended up with a very easy life. The best thing about the California real estate market is that the costs are upfront, and the market favors people who already live here. Just become of those people, wait out the storm, and retire in style.
Even if your down payment is only $50k, you'll be able to get a loan if you don't have other monthly obligations getting in the way. Your debt-to-income ratio is probably the biggest factor, and after that, you'll want good credit to get the lowest rate possible. Rates aren't that high right now, but they've been a lot higher in the past. I doubt they'll be unbearably high in just three years, though.
The down payment affects the loan amount through how it changes the percent of your monthly income going toward obligations. A lot of places use national standards for that (mine did), but it's ultimately the decision of the underwriter. Standards are a lot tighter now than they were a decade ago, so be prepared to have your finances put under a microscope.
You have a big spike in your monthly payment if you don't put down at least 20%, because you'll get stuck with private mortgage insurance, which is just the bank taking an extra fee from you to cover the risk of giving a loan to someone without enough assets to pay 20%. It's money down the drain. Fortunately, it goes away once you have 20% equity.
Buying a single family home is very possible. You don't have to start with a condo. Starting with a house is probably more efficient, anyway, since you don't pay extra fees for no reason. The only problem is that it's a bit harder to clear the initial hump. You're not in a terrible position, so I would recommend making a push to get a home in the next couple of years. Then just enjoy life. That's what California is all about.
You didn't mention any savings for a down payment. Let's say you find and want to buy a $300,000 home. Even at 10% down, you'll need $30,000 in cash (and many mortgage lenders will be looking for a larger down payment than 10%). So, if you haven't already started putting that down payment together, make that job 1. It may mean figuring out a way for you and your fiance to bank most of one salary and live off just one salary for a few years. That may also mean really tightening the purse strings for a while, such as living in a less expensive rental in a less desirable area.
Of course, the other issue is what $300,000 will realistically buy you. Even in Imperial Beach, you're not going to find many single family houses for $300,000 but you will find very nice condos in and below that price range throughout the county. But, a condo can work just fine as a first home too.
Keep your options open -- don't get too attached to any particular area. If you're open to the south bay, there are lots of areas in the south bay that are worth considering. The same is true about the mid-city and east county areas. Even north county has lower priced areas. Be open to something a little smaller than ideal or a place that needs TLC.
The issue many first time homebuyers run into is expecting that their first home will be their "dream home" -- perfect size, perfect location, perfect shape. I agree with OwlandSparrow's excellent advice to look for the cheapest house you can reasonably afford in an area where you would feel comfortable living. Don't think of your first home purchase as your last home purchase; think of it as a way to get a foot in the door so that you can eventually build enough equity to move into the "dream" home.
Finally, I would suggest that you and your fiance schedule an appointment with a mortgage broker. A good mortgage broker will give you an honest evaluation of what type of mortgage you could qualify for on your current salary and how much of a down payment you should be working towards. That information will help you plan out what you need to budget each month to reach your goal.
But first step is getting the down payment going if you haven't already done so. Don't worry about folks who tell you that if you don't buy TODAY, you'll be priced out entirely as panic will make it harder to start saving. Just stay focused on the goal. It doesn't have to happen today, or even next year, as long as you are working towards the goal steadily.
If you are motivated, you and your fiance will make it happen.
If you don't have the down payment now, then it might be rough.
If I were you, I'd ditch the $1700 rent if possible, especially if you don't have kids or pets. Try to save an extra $500 each month for your down payment fund. A $50,000 down payment is not enough on a $300,000 home, and that's at the extreme low end of what you might find now even if you search the suburbs (which I recommend, by the way, at least for a starter home). You'll want to be over 20% to get out of paying sucker insurance (i.e., PMI). No good reason to pay that.
The hardest part about building equity in a condo instead of the cheapest SFH you can buy is that you flush your condo fees down the drain.
You have a big spike in your monthly payment if you don't put down at least 20%, because you'll get stuck with private mortgage insurance, which is just the bank taking an extra fee from you to cover the risk of giving a loan to someone without enough assets to pay 20%. It's money down the drain. Fortunately, it goes away once you have 20% equity.
Buying a single family home is very possible. You don't have to start with a condo. Starting with a house is probably more efficient, anyway, since you don't pay extra fees for no reason. The only problem is that it's a bit harder to clear the initial hump. You're not in a terrible position, so I would recommend making a push to get a home in the next couple of years. Then just enjoy life. That's what California is all about.
OwlAndSparrow offers good advice overall. However, I have a few points to nit pick since the OP is new to home buying in general.
Don't get fixated on any one point -- look at the overall picture. Condo fees CAN be exorbitant and condo associations can be a pain in the butt. But the same can be said about home owner's association fees and their deed restrictions. And if condo fees cover grounds maintenance and other similar services, that's something you don't have to do yourself (and maintain mower/blower/etc.) or pay someone else to do. And often a large association has a lot more price leverage than a single home owner.
