Can we afford to buy house in Bay Area?

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nicetohave
Posts: 12
Joined: Wed Apr 11, 2018 9:29 pm

Can we afford to buy house in Bay Area?

Post by nicetohave » Sun Jul 08, 2018 6:55 pm

Facing a difficult financial decision. We live in Bay Area and want to buy a house.

Current situation:
- Salary + Bonus: 210K
- RSU: 300K a year
- 401k: ~100K total, maxing out every year
- Current house equity: ~400K (assuming I sell it today and exclude all closing costs)
- Cash: 250K in money markets account(waiting to add to downpayment)
- Have separate emergency fund for 3-4 months income.

Major Expenses:
- Kids day care, school: 2K monthly

House cost in my area is 1.7M, with 650K down, it'll be 1.05M. Affordability calculator shows it's on 42%-43% debt-to-income, which is a big stretch based on just salary and bonus.

If I understand correctly, banks do not take into account RSUs?

Do you think it's good or bad decision from financial perspective? If it's bad, what house price limit would you recommend?

tim1999
Posts: 3469
Joined: Tue Dec 16, 2008 7:16 am

Re: Can we afford to buy house in Bay Area?

Post by tim1999 » Sun Jul 08, 2018 7:03 pm

Your post is a little confusing and I don't understand the situation..you own a house in the Bay Area already with 400k in equity and you are looking to buy a different one, yes or no? What is the value of your current house, the current payment amount, and why do you need to move to another house?

TheAncientOne
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Re: Can we afford to buy house in Bay Area?

Post by TheAncientOne » Sun Jul 08, 2018 7:12 pm

If you go to First Republic Bank, which specializes in jumbo mortgages, they'll take RSUs into account. The issue will be how many you have in each of the next several years. I'm pretty sure they discount them as well since high tech stocks have been known in the dim past to go down sharply.

47Percent
Posts: 321
Joined: Tue Oct 29, 2013 9:59 pm

Re: Can we afford to buy house in Bay Area?

Post by 47Percent » Sun Jul 08, 2018 7:30 pm

nicetohave wrote:
Sun Jul 08, 2018 6:55 pm
Facing a difficult financial decision. We live in Bay Area and want to buy a house.

Current situation:
- Salary + Bonus: 210K
- RSU: 300K a year
- 401k: ~100K total, maxing out every year
- Current house equity: ~400K (assuming I sell it today and exclude all closing costs)
- Cash: 250K in money markets account(waiting to add to downpayment)
- Have separate emergency fund for 3-4 months income.

Major Expenses:
- Kids day care, school: 2K monthly

House cost in my area is 1.7M, with 650K down, it'll be 1.05M. Affordability calculator shows it's on 42%-43% debt-to-income, which is a big stretch based on just salary and bonus.

If I understand correctly, banks do not take into account RSUs?

Do you think it's good or bad decision from financial perspective? If it's bad, what house price limit would you recommend?
I am assuming that your current home is not in the bay-area.

Are you asking if the banks will lend you, or whether you should do it at all in the first place?

If it is the former, the best way is to pre-qualify and see what they say about 42-43%. I have known mortgages issued at that level since you are putting down 40% in down payment.

The new Tax law is definitely going to be a bummer for you. About a quarter of your mortgage payment and more than half of your property taxes will not be deductible. That's about $23K in lost deduction.

Even if the banks don't consider the RSU's, if and when they vest they should provide enough cushion that you can probably bring your loan down by paying back the principal -- but unless you refinance your payments will remain the same. So you will have to wait for a favorable interest rate environment and re-qualify.

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CyclingDuo
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Re: Can we afford to buy house in Bay Area?

Post by CyclingDuo » Mon Jul 09, 2018 12:50 pm

nicetohave wrote:
Sun Jul 08, 2018 6:55 pm
Facing a difficult financial decision. We live in Bay Area and want to buy a house.

Current situation:
- Salary + Bonus: 210K
- RSU: 300K a year
- 401k: ~100K total, maxing out every year
- Current house equity: ~400K (assuming I sell it today and exclude all closing costs)
- Cash: 250K in money markets account(waiting to add to downpayment)
- Have separate emergency fund for 3-4 months income.

