Buying 900K SFR in Irvine - advice needed

A

alchemist

New member
I've been shopping for a house for the last 3 months. My spouse and I are expecting our first child in Jan. and we would like to buy a 4 bd SFR in Irvine. We're very middle class. We're having issues w/ our 2 bd townhouse and I feel it's a good time to get out. We'd like to keep it as a rental property though.

We found a 30 yr old home that we love for $900k (neighborhood comps $940k). We live on my income alone. My spouse is currently a compsci student at UCI and expects to grad. in Mar. 2017. We qualify for an 800k loan so we might need help from family (they are willing but not rich by any means). My spouse is a veteran so we can use the VA loan for a 0 down but we'd like to put at least 15% down (no PMI) so that our monthly mortgage isn't $4300 a month. However, if we use the zero down, we'll have cash saved up for 12+ month of emergencies.

My concern is that for about 1.5 years, our finances will be tight since we will be on a single income with a newborn baby. I don't feel we'll be living paycheck to paycheck but things could get stressful at times. However, we've seen over a dozen Irvine open homes and we love this home. We plan to raise our kids in it. I'm looking at it for the long term.

For anybody who has a family, would you buy this home despite an expected tight financial circumstances for 1.5 years? I'm concerned about rising interest rates but at the same time with the current economic state, i'm worried about falling home prices (only if it dropped over 10%) after we purchase. If we could save $50k now, it would be great but its unlikely.

The alternative is we stay in our small townhouse and wait for another great opportunity. However by then, I would expect rates to rise, negating any potential savings in falling home prices.

Any advice / personal experience / housing outlook is welcome.
 
The main concern is how stable is your job?

Also, I'm a bit confused about your financing because you say you are approved for $800k yet you want to do VA zero down meaning your loan would be $900k (the help from your family would be co-signers?).

Since predicting prices isn't an exact/guaranteed science, you should be concentrating on affordability.

If you can cut expenses elsewhere and you feel your job will not be in jeopardy until you can get that 2nd income online, personally... I would take the risk. I've always felt that you should be able to stretch and as your income grows, it will make it easier. If it's a home you can see yourself in for at least 10 years and you think it's worth it, just know that every home will have its problems.

And if you are keeping your townhome, I guess that's an insurance policy in case things go south and you can move back in if you are forced to sell your bigger home.

The other option is to stay put and save more money, but like you said, you don't know where home prices will be in the next 2-5 years so you will have no idea if you'll get another opportunity although I feel there will always be something.

In the end, it's all about being able to pay the mortgage comfortably.

Good luck and let us know how it turns out.
 
VA loans for prices over $625,500 require some down payment - not much, but it's not zero down.

After your down payment, do you have 12  months of post closing cash reserves as "just in case" funds should your job not go as planned and your renters refuse to pay? If not, it sounds like this purchase is going to weigh fairly heavily on you and your family - given only the tone and nature of your post. Apologies in advance if I'm misreading it.

Let's say you wait 2 years. Assuming today an $800k property and a 6% price appreciation per year, you're at or about $882,000 in value in 2017. Assume also that today's 30 fixed at 4.0% (remember, you're putting a low down....) goes to 5.0%. Absolutely no one knows if values will go up, or rates will rise, so we're going with some pretty big assumptions at the moment. Here's the comparison:

2015

$800,000 x 15% is $120,000
$680,000 at 4.0% is $3,246.42

2017

$882,000 x 15% is $132,300
$749,000 at 5.0% is $3,579.18

So this then is a $12,300 cash down, $332.76 per month question that ultimately begs another needing to be considered before committing: In 2017, will your income/cash flow be higher than it is today?

My .02c

SGIP

 
Irvine is not a middle class city....it is for rich people.  Your $900,000 gamble will likely pay off, but you will have to pay....with lots of financial stress.  Everyone wants to move up in life...so do it.

after that..it's Newport Coast or bust.

