Mortgage Down Payment Help

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robotfood540
Posts: 4
Joined: Tue Jun 05, 2018 8:38 am

Mortgage Down Payment Help

Post by robotfood540 » Tue Jun 05, 2018 2:34 pm

Hi everyone,

My girlfriend and I are about to pull the trigger on our first home. We were presented an opportunity to buy her father's house at a family discount and we would be stupid to pass up the opportunity given the housing market in the Boston area.

A little about us:
-Aged 30 (me) and 27 (her)
-Combined income of approximately $180,000/year
-No debt besides student loans, approximately $15,000 combined
-Retirement accounts consists of only employer sponsored 401k. We both only contribute the 6% needed to get the max match from our employer
-Have $75,000 saved

Here's the financial breakdown:
-Agreed purchase price of the house is $500,000. Trust me, you're not getting half the house for around this money in the Boston area.
-House was recently appraised for $600,000, providing us $100,000 in gifted equity
-In order to avoid paying PMI and burning money, we must out down 20% of the appraised value ($600,000 x 0.20 = $120,000)
-With the gifted equity of $100,000 we only need to put down an additional $20,000 cash for the PMI to be waived

Questions:
-How much on top of the $20,000 should we put down? We are currently saving $4800/month so we may have additional savings depending on when we close.
-What should we target for our emergency savings? Is $25,000 sufficient? Allowing us to put $50,000 down?
-Should we pay off all our debts with our savings and use the rest for the downpayment/emergency fund?
-Should we consider taking some cash and buying points? We had a rate of around 4.75% just a few weeks ago, but that has since skyrocketed to over 5%. Because my girlfriend has the poorer credit score of the two of us, she is driving our financing. She recently paid down some debts to increase her score quickly based on a credit optimizer utilized by our lending agent.

Basically, how can we best utilize our available cash and equity to lower our mortgage payment as much as possible while still maintaining an emergency fund and potentially getting ahead on our student loans.

Thanks everyone!

Easy Rhino
Posts: 3267
Joined: Sun Aug 05, 2007 11:13 am
Location: San Diego

Re: Mortgage Down Payment Help

Post by Easy Rhino » Tue Jun 05, 2018 4:44 pm

huh, weirdly, the mortgage professor website had two articles explaining your question about the cost-benefit of larger down payments, and also paying points.

https://www.mtgprofessor.com/A%20-%20Do ... Points.htm

tl;dr version: getting a down payment large enough to eliminate PMI and get in the most favorible possible LTV ratio has a good payoff. After that, the payoff of a larger down payment is simply equal to the interest rate of the mortgage.

Points are a good buy if your time horizon in the mortgage is fairly long. There's a calculator. Personally, we didn't pay points because estimating what's going on 8 years in the future seemed pretty unfeasible.

But you know, 5% interest rate sounds like a bummer on a mortgage. Can you be a bit patient on when you buy the house, and use that time to repair credit a bit?

creditboards.com is the go to resource (albeit terrifyingly unorganized) for credit repair, but here's the idea:

* ensure you pay your bills on time
* review both your full credit reports, from all three bureaus. You can use annualcreditreport.com
* if there are any inaccuracies that would lower score (like derogatory info on an account, duplicate accounts, late payments, or accounts that aren't yours) then challenge them with the bureaus
* decrease the utilization on your open lines of credit. You want to decrease both overall utilization, and per-line utilization. So start with the most-maxed-out card. Try to get lines below arbitrary breakpoints that might cross a threshold, like 90%, 50%, 20%, etc.
* Try to have the balances lowest when the cards cycle their statements, that's what gets reported on credit reports.
* paying down things like car loans or student loans doesn't really help the score (but don't miss payments).
* you say your only debt is student loans. so check for the first few areas to see if there's room for score improvement. if not, then you're probably stuck with the current rates.

Saving $4800 a month is a lot. if you really concentrate this, you might be able to improve credit score significantly in a couple months. And then qualify for lower mortgage rates.

The amount of your emergency fund you need to keep is up to you. Whatever helps you sleep at night. I'd personally be willing to drain it (to pay off cards) as long as we were both committed to bringing it back up to the desired level quickly. (that last part is crucial).

And remember that buying a new house is going to triger oh so much additional spending to furnish the new house, even if you think you're frugal. Like $10k-$30k.