Major Expenses:
- Kids day care, school: 2K monthly

House cost in my area is 1.7M, with 650K down, it'll be 1.05M. Affordability calculator shows it's on 42%-43% debt-to-income, which is a big stretch based on just salary and bonus.

If I understand correctly, banks do not take into account RSUs?

Do you think it's good or bad decision from financial perspective? If it's bad, what house price limit would you recommend?
In a previous post you mentioned that you "need" to move to a bigger house than your current house. In the type of market you are in, I would really rethink that and learn to live in a small space - even with small children (people throughout the world do this with no troubles day in and day out). We lived in a very small space (apartment) with 2 small children in a major European city for a decade and did just fine. I would think that this would allow you to continue with your saving's plan, build up more equity, and set a target down the road for a larger home when the debt-to-income ratio is much more in your favor.

Just Google living in a small space and you will get tons of links.
"Everywhere is within walking distance if you have the time." ~ Steven Wright

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yukonjack
Posts: 565
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Location: Rocky Mountain West

Re: Can we afford to buy house in Bay Area?

Post by yukonjack » Mon Jul 09, 2018 12:58 pm

CyclingDuo wrote:
Mon Jul 09, 2018 12:50 pm
nicetohave wrote:
Sun Jul 08, 2018 6:55 pm
Facing a difficult financial decision. We live in Bay Area and want to buy a house.

Current situation:
- Salary + Bonus: 210K
- RSU: 300K a year
- 401k: ~100K total, maxing out every year
- Current house equity: ~400K (assuming I sell it today and exclude all closing costs)
- Cash: 250K in money markets account(waiting to add to downpayment)
- Have separate emergency fund for 3-4 months income.

Major Expenses:
- Kids day care, school: 2K monthly

House cost in my area is 1.7M, with 650K down, it'll be 1.05M. Affordability calculator shows it's on 42%-43% debt-to-income, which is a big stretch based on just salary and bonus.

If I understand correctly, banks do not take into account RSUs?

Do you think it's good or bad decision from financial perspective? If it's bad, what house price limit would you recommend?
In a previous post you mentioned that you "need" to move to a bigger house than your current house. In the type of market you are in, I would really rethink that and learn to live in a small space - even with small children (people throughout the world do this with no troubles day in and day out). We lived in a very small space (apartment) with 2 small children in a major European city for a decade and did just fine. I would think that this would allow you to continue with your saving's plan, build up more equity, and set a target down the road for a larger home when the debt-to-income ratio is much more in your favor.

Just Google living in a small space and you will get tons of links.
This is great advice no matter what the question is.

ShowMeTheER
Posts: 358
Joined: Mon May 24, 2010 9:12 am

Re: Can we afford to buy house in Bay Area?

Post by ShowMeTheER » Mon Jul 09, 2018 1:20 pm

With those numbers, yes you should be fine buying at that level. Your call if you should do so.

Plenty of banks will just take your recent income into account, so if your last year or two reflects plenty of vesting events in the RSU's then it'll come through both in paystubs and W-2 and make your approval much easier.

If not, then you may need to find a bank that is more familiar, as a prior poster mentions.

DavidW
Posts: 77
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Re: Can we afford to buy house in Bay Area?

Post by DavidW » Mon Jul 09, 2018 2:11 pm

CyclingDuo wrote:
Mon Jul 09, 2018 12:50 pm
nicetohave wrote:
Sun Jul 08, 2018 6:55 pm
Facing a difficult financial decision. We live in Bay Area and want to buy a house.

Current situation:
- Salary + Bonus: 210K
- RSU: 300K a year
- 401k: ~100K total, maxing out every year
- Current house equity: ~400K (assuming I sell it today and exclude all closing costs)
- Cash: 250K in money markets account(waiting to add to downpayment)
- Have separate emergency fund for 3-4 months income.

Major Expenses:
- Kids day care, school: 2K monthly

House cost in my area is 1.7M, with 650K down, it'll be 1.05M. Affordability calculator shows it's on 42%-43% debt-to-income, which is a big stretch based on just salary and bonus.