I've also heard that real-estate is softening...but if you're in it for the long haul, don't worry about that.  Irvine doesn't discount as much as other cities.
 
zubs said:
Irvine is not a middle class city....it is for rich people.  Your $900,000 gamble will likely pay off, but you will have to pay....with lots of financial stress.  Everyone wants to move up in life...so do it.

after that..it's Newport Coast or bust.
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I think it depends on the definition of "middle class" which the OP did not specify. I have seen previous threads with many posters here talking about 250K being middle class. If that is the benchmark, then 900K should be doable. But if you're talking the real middle-middle class, then 900K may not be so realistic, unless there is a sizeable downpayment to bring that DTI to a more manageable number.  I think the problem is that Irvine was originally meant to be a real middle class suburb, and much of the older housing stock reflects that, but the prices have risen faster than its image has changed. I would say Irvine is squarely upper middle class in its average demographic by now.
 
Yes...upper middle class ...I was going to use that, but "rich people" sounded more vulgar/provocative.

Also...Crystal Cove or bust...cause Newport Coast is for the plebes.
 
Also remember that you will need to add your current mortgage to your new loan qualification if you plan on renting it out as an investment property.  I'm guessing your current mortgage is at least $200k so you would need to qualify for at least $1MM. 
 
Stretching to buy a home isn't a terrible thing because:
- Inflation: Your home gets cheaper over time due to inflation
- Transaction Costs: It can be more expensive to buy a home that is too small and have to move in 2 years than to stretch a little now and get a home you can live in for 20 years.

We stretched our budget to buy our first home and if anything, I wish I had stretched a little more (my mortgage was about 60% of what we qualified for).
 
We stretched on our first house (Irvine) since we were still in College at the time and it paid off well for us.  It was a good gamble since our incomes were not that big and we knew it would just grow once we were done with school. 

When we decided to move to a bigger home because our family was outgrowing the house we had (it is amazing how much space each kid/baby takes), we tossed around the idea of keeping the first house and renting it out or selling it and rolling the equity into the new home to have a more comfortable payment.  As a side note, with the second house we decided not to 'stretch' like we did the first since we were established in our careers and salary growth (percent wise) would not be as explosive as it was when we were starting out.

In the end we decided to sell our first home and roll the cash into the second home.  To help make that decision, we asked ourselves the questions below:

1) Were both our jobs stable?

2) Did we have a cash cushion if things went sideways with one of our jobs? 

3) Could we carry the mortgage, taxes, insurance, etc. of both homes with legal expenses easily if the renters did not pay and decided to squat until we could get them evicted (California leans renter friendly).

4) How hard will the banks/lender scrutinize us if we tried to keep the existing home and buy the new home?  <- This is back in 2009 when lending was really tight.

5) If we had to sell, could we sell easily?

6) Do we want the stress of having that much debt on paper or have peace of mind having a large equity cushion in one home and a much lower payment?

In retrospect seeing how the market turned out, either way would have been fine.  Our jobs were stable, we had a cushion, etc.  The ones which concerned us were items 3, 4 and 6.

The people who bought our first home from us did eventually sell and they made a tidy six figure profit which would have been ours if we kept it but in the end I am happy with our decision because of the lower stress I had in that part of my life.
 
You want to buy a bigger/better house, but you can't afford the house you want. We're all in the same situation to one degree or another.

Sell the townhouse and use the equity to add to your downpayment, which should be no less than 10%. Yes this constricts the amount of house you can buy. Any back-end DTI (all recurring monthly debt + PITIA) over ~35% is asking for trouble, even though creditors will allow you to pass 40%.

Run those numbers and you'll see the amount of house you can really afford. If you want to spend more, continue living where you are and saving money.
 
SubSolar said:
Sounds like a future troubled caller to the Dave Ramsey Show.
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Good advice - Start listening to Dave Ramsey's podcasts. You don't have to be as extreme as he is in many areas, but he'll help you understand why over-extending yourself on a house isn't wise.

His advice is to be completely debt-free with a 3-6 month emergency fund before you consider buying a house, and only then should you use a 15-year mortgage where the total payment (PITIA) is less than 25% of your net household income.
 