Traditionally, if one puts less than 20% as the down payment, then most lenders require PMI. Keep in mind that is 20% pure down payment and closing costs are on top of that. If you have to pay closing costs as a buyer, they can be 2-4% of the home price, meaning you need more like 22-24% cash to avoid PMI. Also, I believe lenders are required to remove PMI automatically when the loan to value ratio was ORIGINALLY SCHEDULED to reach 80%. In other words, the lender isn't required to consider appreciation (through natural means or through homeowner improvements). If you think your property has appreciated and therefore may be due to remove PMI sooner than originally scheduled, you have to take initiative, contact the lender and start the process. Generally, they'll require you to arrange and pay an appraiser off their list.
If someone struggles to save at least 10% for a down payment in a reasonable time frame for a given home price, I think that is a general indicator they are overreaching (i.e., targeting too high a price) and may end up perpetually cash strapped (house poor). If you can save 20%, that's a pretty solid indicator you're in the right zone.
Thanks everyone, really solid advice. I think saving for the 20% down payment will be the way to go. We're not in any particular hurry, but are also aware of the rising cost of housing. I've spoken with a few mortgage brokers just to see what what our options are. It always helps to hear from those who have lived here for sometime, and I welcome any additional advice or suggestions that may not have been mentioned or addressed in this post
Can't add too much to the solid advice already posted, other than:
- I would not recommend buying now. Wait until AFTER a crash happens, then swoop in within a few years afterwards. In the meantime - pay as little in rent as you have to and save your money until the inevitable crash occurs. You'll know when it does - prices will be 15% or more less than the previous peak, people will be panicking and there'll be nothing but articles and people talking about how bad an idea it is to buy real estate.
- The old rule of Real Estate (Location, Location, Location) is so very true. It is far better to own a dinky place in a nice area than a gigantic house in a crap area.
- A townhouse (in a nice area) would be a perfectly acceptable first piece of real estate to own - when it comes time to buy a house, it may well become a rental property for you. The key is to absolutely make sure to buy in a nice area. (sorry for repeating this - but so many people don't do this, and end up being burned; real estate in crap areas just doesn't go up very much (if at all) unless the area happens to undergo gentrification - but there's no guarantee that will happen).
You can look up my previous posts on this subject, but long story short - my first property in San Diego (mistakenly bought right before a crash) was a townhouse in Carmel Valley. Even losing 8-10 years (because I bought at a peak), that one townhouse has resulted in my San Diego real estate holdings to now be three properties, with a combined equity of around $1M - all for the cost of my initial down payment (renters have been kindly paying off my mortgages on two of the properties, as well as giving me additional monthly income in the process). You are young - wait a few years before buying - the you of 15 or so years from now will thank yourself for not buying close to a peak.
So some of your questions regarding lending can be best addressed by a mortgage lender. If you need a referral just PM me.
Are banks willing to loan more money in California, since the average price of real estate is higher?
Yes, the conforming loan limit is higher in San Diego than other areas of California and in CA more so than other states. However that is just the conforming loan limit. What they will lend you depends on a variety of factors but essentially your debt and income.
How does the down payment affect loan amount and interest in California compared to other states, say Washington?
Interest rates literally change daily so that is something to discuss with a lender. If you put more money down and choose to go with a conventional loan product as opposed to an FHA loan you may be able to get a better rate though.
Will you be able to receive a loan, but pay very high interest?
If you have poor credit the interest rates are higher (if lenders are willing to lend) but if your credit is good you should get the best rates. And you can shop rates among lenders as well.
Is the only road to a home buying a condo, and slowly moving up?
Depending on what you qualify, it might be but not necessarily. That or a fixer upper, or a single family home in an area of San Diego that is a bit more affordable (so not La Jolla as your first home purchase for example) and then moving your way up. I bought my first property at 23 and it was a fixer. I don't think I could have been able to afford the next couple if I didn't build some sweat equity in that one (I sold it after 3 years). The problem in my opinion is, I see a lot of people who want to buy but want to buy a huge, perfect house in a high end area that they can't yet afford so instead of buying anything they wait and wait and keep renting for years. The problem is that properties appreciate over the years (of course we have up and down cycles) but over the course of 5, 10 years etc they appreciate a lot. So when people say " i think i'll just rent for the next 5 years and save up", sometimes they can't save up money at a rate as fast as the market appreciates.
Any advice or suggestions? I think it goes without saying that I have no experience with this kind of thing. I've had presumptive qualifications for around 380k without a fixed rate for 30 years, with a fixed at 300k. Should we wait and save up till we have a higher down payment?
So that kind of relates to my answer above hehe Have you looked to see what the market has available in that price range? I'm not sure what area you're looking in.
The both of us are very frugal, and are very good with money management.
You could also each be adding a part-time job to your week, move to a studio apartment or have a roommate or two, and have a no-frills or city hall wedding if you both are really goal-driven.
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