If I understand correctly, banks do not take into account RSUs?

Do you think it's good or bad decision from financial perspective? If it's bad, what house price limit would you recommend?
In a previous post you mentioned that you "need" to move to a bigger house than your current house. In the type of market you are in, I would really rethink that and learn to live in a small space - even with small children (people throughout the world do this with no troubles day in and day out). We lived in a very small space (apartment) with 2 small children in a major European city for a decade and did just fine. I would think that this would allow you to continue with your saving's plan, build up more equity, and set a target down the road for a larger home when the debt-to-income ratio is much more in your favor.

Just Google living in a small space and you will get tons of links.
+1

the new home will put a lot of pressure on your finances. Perhaps you can do a remodel where space could be more efficiently used. I have seen space in Asian where space is use very efficiently...

This guy took it to the extreme....

https://www.youtube.com/watch?v=WB2-2j9e4co

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Top99%
Posts: 332
Joined: Sat Apr 22, 2017 9:30 am
Location: Austin, TX

Re: Can we afford to buy house in Bay Area?

Post by Top99% » Tue Jul 10, 2018 8:08 am

DavidW wrote:
Mon Jul 09, 2018 2:11 pm
CyclingDuo wrote:
Mon Jul 09, 2018 12:50 pm
nicetohave wrote:
Sun Jul 08, 2018 6:55 pm
Facing a difficult financial decision. We live in Bay Area and want to buy a house.

Current situation:
- Salary + Bonus: 210K
- RSU: 300K a year
- 401k: ~100K total, maxing out every year
- Current house equity: ~400K (assuming I sell it today and exclude all closing costs)
- Cash: 250K in money markets account(waiting to add to downpayment)
- Have separate emergency fund for 3-4 months income.

Major Expenses:
- Kids day care, school: 2K monthly

House cost in my area is 1.7M, with 650K down, it'll be 1.05M. Affordability calculator shows it's on 42%-43% debt-to-income, which is a big stretch based on just salary and bonus.

If I understand correctly, banks do not take into account RSUs?

Do you think it's good or bad decision from financial perspective? If it's bad, what house price limit would you recommend?
In a previous post you mentioned that you "need" to move to a bigger house than your current house. In the type of market you are in, I would really rethink that and learn to live in a small space - even with small children (people throughout the world do this with no troubles day in and day out). We lived in a very small space (apartment) with 2 small children in a major European city for a decade and did just fine. I would think that this would allow you to continue with your saving's plan, build up more equity, and set a target down the road for a larger home when the debt-to-income ratio is much more in your favor.

Just Google living in a small space and you will get tons of links.
+1

the new home will put a lot of pressure on your finances. Perhaps you can do a remodel where space could be more efficiently used. I have seen space in Asian where space is use very efficiently...

This guy took it to the extreme....

https://www.youtube.com/watch?v=WB2-2j9e4co
I personally wouldn't be comfortable with the housing cost to income ratio required (unless the RSUs are pretty much guaranteed) but I have a couple of things you might ponder prior to deciding:
1) How secure do you feel your job/salary are? Specifically, if your company laid you off how confident are you in finding another job in the Bay Area with comparable pay?
2) Housing prices in the Bay Area have been in an uptrend for a while now but have a history of crashing during recessions. Do you anticipate staying in the Bay Area for a long time? Would you be able to sleep at night if you were temporarily upside down on a big mortgage?

What I am getting at is an expensive house can be kind of a ball and chain so make sure you are comfortable with that.
Adapt or perish

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Pajamas
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Re: Can we afford to buy house in Bay Area?

Post by Pajamas » Tue Jul 10, 2018 8:18 am

Seems like you would be making yourself very house poor and as a consequence be placing yourself in a very risky financial position. If you prefer to consume most of what you earn rather than invest it then you might go that route regardless of the risks. If you don't want to start by looking at what you need and can reasonably afford in the context of your overall financial planning, then start by seeing how much money you can get someone to lend you and go from there.

You might be able to rent more than you could buy if maximum consumption is your goal.

nicetohave
Posts: 12
Joined: Wed Apr 11, 2018 9:29 pm

Re: Can we afford to buy house in Bay Area?

