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  1. #1

    Default Can we afford a house in 2 years?

    We are currently enjoying our childless life in the city but we'd like to buy a house, settle in the suburb and start a family before we turn 30 in 2020.

    We are earning 150k income pre-tax. Our current take home is around 8k monthly after taxes and my 401k contribution, wife no 401k. We are still contributing max to our IRAs and I started contributing max to my 401k last year.

    We increased our net worth from 60k to 125k last year 2017. We believe we can double it to 250k in 2 years. Excluding IRA and 401k, we can save around 30k cash per year if we really make an effort.

    Here's the breakdown of our net worth
    Cash: 7.5k
    Emergency Fund: 15k
    ALL Retirement Accounts: 67k
    Two vehicle: 35.5k

  2. #2
    We are debt free, have excellent credit score and our job security is not a concern.

    BUT housing market here in SoCal are so expensive. I was just looking around and for example, even a decent 3 bedroom house in Northridge (a suburb 25+ mile / 1+ hour commute from Los Angeles) is around 650-700k.

    I know most people will say that we should put 20% down payment to avoid PMI. I listen to Dave Ramsey and he even said only do a 15 year mortgage. That being said, let say we want a 700k house, in theory we need to save 140k. That's a lot of money and will take us forever to save that much.

    Let say we want a cheaper house for 650k. Realistically, we can save 10% down payment in 2-3 years. If that is the case and we do a 30-year fixed with 4% interest rate, payment will be around $3,400 including taxes, insurance, and PMI. That's probably manageable with our take home but not with 15-year fixed. 15-year fixed is around $5,000 - wow that's more than half of our take home.

    so my question is, what's wrong in this picture? Are we doing something wrong? What can we do to put ourselves in a better position to be able to buy a house in the future?

  3. #3
    You're not doing anything wrong. You are living in a crazy expensive housing market. Your theoretical $140K down payment would buy you a decent house for cash where I live.

    Rules of thumb are not set in stone. It looks like you are in a financial position to put down less than 20% on a 30 year note and suck up the PMI until you can refi at some point in the future. If that doesn't sound appealing, you're other option is to keep renting, keep saving, or relocate to a cheaper area.


  4. #4
    Living in California myself, I'd say that Dave's rules are unreasonable (for this market). I personally wouldn't do a 15-year mortgage, because of the higher cost of housing.

    Being unwilling to put less than 20% down and to have such a huge mortgage, we personally started with a condo so that we could earn equity towards a house. Is what more financially conservative people do in those situations ~ condos or townhomes. (In our case, we gave up and moved to a cheaper city, but that was our original plan and is what many of our family and friends did).

    As an aside, I just had a PM from a forum member about my experience with high cost of housing (seven figure real estate). The reality is I doubt I know anyone with more than a $300k or $400k mortgage in the Bay Area. They bought their single family homes with significant amounts (hundreds of thousands of dollars) of condo/townhome equity.

  5. #5
    You definitely aren't doing anything wrong. The problem is the market, not you.

    So what's wrong with the picture is that the recommendation is to spend 2-3 times your income for your home. You make 150K so that puts you in the market for a house up to 450K, except those houses don't exist where you live.

    Brian is correct that rules of thumb aren't absolutes, but they exist for a reason. Sure, you can spend 4-5 times your income on a house, but that's going to throw off the rest of your finances for the next 30 years. It will impact your ability to save for retirement. It will impact your ability to save for college for the kids. It will impact every aspect of your financial life.

    I don't know how people do it.




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