Jablean
Posts: 250
Joined: Sat Jun 02, 2018 2:38 pm

Re: Mortgage Down Payment Help

Post by Jablean » Tue Jun 05, 2018 7:22 pm

Don't be house rich and cash poor. Put in enough to get rid of the PMI (good on you to even know what that is at 30) I paid on two houses FHA and VA before we had enough savings to go without. Go for a 30 year loan as it will give you the lowest payment (that's if interest rates aren't too different) you can always pay more in months when you have money but you aren't locked into the monthly cost if one of you loses a job.

Look into how you are going to title it. Since you aren't married yet you'll have tax consequences and also need to decide what to do if you break up. You won't have courts helping you how to decide to split things down the middle so make an agreement. I was only engaged on one house but it was only $80,000 so wasn't going to be a big deal, yours at $600,000 will be.

You have a good supply of cash if the $75,000 is in that and not the 401k. Pay points if it will lower your interest rate and then you can ignore your credit scores but remember it's a trade off as if you pay off fast you lose the benefits of a low rate. But I consider 3% low as I haven't taken out a HELOC in 20 years.

123
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Re: Mortgage Down Payment Help

Post by 123 » Tue Jun 05, 2018 8:29 pm

Have you and your girlfriend thought about how the house situation will be unwound if the relationships unwinds? Could either of you afford the property on your own? If the relationship unwinds and the property ends up in foreclosure that great discount from her dad just fades away.
The closest helping hand is at the end of your own arm.

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whodidntante
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Re: Mortgage Down Payment Help

Post by whodidntante » Tue Jun 05, 2018 8:34 pm

As long as you are at 80% LTV, I don't think the lender should care how much you put down. You can try another lender, maybe a credit union that holds their own notes would be more flexible.

robotfood540
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Joined: Tue Jun 05, 2018 8:38 am

Re: Mortgage Down Payment Help

Post by robotfood540 » Wed Jun 06, 2018 8:55 am

I am not worried about our relationship unfolding, though I certainly understand the risk. We have been together for 3 years, lived together for 2, and will be getting engaged at some point this summer.

My credit is in great standing and she has been slowly fixing hers since we have been dating. As stated, our lender ran some program which analyzed her credit and told her what to pay down to get a bump in her score as soon as possible. We are currently still waiting for a revised mortgage rate quote based on her revised score, but should know any day now. We hope it will be substantial enough to get us into the next best rate bracket and we can lock it in while we determine the best way to utilize our free cash.

We are under the assumption that this will not be our forever home and therefore buying points may not be worth it. Considering we are still young and without children who knows where life will take us in the long run. I am not sure if this is reason enough to not buy down points?

Everything I have read insists that mortgage rates will continue to climb and locking in a rate as soon as possible is a smart play. How long can rates be locked? If we could lock in a rate for even just 60-90 days the additional money saved alone could go straight towards paying off our student loans.

KlangFool
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Joined: Sat Oct 11, 2008 12:35 pm

Re: Mortgage Down Payment Help

Post by KlangFool » Wed Jun 06, 2018 9:04 am

robotfood540 wrote:
Wed Jun 06, 2018 8:55 am

I am not worried about our relationship unfolding, though I certainly understand the risk. We have been together for 3 years, lived together for 2, and will be getting engaged at some point this summer.
robotfood540,

1) From my own personal observation among my family members and friends, folks in your situation are more likely to end up in divorce: people that are in a relationship for a long time (5+ years) but not married until much later. Meanwhile, marriage between folks that only know each other for less than 2 years tends to last very long.

My nieces married their long-term boyfriends of 5 to 8 years. They were divorced 2 years later.

So, it may not be true in your case. But, please do not assume that the relationship is safe just because you were together for a long time. It tends to have an opposite effect.

2) The most common reason for a failure in marriage is the financial stress. By buying the house, you are adding financial stress to the relationship. With the house coming from her father, you had added complication.

3) Rent the house from her father until your financial situation improves. That would be my advice.

KlangFool

sterlingcooper05
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Joined: Tue Mar 04, 2014 4:06 pm

Re: Mortgage Down Payment Help

Post by sterlingcooper05 » Wed Jun 06, 2018 9:11 am

The problem with this deal is that it only works out if EVERYTHING works out....including both relationships with girlfriend and her father. This is a total cart before the horse scenario. Can she buy the house on her own and you rent from her in the meantime? It would be a much cleaner transaction among a non-married couple.

armeliusc
Posts: 278
Joined: Wed Dec 21, 2011 9:40 am

Re: Mortgage Down Payment Help

Post by armeliusc » Wed Jun 06, 2018 9:43 am

Hello,
If I were you, I would do the following:

- Only pay enough downpayment to avoid PMI (i.e. 20% down). Don't buy point, especially if you don't know for sure how long you'd be in the house. Rate is just what it is, no one really knows what it's going to do. We bought some point when we closed last year, and ended up that about 6 month later the rate
dropped and we got a no-cost refinanced. Compare maybe 30-year vs 20-year, and see how you feel. If the rates are not that different (i.e. less than 0.5%), 30 year gives you more flexibility. You can always prepay or refinance.

