California is an expensive real estate market. I’m currently looking at the possibility of buying a house in Sacramento, as the Bay Area is really outside my price range. At most, I am looking to buy a house valued at $500,000. Currently, I qualify for a $400,000 house. However, that valuation was based on my old income and doesn’t include the rise in my salary. I’m fairly confident that I can afford and will qualify to purchase a $500,000 house. But, that begs the question: should I buy a house? The biggest hindrance for me isn’t so much paying the monthly mortgage. It’s coming up with the downpayment and closing costs. I’m looking at purchasing the house in April of 2019, or soon thereafter. However, I am far away from my goal.
Saving For A Downpayment
The first hurdle I have to overcome is to save for a downpayment. If I obtain an FHA loan, then I should be able to put down a 3.5% downpayment. That comes out to $17500. Ouch. The good news is that a potential mortgage lender has advised that I could receive a conventional loan at 3% down. If so, then that would bring the downpayment cost to $15000. So, how am I going to afford this?
In a few days, I will have access to around $11000. Basically, I transferred the funds from one account to another. I have about $3000 in credit card debt remaining. My plan is to wipe out my credit card debt, which will leave me with $8,000.
Based on my savings rate, I’m confident that I can save the remaining $7000 by April from my paycheck. I should be able to do this while maintaining the minimum level of contributions to my dividend portfolio, which is around $1100 per month.
Saving For Closing Costs
The second hurdle I have to overcome is saving for closing costs. In general, I can expect to pay around 3% of the purchase price in closing costs. That’s another $15000. It could even be higher. The problem is, I don’t know where this money is going to come from.
The one thing I was thinking about was to greatly reduce the minimum level of contributions to my portfolio. Specifically, I would contribute $800 less to my portfolio and save that amount of money towards closing cost. But, that’s only an additional $4800 by April. At best, assuming everything worked perfectly, even combined with additional savings from my paycheck, I would only be able to save an additional $5000. That would still put me about $5200 short of the $30000 I would need for both the down payment and closing costs.
I’m not sure it’s a good idea to reduce the contributions to my dividend portfolio. I don’t want to get into the habit of limiting those contributions. But, in an ideal world, the house would be a good long-term investment (hopefully), and so the temporary pause or reduction to my dividend portfolio might be worth it.
I refuse to reduce the contributions to my retirement accounts to buy a house.
Should I Buy A House?
This is the key question. I realize that I haven’t provided a lot of details of my underlying financial situation. But, the fact that I was able to qualify for a $400,000 house already should hopefully give you an indication that my financials are intact. However, the fact that I don’t readily have the closing costs available is also an indication that if I bought the house, I would be house rich and cash poor.
Do you think that I should reduce or pause my contributions to my dividend portfolio to save to buy a house? Of course, an easy solution would be to just save longer. After all, there is nothing magical about the April timeframe (other than I’m just impatient, and I would benefit from lower interest rates, which seems to be constantly on the rise).
Do you think I should buy a house outside the state of California? I’m looking at buying a beachfront property in South Carolina in Myrtle Beach. I think I could get a decent property for $300,000, but it would be out-of-state for me. I would rely on a property managing company just like I do for my current out-of-state rental property.
Finally, I believe my overall financial situation will improve with the purchase of another house. Once I buy a house, I will have roommates to help me pay for the mortgage. That way, I will likely be living mortgage free or at least for less than I’m paying now in rent.
Conclusion
There are certain things that won’t happen in order for me to buy my next house. I don’t intend on borrowing money from family or friends to get the downpayment or closing costs. I also won’t put any of that on my credit card. I did that for my car and regretted it afterward, although the downpayment there was only $2000.
In addition, saving for the downpayment and closing costs would be beneficial because it would force me to drastically cut back on wasteful spending. Wasteful spending is way too prevalent right now, and it might not be a bad idea to cut back. In any case, I will be looking on various programs that assist with either the downpayment or closing costs or both.
I do admit that I would be cash poor, but I fully expect that would be temporary. I also realize that buying a house comes with added expenses such as property taxes, insurance, unanticipated repairs, etc. But, I feel that my current financial situation is stable and adequate enough to handle such situations. But I do admit, I am having second thoughts about whether it’s a good idea to buy right now.
So, what do you think? Are you familiar with the Sacramento market? Do you think it’s a good time to buy in Sacramento? Regardless, do you think I should buy a house? This would be house number two for me. My plan is to own several houses by the time I retire.
Let me know your thoughts by commenting below.
Based on what you have shared here, I would not buy a house if it were me. There are too many “should” and “hopefully” assumptions for me to be comfortable, and I am not in favor of ever being house rich / cash poor. If you do want to proceed with buying a house, I would encourage a longer timeline to save for the down payment and closing costs–plus it gives you the opportunity to demonstrate to yourself that the wasteful spending is under control.
Wish you all the best and look forward to hearing how this decision pans out for you.
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Fair point DivvyDad. Once I make the decision, I will be sure to post it. Given the size of the anticipated purchase price, I am certainly more cautious and trying to make sure that I make the right decision for me. But, I will definitely be posting my decision online. In fact, I’m sure there will be more posts on this topic along the way.
Saving longer for the downpayment is certainly an option, just not an ideal one for me. Another potential option is to buy a cheaper house in Sacramento. We will see.
I’ve had very different views on this over time Div Portfolio. I used to think it would be best to spend as little as possible on a home, but a couple of times we have really stretched ourselves to buy what we really want, and have had absolutely no regrets, because we absolutely love our home. The asset value has increased too (let’s not get into a debate as to whether the home is an asset or not!), but we don’t really focus on that at all. What matters is that you can comfortably service any mortgage – I don’t disagree with DivvyDay when he says he doesn’t want to be ‘cash poor’. You don’t want it to be a burden that cramps your lifestyle significantly for years to come.
Cheers, Frankie
Frankie @ Fully Franked Finance recently posted…Fund Performance Update September 2018 – Stayin’ Alive (and Ahead)
I don’t disagree Frankie. I don’t want to be cash poor either. Whatever house I buy, if that happens, will definitely be something I am comfortable with. In fact, I will still want to buy another house even after the next one. Living with roommates will help solve the cash-poor situation – in fact, I expect that it will improve my current cash flow situation. But I certainly don’t want to make a rushed decision or one based entirely on emotions. Thanks for the comment as always.
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