Post by nicetohave » Wed Jul 11, 2018 12:53 am

tim1999 wrote:
Sun Jul 08, 2018 7:03 pm
Your post is a little confusing and I don't understand the situation..you own a house in the Bay Area already with 400k in equity and you are looking to buy a different one, yes or no? What is the value of your current house, the current payment amount, and why do you need to move to another house?
Sorry for confusion.

I own apartment in Bay Area and want to move to a house. Current home value ~1M, principal balance ~550K.

I need to move to improve quality of house (space and backyard) and don't deal with various HOA restrictions (like having hardwood floors).

nicetohave
Posts: 12
Joined: Wed Apr 11, 2018 9:29 pm

Re: Can we afford to buy house in Bay Area?

Post by nicetohave » Wed Jul 11, 2018 12:54 am

TheAncientOne wrote:
Sun Jul 08, 2018 7:12 pm
If you go to First Republic Bank, which specializes in jumbo mortgages, they'll take RSUs into account. The issue will be how many you have in each of the next several years. I'm pretty sure they discount them as well since high tech stocks have been known in the dim past to go down sharply.
Makes sense. Thanks for the info!

nicetohave
Posts: 12
Joined: Wed Apr 11, 2018 9:29 pm

Re: Can we afford to buy house in Bay Area?

Post by nicetohave » Wed Jul 11, 2018 12:56 am

47Percent wrote:
Sun Jul 08, 2018 7:30 pm
I am assuming that your current home is not in the bay-area.

Are you asking if the banks will lend you, or whether you should do it at all in the first place?

If it is the former, the best way is to pre-qualify and see what they say about 42-43%. I have known mortgages issued at that level since you are putting down 40% in down payment.

The new Tax law is definitely going to be a bummer for you. About a quarter of your mortgage payment and more than half of your property taxes will not be deductible. That's about $23K in lost deduction.

Even if the banks don't consider the RSU's, if and when they vest they should provide enough cushion that you can probably bring your loan down by paying back the principal -- but unless you refinance your payments will remain the same. So you will have to wait for a favorable interest rate environment and re-qualify.
Sorry for confusion. Current apartment is in Bay Area, where I live.

I'm asking whether I should do it at all and if banks would lend me -- so, both.

nicetohave
Posts: 12
Joined: Wed Apr 11, 2018 9:29 pm

Re: Can we afford to buy house in Bay Area?

Post by nicetohave » Wed Jul 11, 2018 12:58 am

CyclingDuo wrote:
Mon Jul 09, 2018 12:50 pm
In a previous post you mentioned that you "need" to move to a bigger house than your current house. In the type of market you are in, I would really rethink that and learn to live in a small space - even with small children (people throughout the world do this with no troubles day in and day out). We lived in a very small space (apartment) with 2 small children in a major European city for a decade and did just fine. I would think that this would allow you to continue with your saving's plan, build up more equity, and set a target down the road for a larger home when the debt-to-income ratio is much more in your favor.

Just Google living in a small space and you will get tons of links.
That's all right, but I'm afraid, that with always rising housing in Bay Area, it'll be harder and harder to get good debt-to-income ratio to buy a house.

nicetohave
Posts: 12
Joined: Wed Apr 11, 2018 9:29 pm

Re: Can we afford to buy house in Bay Area?

Post by nicetohave » Wed Jul 11, 2018 1:03 am

Top99% wrote:
Tue Jul 10, 2018 8:08 am
I personally wouldn't be comfortable with the housing cost to income ratio required (unless the RSUs are pretty much guaranteed) but I have a couple of things you might ponder prior to deciding:
1) How secure do you feel your job/salary are? Specifically, if your company laid you off how confident are you in finding another job in the Bay Area with comparable pay?
2) Housing prices in the Bay Area have been in an uptrend for a while now but have a history of crashing during recessions. Do you anticipate staying in the Bay Area for a long time? Would you be able to sleep at night if you were temporarily upside down on a big mortgage?

What I am getting at is an expensive house can be kind of a ball and chain so make sure you are comfortable with that.
Of course, RSUs income in not 100% guaranteed and value may fluctuate.

