How long should it take to have a downpayment?

Gohabsgo_IHB

Gohabsgo_IHB

New member
One things is sure: it takes a long time and a lot of discipline. However, it is doable and has been done in the past.



I've done a quick analysis where I looked at someone starting with no capital. I assumed this person would put a fixed % of his gross salary aside and invest it. Then I looked at what type of home this individual would likely be looking for (as a % of his salary), then I looked at when does the savings equal 20% of that home.



Let's look at the variables:

Note: Base Salary is not a variable because everything else is a function of it.

Savings: The higher the percentage of your salary you set aside, the faster you will have your downpayment ready.

Interest Rate: The higher the interest rate, the faster you will have your downpayment ready.

Salary Increase: The bigger your annual salary increase, the harder it is for your savings to catch up with. This one might not seem logical, but if you have a 10% raise, you will likely be looking for a 10% more expensive house, therefore your savings would be a lesser percentage of that new more expensive home.

Ideal Home as % of Salary: The more leverage you use, the longer it takes to save enough downpayment for that home. You'll have a 20% downpayment quicker for a home that is 3.0 times your salary vs a home that is 4.0 times your salary.



In my initial analysis, I used 6% salary increase, 8% interest rate, 10% of gross salary set aside for downpayment, and home at 4.0 times gross salary. In this case it would take 8 years to save 20% of that home!



I did another scenario with conservative assumptions: 3% salary increase, 5% interest rate, 7.5% of gross salary set aside for downpayment (closer to 10% of net), and home at 4.0 times gross salary; it would take 10 years to save 20% of that home.



Under an aggressive scenario: 6% salary increase, 10% interest rate, 15% of gross salary set aside for downpayment (around 20% of net), and home at 4.0 times gross salary; it would take 5 years to save 20% of that home.



My point is, people shouldn't expect to save 20% in less than 5 years and it can easily take 10 years if you don't really work hard on it.



Hope this brings some perspective on the work and financial management skills needed to own (and deserve) a home in the future. I really wished there was a class in school who taught this to people.
 
I think that sounds about right. My own personal finances with amount saved and time it took falls into that. (Although I don't know if I can consider my down having come from "saving" - I bought my house low and sold high(er), so that's where the majority of it comes from.) However, I think in addition to the 20% down, a buyer also needs to have a certain number of month's worth of payments in reserve, right? I have heard varying opinions on how many months that is. For me, I am keeping at least about $20k off to the side for those purposes and not including that in the amount saved for the down.
 
[quote author="Roo" date=1224203576]This one might not seem logical, but if you have a 10% raise, you will likely be looking for a 10% more expensive house, therefore your savings would be a lesser percentage of that new more expensive home.

Ideal Home as % of Salary: </blockquote>


Its interesting that so many people think about 'what they can afford'. I've been simply thinking about what I 'need', not what I can afford. I need a 2 bedroom. I need one room to sleep in, another for an office/guest room, a place to watch movies.



I'm hoping for a 4 or 5% raise. An extra few hundred bucks for me is just going to go right into investments. I'm sure some day I"ll have a family and actually need a 4 or 5 bedroom place, so I'll get one of those then. *shrug*
 
Assuming a house price of 3x my current income, I managed to go from nothing to 20% down in about 42 months. I made 401k contribs the entire time, though I did cut back my payroll contribs to 5% for most of this period.



It can be done... One just has to put their foot down and say "enough is enough" and start living way below one's means. Every cost has to be scrutinized. Drive a cheap car, get a roommate, eat at home, stay the hell out of Nordstrom's, etc.
 
25, why a house then if no family? what's the longest possible scenario that you might have your bachelor pad before needing to trade up because your future wife doesn't like the poker table that's doubling as a dining table. (which btw i don't get what the fuss is about anyway. built-in cupholders? i mean, what could be more perfect for kids, no?)
 
[quote author="effenheimer" date=1224210879]Assuming a house price of 3x my current income, I managed to go from nothing to 20% down in about 42 months. I made 401k contribs the entire time, though I did cut back my payroll contribs to 5% for most of this period.