- Use some of your EF to abolish any other debt (e.g. student loan). You should still have sufficient EF. You can keep rebuilding it or redirect to increase your 401K. Personally, I'd do the latter, but this is your call.

Good luck!

robotfood540
Posts: 4
Joined: Tue Jun 05, 2018 8:38 am

Re: Mortgage Down Payment Help

Post by robotfood540 » Wed Jun 06, 2018 10:18 am

Darn, typed out a nice long response and it vanished. Oh well.

Again, thanks guys. I understand everyone's concerns about us not being married, but it is what it is. We were presented this opportunity by her father since he was going to sell anyways and we jumped at it.

To get back to the key questions:
-It's looking less likely that buying points is worth it considering we have no idea where we will be in life by the time the cost benefit comes to fruition.
-Is it advantageous to make sure we are get into a "conforming loan?" I.e. requiring us to put down a minimum of $46,900 vs. only the $20k down needed to avoid PMI?
-How long can a rate be locked in at no cost? If we could extend this then we could continue to take advantage of our situation and keep saving. This additional money would strictly go towards the EF or debts. No matter what, her father needs the money by September so he can buy a condo when his current lease is up.

JGoneRiding
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Joined: Tue Jul 15, 2014 3:26 pm

Re: Mortgage Down Payment Help

Post by JGoneRiding » Thu Jun 07, 2018 9:39 am

I th I k it's fine to.buy not married. Being married is no guarantee things will work. The advantage of marriage is there is an established court system for dealing with asset division. You won't have that advantage therefore what you should have is a clear way of titling property and a written out agreement should you dissolve.

To consider: does she get all the 100k equity or will you split all equity in the house

What if she wants to stay in the house and you want to leave and want money out.? How will that be split? How will you determine value?

daheld
Posts: 343
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Re: Mortgage Down Payment Help

Post by daheld » Thu Jun 07, 2018 10:41 am

At your income level, I would highly recommend killing off that remaining student loan and then maxing out your 401k's. It's going to be a lot harder after you take on a mortgage, but if you're saving $4800/month, there's no reason to not be putting it in a retirement account.

JoeRetire
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Joined: Tue Jan 16, 2018 2:44 pm

Re: Mortgage Down Payment Help

Post by JoeRetire » Thu Jun 07, 2018 11:15 am

robotfood540 wrote:
Tue Jun 05, 2018 2:34 pm
We were presented an opportunity to buy her father's house at a family discount and we would be stupid to pass up the opportunity given the housing market in the Boston area.
Are you sure this is where you want to live? Are you sure this is the best house for you long-term?

If this particular house wasn't on the market, would you still be looking to purchase a $500k home at this time? Just because the house is underpriced for the market, that doesn't mean it's the right choice for you. A $5M dollar house discounted to $4M still wouldn't be a good choice. Don't let a "great opportunity" cause you to purchase more home than you need.

My wife likes to brag that she got 40% off on a coat. But since she already had plenty of coats, it didn't seem like much of a bargain to me.

You wrote "Considering we are still young and without children who knows where life will take us in the long run." Have you and your girlfriend talked this through? Do you know if/when you might want children and how the work situation might change if you do? Could you afford the house payments on one income?
How much on top of the $20,000 should we put down?
None. Put down the $20k and keep the rest.
What should we target for our emergency savings? Is $25,000 sufficient? Allowing us to put $50,000 down?
I would tend to prefer the $50k in emergency funds. Having a home means having more emergency possibilities. But it also depends on the nature and dependability of your jobs/income.

Remember that a big house must be furnished, insured and maintained. And that bigger real estate taxes must be paid.
Should we pay off all our debts with our savings and use the rest for the downpayment/emergency fund?
You should not deplete your emergency fund to pay off your debts.

Instead, you should save more monthly and use that to pay off the student loans (depending on the interest rate of the loans).

