Down payment options?

Ok, here's my question - I'm almost 50, my wife is 2 years younger, we have been married 25 years and in the same home for 24 years.  We have always wanted a new "luxury style" home.  We both work, with an annual combined income of $205,000.  It is very unlikely that either one of us would lose our job.  Our years of service in these positions is 25 yrs plus.  We did not expect this recent real estate crisis, for us we would like to make it an opportunity.  We owe about 45% of our present home's current estimated value.  Combined we have about 275,000 in 401k retirement accounts.  We have been looking at the homes in our area for about 4 months, based on that I can tell we both like homes in the 750,000 to 1,000,000 range.  I have been pre-approved at 2 institutions.  Here's our dilemma - we haven't been saving money for a downpayment.  We have been putting money into our retirement accounts and raising 3 children.  Had we seen this coming years ago we could have set aside 150k.  What opportunities are available to us?  Who keeps 150 to 200k in a low return bank account?  It's just not the best use of that kind of money.   We believe we can uncover a good deal on a home that may not be available 5 years from now.  I will not take money out of these retirement accts.  It would just be foolish to do so.  Are we forced to wait?  A 5% down payment is not a problem but, I don't want to have to pay for Private Mortgage Insurance.                 Thanks for your advice.

Hello,

Well, you didn't mention how much the home you own now is worth, but you did say you only owed 45% of its value. The simple solution here is to sell your current home and then use the proceeds as your down payment on the new home. You can put in offers on these homes with a contingency that you sell your current home first before you can close. While not ideal this still can work for the right home and seller. You would need to get your home market ready and prepare for some juggling, but it happens all the time. Jumbo loans (over $417K) are not attainable with only 5% or in most case even 10% down, so you will not have that option anyway on a home in the $750-$1M range. You will need at least 20% down to get a decent mortgage. Please keep this in mind. Many 401K programs also allow for 'loans' so if you don't want to have to sell your current home and on paper you qualify to carry your current debt plus the 401K loan and the new homes mortgage, taxes and ins. you could entertain that, but this is risky, what if your home doesn't sell fast and you are then stuck carrying two homes mortgages and debt? You would then pay back your 401K with the proceeds when you do sell.

I think you sell your current home and then go for the dream home then. This is the less risk and out of pocket path and far less stress!

Feel free to call with any questions,

Dan - 847-277-1781

Hello Dan and others,

     I would estimate the value of our home in the current market at 450,000.  I mentioned above that I had been pre-approved, one was with my current mortgage holder (a credit union).  They have limitations on the amount of the mortgage, further divided as to the homes location (subdivision or not). A subdivision home location gets 20% more than one that is not - 500k vs 400k max.  The other institution was BAC - limited by your income etc...  With both I said we would keep our present home and rent it out, neither had a problem with that mainly because it wouldn't be hard to cover the mortgage + insurance + taxes.  Honestly, I was just testing the water with them.  I didn't know what they would say, it just allowed us to move faster should the right place/price be found and it is true I could rent the home and cover it's cost plus some.  Of course being a landlord is a hassle I would rather not have.  There is also the junk that 25 years in the same place tends to accumulate - that's what my wife calls it anyway.  Our thinking was if things were workable we could move and get our present home more presentable and keep it that way.

    Nothing is that easy, but that's how our plan evolved.  My wife and I have talked and in our discussions we've wondered would an institution allow us to use equity in our home; what if we took out a home equity loan and used that money for the down payment; we've read about pledged asset mortgages where we could pledge our's or ones 401k - don't know if they still exist or worked like that anyway; and in frustration we've said lets just stay in our home and save for 15 years, retire and then die here - but, this is not what either of us really wants.  Seems like a vicious cycle, we wish we were first time home buyers with our present income, seems like we would get every break then.  I'm sure it's frustrating for others as well and that includes realtors, lenders, borrowers, builders, buyers and sellers.  Should we look for Lease/Option homes or builders homes that are not mortgaged?  Our present plan is to wait out the Fall, if our favorite home gets picked off we'll have a runner-up or two, then in the doldrums of winter we might be more appealing with what we have to offer.  The frustrating thing is we're ready with a capital R.  It's a stupid dream that we've always had and for some strange reason I'm excited about doing.  It's very difficult and sadening when I know how happy it would make my wife.  I probably shouldn't have allowed it to go this far, I came to this website hoping there might be reasonable optiions I was unaware of. 

                                          Thanks for the advice.

Hi Lookintwo,

Decisions, decisions........Damned if you do Damned if you don't............

I understand your 'dilemma', but you really only have a couple of options when it comes down to it. By choosing to keep your current home AND buy a new one, you will have to qualify on paper to carry the current loan, the equity line loan (if that is what you do to get the down payment for the new home) AND the new homes' mortgage, taxes and insurance. Today's guide lines will not give you the rent collected on your current home as part of the equation. You need to be a landlord for 2 yrs and claim rental income on a sch. E to have the rents counted as part of your income. Please keep this in mind. You can maybe find a Heloc (Home Equity Line of Credit) to 90% but more likely only 85% of the current value. So, if your home is worth $450K you can maybe get out $175K if you only owe around $200K now. This loan is based on the prime rate plus a fixed margin and it may be low now but it will certainly go up. If you chose to do a fixed 2nd mtg the rates are up near 7% and this payment will shock you. The other option would be just a new 30 yr fixed and a cash out refinance to 75%LTV. This would get you about $135K, but certainly be a lower payment than a new 2nd in the long run.

I am going to stick with my original suggestion if you are set on the $1M home: Get your current home ready to sell, get rid of the 'junk', you don't need it and it will actually refresh you to unload it, trust me. If you have items you haven't 'touched' in over 2 yrs, e-bay them away. You already said you don't want to be a landlord and I have been one for years and it is not 'fun', it's a second job - full time, you need to commit to it. Now if you can carry all the mortgages comfortably, well then you can go for it too, but make sure you are 'comfortable' as in you have no renter for 3-4 mos at times.