It can be done... One just has to put their foot down and say "enough is enough" and start living way below one's means. Every cost has to be scrutinized. Drive a cheap car, get a roommate, eat at home, stay the hell out of Nordstrom's, etc.</blockquote>


For the same scenarios as in the initial post, it would take respectiely, 6 years, 8 years, and 4 years. You are slightly better than the aggressive scenario, good for you!
 
[quote author="25w100k+" date=1224207851]Its interesting that so many people think about 'what they can afford'. I've been simply thinking about what I 'need', not what I can afford. </blockquote>


This is understandable, but I am not sure it is applicable in real life.



Q. Why do you work?

A. To make money



Q. Why do you need money?

A. To buy what I want and have a lifestyle that I enjoy



So, in theory, you are working to have a certain lifestyle. It is up to you to decide what lifestyle you want and how badly you want to work for it. Given that you have a pool of money, you can decide to spend it as you want, but in theory, you should consume it all over your lifespan. Meaning, that some of your money you will spend, but you can donate or leave it to future generations. All in all, at some point you make a decision about how much you are willing to spend on certain things. For some, it's a car, others a home, restaurants, vacations, church, children, etc.



So if you buy a lesser home and save money, it's because you value that excess money more if spent elsewhere.



As far as I am concerned, I look at how I spend the money I have in a pie chart. I can say that I am willing to spend X% of it on specific goods (such as a home) and I will try to get as much as I can on it. That's what it means for me to get a home that I can afford. It doesn't have to be more or less than my neighbor, I could earn less money than him, but have a bigger home because I'm willing to sacrifice other things and vice-versa.
 
I think this calculation also depends on what is a realistic "starter home" in the area.



For Irvine, it means condo or town home. If your expectation is a 3/2 SFR, you'd have to buy in another city.



My parents saved for about 7 years before buying their town-home in Buena Park. During that time they saved very little for their retirement.



I made the choice of putting as much as I can into tax-deferred retirement fund as early as I can, thus I could only afford to buy condos instead of SFR's. Was that a right choice? Time will tell.



If I had been smarter or better informed, I'd have used City of Fullerton's Downpayment Assistance Program many years ago. It's no longer offered, but if anyone is curious:



http://www.cityoffullerton.com/depts/city_manager/focus_on_fullerton/2003/february.asp

<em>

If owning your own home seems out of reach for your family, the City of Fullerton may be able to help make that dream come true.



The Downpayment Assistance Program provides financial assistance to qualifying applicants who are first-time homebuyers.



Under the program, loans may be made to qualifying applicants who are expected to provide a minimum of 3 percent down on the home price. Participants must be at or under 70 percent of the HUD median family income.



Homes purchased must be within the Fullerton city limits, and must be the applicant's principal residence.



The down payment assistance will be furnished as a 30-year, no interest deferred loan. Maximum loan amount is $45,000. Terms are no payments for the first 15 years of the loan, with payments on the principal only for the duration of the loan. The balance must be repaid on sale or transfer of the property or the end of the loan term.



Loan applications will be processed on a first-come basis.</em>



=============================================



The program is now administered by OC Community Services:



http://egov.ocgov.com/portal/site/ocgov/menuitem.4981dc715fc6e27bdadd603d100000f7/?vgnextoid=2ca190236dbda110VgnVCM1000005b00610aRCRD&vgnextfmt=default



Mortgage Assistance Program (MAP)



<em>The County's MAP provides silent second loans to assist low income first-time homebuyers, with annul incomes not to exceed 80% of the Area Median Income (AMI). The loans are designed to help pay for down payment and/or closing costs to purchase a home. The 3% simple interest, deferred payment loan has a term of 30 or 45 years depending on the funding source, and a maximum loan amount of $40,000. Homebuyers must occupy the property as their primary residence. There is a 1% minimum down payment required for this program and the total sales prices shall not exceed 85% of the Orange County median sales price for all homes, which as of October 2004 is $454,750 (85% of $535,000). All applicants are required to attend a homebuyer education workshop.



