Should we buy a home in San Jose? (2014, lease)

[col79]

The background
6 years ago I was working as a junior software developer making $75K in NYC, my wife was in the childcare management field making $55K. I was tired of my field and the limited advancement opportunities at my company, so decided to take the plunge and applied to business school. I graduated 4 years ago with $190K in student loans and $90K in credit cards (yes I know, a crapload of debt) -- the decision to have two kids while in business school didn’t help.

In the career side, things paid off for me, I currently work at a great company (usual Silicon Valley perks) where I make pre-tax $230K [155K base + 30K bonus + equity]; I think I have a “decent” shot at making $450K in about ~5 years from now. Since graduating we have focused on paying down credit, have gotten down balances to $70K credit card and $120K student loan.

My wife is currently finishing her master’s degree (about a year to go) and currently making $12K a year freelancing. We expect she makes about $80K when she graduates.

Current Housing Situation
Since moving to the Bay area 4 years ago, the prices of housing and rent have gone out of control, shooting up 30%-50% in the area where we live. Our rent has gone up $950 in the past two years (from $2300 to $3250) and we expect it to go up to ~$3700 in October (when the year is up); even at that price, seems like we'd be getting a “deal” since properties where we live are now listing at $4200.

The Question
Based on everything that I have read, I know I am not in a position to buy; the original plan was to wait 2-3 years and be in better shape. At this point I am considering buying not so much to own a house, but to put a cap on our housing cost every month.

Given that we don’t have even 10% down, a lender pre-approved us for an FHA loan putting as little as 4% ($27K plus ~$10K on closing costs) on a property of up to $675K, with a 3.3% ARM at 5 years. She said we could get out of it if the property goes up or we can put an additional amount of money to increase equity. That’d put the monthly payment at $2700, plus an additional $1000 for PMI and taxes.

We looked at a property in Santa Teresa and we think it’d be a good starter home; but the question is whether we should buy right now, be a tight spot until wife starts working and we get out of PMI; or hold off for 1-2 years but potentially be even more priced out and end up paying $4K in rent. [not considering the speculation factor, it’s anybody’s guess whether this is a tech bubble or not]

Personal Finance -- any advice for us? ( see the numbers for more detail)
The numbers
Monthly Income [total $8400]
$7400 post-tax income [after maxing out 401K contribution to get employer match]
$1000 freelance income from wife’s work
Monthly Expenses
$3250 rent payment
$2000 credit card payment
$750 student loan payment
$250 car lease payment
$900 utilities [car insurance, electricity, cable, wife’s cell phone, internet, etc etc.]
$300 towards emergency savings
total = $7450
rest goes to groceries, dining out, shopping random things that pop up etc. [it’s tight but we try our best]

Other income:
In addition to monthly income, I vest stock quarterly [about $30K pre-tax] and get a yearly bonus in January [~$30K pre-tax]. I assume 55% of these amounts are gone due to taxes, for a total of $30K net.
Current assets:
$120K in 401K accounts [$90K in mine, $30K on my wife’s]
$7K in Roth IRA (contributed in 2014 towards an eventual down payment)
$17K in liquid savings
$10K in vested stock that haven’t sold

Any help would be greatly appreciated!

[bobby_guz_man]

How big of a place are you looking at?

[col79]

We saw a house we liked for 1,400 sq feet, 4 bdr.Thanks!

[cardinal2007]

If you're totally okay living there for 5-7 years, then go for it. You're familiar with the commute from there I take it? Honestly your student loan payments, car payments, and credit card payments are currently killing your ability to take on a larger mortgage if you wanted to buy a better place, but it is what it is. To be honest if I were in your condition that is the only thing I would ask myself, will I be happy staying there for 5-7 years minimum, the transaction costs will eat your money otherwise trying to sell before that.

Your expenses are going up from $3250/mo to $3700/mo for housing, and you have to then factor in insurance and maintenance. But it sounds like it is going up to $3700/mo anyway.

I would expect interest rates to go up to be honest.

Certainly sounds like you will have to buckle down to refinance at some point, but it looks like you figured that.

[NoMoreSnowForMe]

Yes, buy. But don't do the ARM. Go with a fixed rate mortgage. I knew too many people who ended up priced out of their homes with ARMs when they were popular way back when.

Even if all you ever get out of your home when you sell it, is some of your "rent" money back, then you are ahead. And knowing how much your "rent" is going to be as long as you own your home, is wonderful.

But, there are tax benefits to owning, too. Especially with your wife's freelance business qualifying you for the home office tax write-offs.

Buy the smallest home you can live with, in the best location. There will always be a market for starter homes in good neighborhoods.

Also, should you ever decide to rent it out when you want to move on, remember that your property taxes in CA don't go up much as long as you own the property. The assessed value stays at the purchase price, due to Proposition 13. There is a max of around 1.5% increase per year, if I remember correctly. But, properties in CA don't get reassessed as long as you own it. It could be a good long-term investment for you as a rental, if not your home.

Congrats on making good use of your education, even though it cost so darn much.

[darkeconomist]

I second going fixed rate. Rates WILL go up and are good now. Lock that in, then rent it out instead of selling it down the line. While you'll fix some costs, others, namely upkeep, will be variable. Keep that in mind. Inspect, inspect, inspect, and be there with the inspector to make sure they look at everything (within the scope of that kind of inspection) and can explain everything they saw, then scrutinize the report later.

[dburbs1975]

I say pay of the credit card bills and the loans before considering a house. you are way over your head in debt, even considering your income, and if you are counting your MBA 450K salary before it hatches, you are not wise.

If there is a market downturn, you will be in very serious trouble and won't be able to make what you are making now. the house and credit cards can disappear with bankruptcy (maybe) but those student loans will never go away. never. not even if you die.

If however, you get yourself debt free in about 3-4 years and your MBA 450K+ wishes come true, you will be in an excellent position to actually buy a very nice forever home very comfortably, and easily.

If there is a market downturn in 3-4 years, and your debt is paid off, but the market will only give you a 120K job, you will still be very comfortable, the housing prices will be lower, and you will still be able to afford a house then.

So my vote is clean up your financial house before taking on more debt because it can avert a potential disastrous outcome.

[LiaLia]

No. Not now. You are not well enough positioned. Seems like you know that already. Most likely a little later on you will be stronger financially so do stay encouraged. But now? In a seller's market? In the area you specified? No.

[CC12345]

I would not buy in your shoes. That is a lot of debt for your current income. I would wait until your spouse graduates, spend a year paying off the credit cards, and then consider it.

I also wonder about two things from your budget. You don't have tuition listed, so are you taking on more student loans for your wife to finish? If so, you need to plan for those payments too. I also don't see how 120k in student loans could yield a payment of only $750/month. Are you on income based or graduated repayment? If you are, you need to be planning for when those payments go up.

[CC12345]

I forgot one more thing. You mention that in the four years since graduation, you've paid the credit cards down from 90k to 70k. That's only paying off 5k/year, but your budget shows you paying 24k/year towards them. You either have the world's worst interest rate, or you are still using your credit cards. If it's the latter, you really need to stop that. You make enough that you should be able to make significant progress on your credit card debt without purchasing more on credit.

Also, do you not have daycare costs now? You mention two young children, but I don't see that in your budget. Will you have daycare costs when your wife graduates?