Housing prices have risen rapidly. Is it still possible to buy your own home in an expensive area?
In Episode 7 of the Real Life Planning video podcast, CERTIFIED FINANCIAL PLANNER™ Cynthia Meyer outlines how aspiring homeowners in expensive areas can realize their goals:
This week on Real Life Planning Podcast, Cynthia covers:
How renting is like dating [00:02:39]
Calculating your starting home budget using your rent [00:02:42]
How much of your take home can you afford to spend on housing? [00:05:24]
The great homebuyer program you may not have heard of [00:06:58]
How househacking can help you buy a home [00:10:02]
“…you can basically back into this number because you're already paying a mortgage. It's just not your mortgage.” --Cynthia Meyer
“Renting on the other hand is like a dating. It's something you should keep doing until you really sure you've met the one.” --Cynthia Meyer
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Host Cynthia Meyer and guests share real life stories of how they are realizing their financial potential.
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Transcript - Real Life Planning Podcast - Episode 7
[00:00:00] In the past four years, the median home price in the United States has gone up from about $264,000 to approximately $408,000 at the end of 2021. And if you live in New York Metro area, like I do, the median home price at the end of 2021 was $718,000. So it's hard to buy a house anywhere, but it's particularly hard to buy a house in an expensive area.
[00:00:26] Hi I'm Cynthia Meyer with the Real Life Planning Podcast and this is episode seven, How to Buy a House in an Expensive Area.
[00:00:42] Hi, I'm Cynthia Meyer with Real Life Planning and this is episode seven of the Real Life Planning Podcast, where we're going to talk about how to buy a house in an expensive area.
[00:00:52] So owning a home is a financial goal for many Americans, but for those of us who live in expensive metro areas, like the New [00:01:00] York City area, where I live.
[00:01:02] Boston, San Francisco, Los Angeles, Miami, Austin, right? How do you save enough for a home down payment when you are already paying super high rent as a percentage of your income?
[00:01:14] It can be done. But it's not likely to happen in a traditional way. A while ago in 2018, when I first started talking about this, I wrote a Forbes column about it and I'm going to refer to that a little bit today, things have only gotten crazier and crazier. So I want to talk through some principles about buying a house in an expensive area and you let me know in the comments, if this makes sense to you.
[00:01:39] Does it make sense to buy instead of rent?
[00:01:39] You know, you really need to make sure that it makes sense to buy. Buying a home is the largest financial commitment that you're going to make in your life. You have to make sure that it makes sense to buy instead of continuing to rent.
[00:01:51] And I've said this before, you've heard me say it on the podcast that real estate is like a marriage, right? The wrong choice can really mess up your life. [00:02:00] Renting on the other hand is like a dating. It's something you should keep doing until you really sure you've met the one. You're ready to settle down. You're ready to be in a committed relationship. So maybe people are happy dating and renting for a long time before they decide to commit. If you're ready to commit to a geographic location. If you have kids, that means you're committing to a school district. The next step is to evaluate if it makes sense in your geographic market.
[00:02:28] Is it cheaper to rent or buy?
[00:02:30] I'll steer you towards the New York Times rent or buy calculator. It's a really good one. You should go there and run the numbers if you haven't done so already.
[00:02:39] Learn what your starting home budget is
[00:02:39] The second thing I want to encourage you to do is to calculate your starting home budget from your existing rent that you're paying.
[00:02:47] So you can basically back into this number because you're already paying a mortgage. It's just not your mortgage. It's your landlord's mortgage interest and property taxes- assuming they're charging enough money in rent to cover [00:03:00] those things. So you use your rent as a starting point for how much you can realistically afford to pay every month and housing costs.
[00:03:08] I'll give you an example. If you are paying, you know, $2,800 a month in rent, then you should be able to pay $2,800 a month in mortgage, principal and interest, property taxes and property insurance. You may even be able to pay a little bit more, hopefully if you're not too squeezed on the rent.
[00:03:28] Get yourself a calculator and figure out how much mortgage can a $2,800 a month in rent afford me and use whatever rent that you're currently paying now. I'll put some suggestions in the show notes on some mortgage calculators that you can use that are easy to use and free.
[00:03:47] So you want to make sure you include your assumptions about your down payment, your mortgage term, your mortgage interest rate, private mortgage insurance, or FHA mortgage insurance if you're doing an FHA back loan. You don't want to forget [00:04:00] those things.
[00:04:00] If your rent currently include utilities, make sure you include that as well.
[00:04:05] Because when you're a homeowner, you're going to be paying your own utilities. Keep in mind, if you're increasing your home size, so let's say you're in a one bedroom apartment and you're looking to buy a three bedroom house, all of that stuff is getting to be proportionately more expensive.
[00:04:20] If your electric bill is a hundred dollars now, it could be two or $300 after you buy a home. So another thing I want to just give you a heads up on, if you haven't owned a home before, is that home maintenance is also a factor. You want to build that into your post home purchase budget.
[00:04:37] So make sure you account for it when you think about how much house can I really buy. I'll give you my 2 cents take it or leave it, is that your mortgage lender is probably going to approve you for more mortgage then you want to take with your first home. You don't want to be house poor, right?