My other suggestion may actually be the best for you both. Take cash out and totally, totally gut rehab/add on to your current home and make IT the dream home. This will save you huge, huge dollars, and if you love your neighborhood you will not be 'leaving' friends and neighbors. You could probably make your current home unbelievable for $150-175K and have all the bells and whistles and end up with half the mortgage you would take on with a $800K purchase. Go rent a home or apartment for 6 mos and don't even live in the home during construction. This way you can unload the 'junk', pick all the dream finishes your wife wants and colors and when it's done, move back 'home' to a brand new place with no 'junk' in it. Start watching HGTV.

Now if you just want out of this home period the end, then this doesn't work, but I think you owe it to yourself to have an architect come over and see what they can 'vision' for you. This way you will have a smaller mortgage and be set up for a far better retirement and also probably double the value of your home at the same time.

My two cents!

Call with any questions and enjoy your weekend!

Dan

312-952-8068

Dan,

     Thanks for the dialogue here.  I've had to think about your words for a couple of days to respond.  I agree with all you say.  You are very perceptive in regards to your mentioning of our friends and our neighborhood.  We would miss them as well our children who are all in College or Post-Grad programs would be further from their friends when coming back home.  Our home was always and remains the meeting place, and I quite enjoy the company and contact.  We are central to most everything and that is why I mentioned renting the home not being a problem. These are things we thought about and discussed with the kids prior to considering this.  I'm not sure the house would sell quickly, we are lucky that we don't owe what it is worth or even close.  It gives us some wiggle room.  The timing of the year might also be an issue.

     My wife and I entered the work force at a terrible time in the early '80's.  When we bought this home it was unfinished and interest rates were 18%. It took every dime we had to get into this home.  I later went back to school for a degree that would offer me a career in the area we wanted to live.  We had to rent the house during that time and I had to work full-time while being a full-time Professional - student to make up the difference and make sure there was some cushion.  Just for fun we had 2 children when I was a student as well, the third came a couple years later.  80% of our income is mine and 90% of our 401k monies are from my accounts.  It was well worth the struggle, and I would add my wife is smarter than me she just lacks the grit to fight the tide so to speak that I take and keep going.

     I'm not sure why I tell you all this other than to say I'm sure we want to move, that where we live now is not what we truly want.  We could obtain a second mortgage and make dramatic changes to the home.  I don't know that we would ever recoup that kind of investment in this home and more importantly that doing the work would change our opinion of the home .. ie money can't buy a view or move the highway.  My hope was that we as a couple are somewhat unique as potential mortgagees, but we have learned we are not.  Downpayments of the size required to buy the home we want must be rare, else these price range homes in our area would be selling.  The addage for real-estate has always been location, location, location, lately I've been thinking it's timing, timing, timing.

lookin twobuy:

I'm sure we want to move

Then as Dan as pointed out, you should sell your home and buy. As you pointed out, your situation is not all that unusual, but you thought it was. I often run into this scenario, where a buyer wants to buy, but first they need to sell the home they currently own.  I ask them why they haven't listed it for sale and they often reply, 'I haven't found the house I want to buy yet.' Selling your home prior to finding the one you want to buy is a much better problem to have than finding the home you REALLLLY want to buy, but you haven't even listed your house for sale, much less sold it.

You are also correct about the timing. A sucessful transaction will occur when the timing is right. Trying to buy before you sell your home has the timing all wrong. Call at least three real estate agents. Ask them for a listing presentation. It doesn't cost a dime. Ask them what homes they have listed recently and how much real estate did they sell last year. Ask for data on your neighborhood. Average length of time to sell, selling price as a percent of list price, comps, etc. When you find an agent you can trust, price it right, then LIST YOUR HOUSE!

While your house is listed continue to keep your eye on the market for the type of home you want to buy. After your home is sold, or at least under contract, you can then make an offer. With a preapproval in hand and the cash for the down payment in the bank you can drive a hard bargain. A seller will realize that you are a serious buyer and can close quickly ... as long as they will come down to your terms. Just make sure that you price your home right and make sure it shows well. A house that shows well and is priced right will sell in any market.

Good luck! It sounds like you know what you want and are ready to go for it. Step one, list your house! Otherwise the timing is all wrong.

I think you should "cifitsells" 

Agree, sell the house first.  Other things to keep in mind:  A) how long are you going to keep working?  You're 50 now...is retirement at 55 or 65 or 75?  Are you planning to put the dream house on a 5, 10, 15, 20, 30 yr mortgage?  B) Do both you and your wife agree on retirement goals?  Do you both have awesome pensions (government workers?)  Are you putting the full 15% or maximum into your 401k?  If no on the pensions and the 401k, I would re-evaluate your retirement goals.  C) Have you worked out a budget with the new mortgage payment?  You're currently making $200k per year, you only have a $200k mortgage and $275k in IRA/401k.  Your combined bring home pay is like $12k per month?  Are you sure you are ready to quadruple your mortgage?

Just my opinion....

I've been looking at the loan scenarios and wanted to ask one more question having reviewed the scenarios.  If my DTI is in line (33) and the LTV is less than 80% on a purchase -here comes the potentially stupid part - can a person put zero down?  Remember the above part where I said my wife was smarter than me.  I was hoping there was one female broker here who appreciated that comment.  Gentle responses please.

lookin twobuy:

can a person put zero down? 

On a jumbo loan . . . no.

Thank you for all your advice and support.  I will be putting my home on the market.  I appreciate the professionalism and honesty of all you responses.

                                   Thanks again,

                                          Now - Lookin' to Sell...