Easy Rhino
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Joined: Sun Aug 05, 2007 11:13 am
Location: San Diego

Re: Mortgage Down Payment Help

Post by Easy Rhino » Thu Jun 07, 2018 11:34 am

Oh yeah, a conforming loan. you might get a lower rate if you pony up to keep it under that size limit ($464k?) you'll just have to look at the rate differential to see how long the payback is.

Or... I'm not sure if this is shady or not, have your dad reduce the sale price even further, but then after the house closes each give him an unrelated cash gift to make him whole.

Keep in mind, if you're only going to be in the house for a few years, then it's not going to be worth it to pay the realtor/relocation costs both ways to keep it and then sell it.

And I hadn't noticed you guys weren't married. If I was in this situation it would make things complicated. If you both are liable for the house (on the loan) then you'd both should be titled on it, and just yeesh.

robotfood540
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Joined: Tue Jun 05, 2018 8:38 am

Re: Mortgage Down Payment Help

Post by robotfood540 » Thu Jun 07, 2018 2:52 pm

Haha, I love the coat analogy. We definitely would have pulled the trigger for a similar house at the same price point. We actually explored the open market with a realtor and attended many open houses and considered putting in various offers. After all was said and done, this made the most sense. We get a house close to public transportation into the City where we both work, gain equity, and avoid the bidding wars, stress, etc. that come with purchasing a home.

The equity we gain is leveraged as a downpayment and therefore we only need to put down $24k to avoid PMI. Like I said, the Boston market is insane, unless you live here I am not sure you'd understand. Houses listed for $500k sell the same day as the open house for $100k over asking.

The reason we aren't putting our savings into retirement is because we have been preparing to buy a house and therefore keeping all our funds liquid. At this moment, I think our best bet is to put as little down as possible to avoid PMI, pay off our student loans, and still have approx. $40k for emergencies. At that point we will have an extra $600/month income that can be put to further build the emergency fund or be more aggressive for retirement.

We have a call with our lender tonight and we will discuss all scenarios of various amounts of money down including hitting the "conforming loan." We can look at the pay back periods for these amounts and deem if it's worth it.

-buzz-
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Location: USA

Re: Mortgage Down Payment Help

Post by -buzz- » Thu Jun 07, 2018 4:44 pm

Combining finances/debt or buying a house with someone your aren't married to is risky.

Since you're probably going ahead anyway... protect your interests the same as you would in any other business transaction.

Two pieces of advice:

(1) Before the purchase, execute a written property agreement that spells out your ownership shares (equal or unequal) and what will happen with the house in the (however unlikely) event that your relationship ends prior to being married. The agreement should spell out the terms and timeline for how the property partnership will be unwound if necessary. I would also put in the agreement how the monthly payments are to be shared. Finally, the agreement would also ensure that ownership passes to the surviving partner in case of death rather than to the deceased partner's estate.

Hardly romantic topics of conversation. However, you're talking about a $500k shared purchase which is further complicated by the involvement of her father.

(2) Get a professional home inspection before you buy. It will be worth the few hundred bucks it costs. Check the HVAC, electrical, roof, foundation, ensure no mold, etc. The inspection is to identify potentially expensive repairs and avoid buying into some kind of problem, even one the current owner doesn't know about. If the house is truly being sold $100k under market value, I would not negotiate about maintenance repairs based on the inspection.

Her father could be annoyed at the idea of having an inspection. It isn't about trusting him. It is about getting a professional opinion on all the working systems so you can properly plan for future repairs. (Plus, you want to know what you're buying and I assume you're not a pro in that area.)

Anecdote: On one home purchase, I paid for both a home inspector and an HVAC technician to check out the AC units. I had concerns about what appeared to be older AC units and whether they were adequately sized for the newly finished basement. The home inspector found a few minor things that were no big deal. However, the HVAC tech found one AC unit was leaking badly and the upstairs ductwork was infested with black mold. The current owner was present during the inspection and had no idea about the mold until the tech showed him. We withdrew our offer. The extra money spent on the HVAC tech saved us a lot of problems.

-buzz-
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Location: USA

Re: Mortgage Down Payment Help

Post by -buzz- » Thu Jun 07, 2018 5:07 pm

Easy Rhino wrote:
Thu Jun 07, 2018 11:34 am
Or... I'm not sure if this is shady or not, have your dad reduce the sale price even further, but then after the house closes each give him an unrelated cash gift to make him whole.
If the price gets too low on a family sale, the IRS might get curious and want to apply gift taxes.

http://www.crestico.com/realty/seller/s ... ket-value/

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