Perspective said:
Good advice - Start listening to Dave Ramsey's podcasts. You don't have to be as extreme as he is in many areas, but he'll help you understand why over-extending yourself on a house isn't wise.

His advice is to be completely debt-free with a 3-6 month emergency fund before you consider buying a house, and only then should you use a 15-year mortgage where the total payment (PITIA) is less than 25% of your net household income.
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I wonder how many people here were like that before they bought their first, second or 10th home.

I know I wasn't.
 
Perspective said:
SubSolar said:
Sounds like a future troubled caller to the Dave Ramsey Show.
Click to expand...

Good advice - Start listening to Dave Ramsey's podcasts. You don't have to be as extreme as he is in many areas, but he'll help you understand why over-extending yourself on a house isn't wise.

His advice is to be completely debt-free with a 3-6 month emergency fund before you consider buying a house, and only then should you use a 15-year mortgage where the total payment (PITIA) is less than 25% of your net household income.
Click to expand...

(I listen to Dave Ramsey, but not recently)
 
I used to listen to him a lot on the radio. Mostly to make myself feel better about my own life and situation after hearing the callers. He's like Rich Dad, Poor Dad, good advice for the most part, don't agree with everything.

Spending less (especially on cars), investing, etc are all people should listen to him about. I don't agree with him on a few things like how he doesn't like ETF's, only recommends mutual funds and how he doesn't recommend a prenup unless you have millions.
 
I listen to Ramsey's podcasts regularly, but that doesn't mean I agree with all of his advice. For the typical US household though, Ramsey podcasts can be very valuable, especially for someone dreading a house purchase and fearing how their financial situation will progress over the first few years.

His folksy metaphors and analogies can be really bad, not only failing to support his point, but actually disproving it. He has increasingly invoked his religious views in his personal finance advice over the years, which takes me to my final point. You don't want to listen to Ramsey and take his advice religiously. You want to take away many rules of thumb that you can adjust, and learn about other things you hadn't thought about.
 
Hi All,

thanks for your responses, advice, and perspective. The seller ended up having multiple offers so we didn't get the price we were hoping for (900k) but after multiple counter offers, we ended up outbidding everybody by offering an extra $22k. hahahah. my spouse and I were so set on not going past $905k but there's something terrible about trying to outbid everybody + really wanting the house. we put 20% down despite the VA loan. we had been saving up the money for the last 5+ years so why not.

We're going to be house poor for the next couple of years but we won't ever be in the red as long as I keep my job. My job is pretty stable. Since this forum seems pretty anonymous, I guess it doesn't hurt to provide our incomes - in case it may help someone else who's in the same situation as us. I earn $120k/year + 15% bonus and my spouse brings in $25k/year from the VA benefits. so we are definitely somewhere in the middle class. we're still in disbelief that we purchase a home for almost a mill but we plan on raising our kids in the same home for the next 30 years so we don't mind the idea of not being able to eat out all the time and forgo a couple of vacations/year for our future kids.
 
alchemist said:
Hi All,

thanks for your responses, advice, and perspective. The seller ended up having multiple offers so we didn't get the price we were hoping for (900k) but after multiple counter offers, we ended up outbidding everybody by offering an extra $22k. hahahah. my spouse and I were so set on not going past $905k but there's something terrible about trying to outbid everybody + really wanting the house. we put 20% down despite the VA loan. we had been saving up the money for the last 5+ years so why not.

We're going to be house poor for the next couple of years but we won't ever be in the red as long as I keep my job. My job is pretty stable. Since this forum seems pretty anonymous, I guess it doesn't hurt to provide our incomes - in case it may help someone else who's in the same situation as us. I earn $120k/year + 15% bonus and my spouse brings in $25k/year from the VA benefits. so we are definitely somewhere in the middle class. we're still in disbelief that we purchase a home for almost a mill but we plan on raising our kids in the same home for the next 30 years so we don't mind the idea of not being able to eat out all the time and forgo a couple of vacations/year for our future kids.
Click to expand...

Was your spouse injured in combat? Does he clean the house, watch the kids while you work?

(Just asking)
 
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