1. I feel very secure with job/salary, with current market it's easy to find a new job.
2. I anticipate staying in Bay Area for long time (at least 10 years I guess).
3. Difficult question with sleeping, clearly I have a sleeping problem right now, because I couldn't afford to purchase a home before and I will have even worse sleeping problem during recession. Hard to measure which sleeping problem is worse ;)

nicetohave
Posts: 12
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Re: Can we afford to buy house in Bay Area?

Post by nicetohave » Wed Jul 11, 2018 1:06 am

Pajamas wrote:
Tue Jul 10, 2018 8:18 am
Seems like you would be making yourself very house poor and as a consequence be placing yourself in a very risky financial position. If you prefer to consume most of what you earn rather than invest it then you might go that route regardless of the risks. If you don't want to start by looking at what you need and can reasonably afford in the context of your overall financial planning, then start by seeing how much money you can get someone to lend you and go from there.

You might be able to rent more than you could buy if maximum consumption is your goal.
Good thought. I'm not that good to look at the problem from this angle and, clearly, don't have a habit to think in this perspective.

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CyclingDuo
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Re: Can we afford to buy house in Bay Area?

Post by CyclingDuo » Wed Jul 11, 2018 6:51 am

nicetohave wrote:
Wed Jul 11, 2018 12:58 am
CyclingDuo wrote:
Mon Jul 09, 2018 12:50 pm
In a previous post you mentioned that you "need" to move to a bigger house than your current house. In the type of market you are in, I would really rethink that and learn to live in a small space - even with small children (people throughout the world do this with no troubles day in and day out). We lived in a very small space (apartment) with 2 small children in a major European city for a decade and did just fine. I would think that this would allow you to continue with your saving's plan, build up more equity, and set a target down the road for a larger home when the debt-to-income ratio is much more in your favor.

Just Google living in a small space and you will get tons of links.
That's all right, but I'm afraid, that with always rising housing in Bay Area, it'll be harder and harder to get good debt-to-income ratio to buy a house.
My point was if you could save much more than $650K to put down (38% of the $1.7M you mentioned), then your debt to income ratio would be better due to the larger downpayment. What if you could save enough to put down 50% for example?
"Everywhere is within walking distance if you have the time." ~ Steven Wright

gotester2000
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Re: Can we afford to buy house in Bay Area?

Post by gotester2000 » Wed Jul 11, 2018 10:08 am

If it is your dream then go for it - but financially it will be a stretch. It does not seem a need for you but a want - the question is do you want to spend half your life in fulfilling one want? A million in mortgage means you are going to end up paying double that amount in 20-30 years. Add to it the initial down payment, other costs and maintenance spent over one want. You will find it difficult to provide for other needs.

sunspotzsz
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Re: Can we afford to buy house in Bay Area?

Post by sunspotzsz » Mon Aug 27, 2018 6:05 pm

We make less than you but bought a house in Sunnyvale last year.

It was a good decision.
Stay the course! | | Californians can save energy, reduce emission and get paid by signing up with ohm. | | https://ohm.co/sunspotzsz

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Hyperborea
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Re: Can we afford to buy house in Bay Area?

Post by Hyperborea » Mon Aug 27, 2018 6:20 pm

Top99% wrote:
Tue Jul 10, 2018 8:08 am
2) Housing prices in the Bay Area have been in an uptrend for a while now but have a history of crashing during recessions. Do you anticipate staying in the Bay Area for a long time? Would you be able to sleep at night if you were temporarily upside down on a big mortgage?

What I am getting at is an expensive house can be kind of a ball and chain so make sure you are comfortable with that.
The core Bay Area (Santa Clara valley, the peninsula, the south-east bay) all held up pretty well during the last few recessions. It's the houses further out where people were either stretching very hard to buy a house or to buy more house for the money where the values really crashed. Those places were too far out for most people to consider commuting from. Some of those areas were hammered so bad during the 2008 recession that the towns went bankrupt (e.g. Vallejo). The moral is to not buy too far out even if it costs you some more now. The appreciation will likely be better and the downside risk smaller.
"Plans are worthless, but planning is everything." - Dwight D. Eisenhower

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