For additional information on MAP or to get pre-qualified, please contact Affordable Housing Clearinghouse (AHC), the County's non-profit service provider, at (949) 859-9255. </em>
 
[quote author="Roo" date=1224214903][quote author="25w100k+" date=1224207851]Its interesting that so many people think about 'what they can afford'. I've been simply thinking about what I 'need', not what I can afford. </blockquote>


This is understandable, but I am not sure it is applicable in real life.



Q. Why do you work?

A. To make money



Q. Why do you need money?

A. To buy what I want and have a lifestyle that I enjoy



So, in theory, you are working to have a certain lifestyle. It is up to you to decide what lifestyle you want and how badly you want to work for it. Given that you have a pool of money, you can decide to spend it as you want, but in theory, you should consume it all over your lifespan. Meaning, that some of your money you will spend, but you can donate or leave it to future generations. All in all, at some point you make a decision about how much you are willing to spend on certain things. For some, it's a car, others a home, restaurants, vacations, church, children, etc.



So if you buy a lesser home and save money, it's because you value that excess money more if spent elsewhere.



As far as I am concerned, I look at how I spend the money I have in a pie chart. I can say that I am willing to spend X% of it on specific goods (such as a home) and I will try to get as much as I can on it. That's what it means for me to get a home that I can afford. It doesn't have to be more or less than my neighbor, I could earn less money than him, but have a bigger home because I'm willing to sacrifice other things and vice-versa.</blockquote>


I totally see your point, I just have a different philosophy on life... I'm not working to really 'support' my lifestyle. Well, of course thats part of it, but also because I have career goals, and the current job is part of the path.



To me, an additional $10k, $20k, even $40k a year isn't going to change my life at all. I'll just drink more expensive wine and have a faster BMW. Thats about it. Maybe a nicer zip code. In the grand scheme of things, *shrug*.



Now, if I have a family someday, then money will be more important, because the wife and kids cost $$$. Perhaps one day i'll start my own business, so extra cash can help with that. But i'm not planning on nickle and diming my way to being a multimillionaire....
 
[quote author="25w100k+" date=1224220249]Now, if I have a family someday, then money will be more important, because the wife and kids cost $$$. Perhaps one day i'll start my own business, so extra cash can help with that. But i'm not planning on nickle and diming my way to being a multimillionaire....</blockquote>


Save those extra dollars for daycare, 529/education IRA contributions, etc.. The cost of kids is a killer...
 
[quote author="ipoplaya" date=1224226293][quote author="25w100k+" date=1224220249]Now, if I have a family someday, then money will be more important, because the wife and kids cost $$$. Perhaps one day i'll start my own business, so extra cash can help with that. But i'm not planning on nickle and diming my way to being a multimillionaire....</blockquote>


Have you read the Millionaire next door. In the book, it states these millionaires do nickle and dime. That's how they get rich, stay rich.
 
[quote author="25w100k+" date=1224220249]To me, an additional $10k, $20k, even $40k a year isn't going to change my life at all. I'll just drink more expensive wine and have a faster BMW. Thats about it. Maybe a nicer zip code. In the grand scheme of things, *shrug*.</blockquote>


Wow, really, so if you get a raise, you say 'Thanks, but not thanks....this other coworker will enjoy it more"?



$40k might not change how you live today, but save it and it will have tremendous impact on your future life...save it and it might save 1 or 2 years of your working life.
 
He did not say that he will pass on the raise, he said he'll upgrade his BMW....3 series to 5 series to 7 series...or I guess he said faster BMW...so maybe that means to an m3 or m5
 
i'm still saving for the right time to purchase in Irvine. Its been 5 years so far, although i'll say that i'm in a slighly different catagory.

It just depends upon what your goals are and what you want to do.

-bix
 
[quote author="biscuitninja" date=1224247055]i'm still saving for the right time to purchase in Irvine. Its been 5 years so far, although i'll say that i'm in a slighly different catagory.

It just depends upon what your goals are and what you want to do.