[00:04:57] So fixated on paying your [00:05:00] mortgage and the related costs of the home that you can't do any enjoying life now. I like to call it like when I was in college, the "frozen vegetables and ramen noodles and tuna fish" diet. Like you don't want to be living that way, when you're home owner.
[00:05:14] You want to make sure maybe that you pick a budget that is going to be approximately the most comfortable, even in an expensive neighborhood. Probably not going to be more than 35% or so of your total take home pay. So some things to think about there. Let's assume you've run the numbers. You figured out how much mortgage does your current rent support. I'm going to encourage you to do a couple of things.
[00:05:42] The one is, don't fixate on a particular neighborhood. I was talking to a wonderful client the other day, who was really focused on this one particular neighborhood and it's starting to be out of their price range. I want to encourage you to expand your horizons a little bit and see if there's an [00:06:00] alternative neighborhood number one or two, your second or third choice, if you will, about where you'd be willing to live.
[00:06:06] Now, obviously if you've got kids and they're in a school district, that's a whole other ball game. You may feel really strongly about staying in that school district and I understand.
[00:06:13] Look at your trade-offs. Maybe you're going to be living somewhere where you can walk to the office. In fact, for many of us, the office is in our living room now, right? So that might not be as big of a consideration.
[00:06:24] You may be able to go far away and work remotely. On the other hand, as we mentioned, it may be worth paying to keep your child in a current school district. As the saying goes, you can have anything you want, you just can't have everything you want, especially with your first home purchase.
[00:06:39] Home Buyer Programs
[00:06:39] So if you're just getting started, I really want to invite you to explore different first time home buyer programs. If you go to the fha.gov website, you can actually find a list of home buyer counseling programs in your zip code. The other thing you might want to think about is going to a NACA, Neighborhood Assistance [00:07:00] Corporation of America. It's a nonprofit that helps get people into their first home. They have a lot of interesting resources in their home buyer education program.
[00:07:08] Lenders typically require that homeowner in a conventional what's called the conforming loan is going to put down 20%. But there are options, right?
[00:07:19] There's low down payment loans through the FHA, through NACA, as we talked about. If you're a veteran or you're buying in a rural area, then maybe other government programs that you can look to. If you're in a low down payment mortgage, for example, that may help you in a very expensive area, you'll pay mortgage insurance for awhile, but otherwise it might be impossible to save 20% of the purchase price in the New York city area, for example. That would take you very long time to do.
[00:07:44] Accumulating that kind of down payment is a challenge when you're already paying high rent. That doesn't mean that you can't buy a home. It just means that you're going to have to be a little bit more creative about how you think about it in [00:08:00] terms of investigating local programs. Go to webinars. Go to workshops. Find out every single first-time home buyer program there is in your region and see if you can participate.
[00:08:12] Then the other thing is you are going to want to downsize your lifestyle while you're saving for a down payment. Some of you may have heard me talk before about how when I was in my thirties actually gave up my car when I was living in the east bay of the San Francisco bay area because I was trying to pay off some student loans and save enough money to buy a house in the expensive bay area. You may have to make some trade offs. There may be something you have to give up for a little while in order to save that extra money for a down payment. So taking a really hard look at tracking your expenses and figuring out what can go, maybe not forever, but just for one or two years until you've put together a little nest egg.
[00:08:50] It's amazing how deciding to buy a home can be a really positive organizing principle around streamlining your budget and your [00:09:00] savings program.
[00:09:00] The other thing is, check into your credit score and try and do this ideally one or two years before you're ready to buy a home.
[00:09:07] Some people don't think about it until they're ready to apply for a mortgage. But ideally, start thinking about it well in advance. That way if you have a problem on your credit record you've got some time to correct it. You may have something that you need to pay off. You need to work on your ratios.
[00:09:25] For example, your credit utilization. How much of your available credit you're borrowing, something like that. You really want to maximize your credit score. Ideally, you're going to get that credit score above 760. Even if you can't get it above 760, get it as high as you can.
[00:09:40] Typically somebody with a credit score of less than 580 is probably not going to be a great candidate for home purchase at this time and has to work on some financial fundamentals before lenders, even a low down payment loans, is going to consider them. So another thing to think about is, and I'll end on this note, I think is if you're [00:10:00] in an expensive area, you may consider house hacking strategy.
[00:10:05] And what house hacking is buying a multifamily property, living in one unit and renting the other units out. If you are looking at a property, say a duplex for example, and one of the units is occupied and you're going to buy the property and move into the unoccupied unit, you can actually use the lease on the other unit as part of the mortgage application process for the loan.
[00:10:27] Now that has pros and cons that we'll get into at another time. Doing some kind of a multifamily purchase, let's say you have a friend that's willing to move into the other side and sign a lease with you, could be an interesting way to get into a home and make it a little bit more affordable.
[00:10:42] In conclusion, I really want to encourage you if you're in an expensive neighborhood that you do not necessarily have to be a renter forever. With some simple changes, starting with the idea that you're already paying a mortgage, you're just not paying your own mortgage, [00:11:00] can help you back into a realistic budget for buying if it meets your long-term goals. Thanks for listening. And if you have any additional comments or questions, leave them in the comments below, or send me an email at firstname.lastname@example.org. Have a great day.
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