-bix</blockquote>
5 years? Same here.
 
In mid-2003, for the first time in my life, I was in the financial position to buy a home. I'd been on the job for six months and had my debt under control. However, I felt that there was a nasty housing bubble brewing and I refused to buy. I only started seriously saving for a house about 42 months ago.



If only I'd known just how far out of control the housing bubble would get, I'd have jumped-in with both feet back in 2003. In my opinion, 2003 should've been the top, then a sluggish and flat housing market for a few years while general inflation caught up. We see how wrong that idea was...
 
[quote author="WestparkRenter" date=1224280189][quote author="biscuitninja" date=1224247055]i'm still saving for the right time to purchase in Irvine. Its been 5 years so far, although i'll say that i'm in a slighly different catagory.

It just depends upon what your goals are and what you want to do.

-bix</blockquote>
5 years? Same here.</blockquote>


Well technically I had owned 7 homes at that time. Once they were all sold, I had more than plenty... Ever since I've just been a stingy bastard waiting for cost to come down....

anyways good luck

-bix
 
If you go from living alone to being married with no kids, it gets much easier to save. Few expenses are exactly double of living alone, and many are considerably less, especially rental housing. I am assuming both people are reasonably responsible and frugal.



In my experience, four things tend to swamp all others in savings: 1. Making more money, but not spending more. 2. Lower housing costs, e.g., roommate or spouse vs single. 3. Getting rid of all credit card debt. 4. Having a car which is paid off. There are some exceptions to that last one. If the manufacturer is really desperate and it is actually 0% financing, it's probably worth it. Skipping the coffee at Starbucks is more of a symbolic gesture.



As many of the people on this blog know, I have a crazy level of savings, and with falling prices I may buy a house for cash. I also sidestepped the market crash and have a positive portfolio return this year.
 
[quote author="MalibuRenter" date=1224391367]If you go from living alone to being married with no kids, it gets much easier to save. Few expenses are exactly double of living alone, and many are considerably less, especially rental housing. I am assuming both people are reasonably responsible and frugal.



In my experience, four things tend to swamp all others in savings: 1. Making more money, but not spending more. 2. Lower housing costs, e.g., roommate or spouse vs single. 3. Getting rid of all credit card debt. 4. Having a car which is paid off. There are some exceptions to that last one. If the manufacturer is really desperate and it is actually 0% financing, it's probably worth it. Skipping the coffee at Starbucks is more of a symbolic gesture.



As many of the people on this blog know, I have a crazy level of savings, and with falling prices I may buy a house for cash. I also sidestepped the market crash and have a positive portfolio return this year.</blockquote>


Agree, agree, agree. Before I buy anything I ask myself, "Do I NEED this? Or do I just want it?" Chances are if I've gotten along without it, I don't need it and put it back. Making more but not spending more is hard for us Americans to come to grips with but is ultimately so very important in getting ahead. Good tips, Malibu. It sounds like you have a great outlook and definitely deserve your mountain of cash. Kuddos!
 
[quote author="MalibuRenter" date=1224391367]If you go from living alone to being married with no kids, it gets much easier to save. Few expenses are exactly double of living alone, and many are considerably less, especially rental housing. I am assuming both people are reasonably responsible and frugal.



In my experience, four things tend to swamp all others in savings: 1. Making more money, but not spending more. 2. Lower housing costs, e.g., roommate or spouse vs single. 3. Getting rid of all credit card debt. 4. Having a car which is paid off. There are some exceptions to that last one. If the manufacturer is really desperate and it is actually 0% financing, it's probably worth it. Skipping the coffee at Starbucks is more of a symbolic gesture.



As many of the people on this blog know, I have a crazy level of savings, and with falling prices I may buy a house for cash. I also sidestepped the market crash and have a positive portfolio return this year.</blockquote>




Glad to know I might not be dirt poor in ten years if I get a wife.... :-D



Now, what do you think about using a HELOC to buy a car? You can write off that interest...definitely saves some money...



Cash for a depreciating asset just seems like such a bad financial move.
 
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