Help me see around corners: We want to buy a house we *can* afford...and then it gets tricky

In My Humble Opinion
1

Okay, here’s the deal. There is a local horse property I have been drooling over since I first moved to this area 12+ years ago. It has a large house and nearly 1 1/4 acres–HUUUUUUGE here in suburban SoCal, especially considering most of it is flat. Since it backs up to a public equestrian park, it is zoned specifically for horses (and livestock–other folks on the road have goats), and no one can come buy it and put 3 houses on it or something. It has a cute little barn with 2 box stalls and a tack/feed room inbetween and is in better condition than the barn where my mare is currently boarded. It also has two large nearly new pipe corrals much further down the property that would be ideal for private boarders–removed from my animals and in their own place, but still bringing in income. It’s in a terrific neighborhood with great schools, and bonus, two of my good friends in the horse community would be just a couple of houses down. Double bonus: one of my 4yro son’s playdate buddies would also be just a few houses down. I could go on and on; in essence, it’s a great house with great property that I drool over.

It’s for sale at a price we can afford. We’ve spoken to our realtor and loan/mortgage person, and we definitely can afford the mortgage with room to spare. The problem is GETTING TO that mortgage.

Despite both of us having credit scores over 800, we’ve been told that no one is getting loans without 25% down or 25% equity. Contingency sales are out. But, we could ask my husband’s parents to cosign on the loan just for their name–we have more than enough to meet the mortgage, but having them cosign would make the bank feel a little more comfortable. Okay, that’s a possibility for the loan issue.

Next: Our current home is mercifully not upside down, but is worth just about what we owe on it. That’s not as big a problem asmost have with their homes right now, but if we sell we’d need to come up with about $30,000 for the closing costs.

We have more than that in investments, but it isn’t very liquid and I’m sure there are penalities for taking a loan against them. Otherwise…um…where do we find that??

So, we consider renting this current home–but the problem with that isn’t the need for $30,000 now, it’s having about $900/mo to cover the difference between what we could reasonably charge to rent it out and our mortgage on it. Now, we can afford the projected payments on the new property–but those payments + $900 more a month is (at least from my current viewpoint) borderline impossible. Additionally, renters mean we’re still on the hook to repairs for that home–which is more money and more. In the long run, though, renting the property is a great money maker. When we’re retired, we’d have a nice chunk of money coming in every month for its rent, at least theoretically.

And now I turn to you, Dopers, for insight, experience, ideas, and advice. We can afford the house and likely can get a loan for that house–but what to do with THIS one?

2

All I have to say is that, if you like horses and land, you’re in the wrong location. We purchased 15 acres in Ohio for $219K. It included a nice log house. And we currently live in it.

3

What can rent the current home for, and what is your mothly payment?
If you are going to rent it for $900 less than the mortgage the numbers do not look good.
That is a $10,800 yearly short fall. Now add property tax and insurance. Any repairs will increase the loss. This property does not look like a money maker but a money pit.

4

Here’s my two cents: you can afford the payments on the mortgage for the new place, but you really can’t afford the new place. So, you are basically trying to figure out how to buy something you really can’t afford. And, believe me, I’ve been there myself (also with real estate).

I’d suggest simply waiting until you can afford it and/or doing things to help you be able to afford it (i.e., make/save more money).

5

If I understand you correctly, you can afford the new place, but you can’t afford to sell the old place. If you can’t afford to sell your old house, I’m afraid that it looks like you can’t afford to buy the new one.

6

The good news is that in this market, it likely isn’t going anywhere. You could spend six month on a serious austerity plan–spend NOTHING you don’t absolutely have to–and then make them a low ball offer. The worst that can happen is that they say no. By that time, you’ll have more saved and they will be ready to listen to your offer.

And if it gets sold in the meantime, there will be other fabulous places. I know how hard that is to believe when you’ve got a particular one in mind, but it’s true.

7

Would the seller help you with the #30K closing costs, or take a second mortgage for that amount?

Instead of selling your current house, could you rent it for the cash?

8

I have no advice, but I hope you get it. My dream is to have a horse property someday.

9

Cat Whisperer, your words make very clear sense: we can afford to buy, but not to sell. (We can just almost afford to…ugh.) There is no harm in us staying in this house–it’s a great neighborhood and we’ve already invested in a completely remodeled (as in, down to the studs and floorboards) kitchen and several other smaller projects. We aren’t “OMG WE HAVE TO BUY THIS HOUSE NOWWWW!” which, thankfully, helps us think more clearly. We are realizing this is a very lucrative investment opportunity (that property has FAR more potential to increase in value, in addition to bringing in cash) that coincides with my lifelong dream to sit at a table and sip my morning coffee, watching my horses graze through the window.

But, I think we may have underestimated rent. We may be able to get something that is closer to our monthly mortgage–about $400-$500 in the hole as opposed to $900-$1000. That’s nice, but STILL a chunk of monthly money.

Annie X-mas, I don’t think so as the current owners just had a “notice of default” filed, so I don’t think they’re in a position to help us with anything. Boo.

10

I would strongly recommend against renting if you know going in it won’t cover your expenses on the property - that sounds like a recipe for financial disaster. Save yourselves the trouble and just go flush $500 down the toilet now, without getting the hassle of tenants. :slight_smile:

11

Now. I don’t know anything about real estate, and this is based on only what I have seen on the news. But. I wanted to put it out there and see how bad an idea it was. In the news there have been a lot of stories of people walking away from houses they are underwater on and letting the bank foreclose. They can afford the payments, but it doesn’t make financial sense to do so.

Since you are buying the new house with your in laws as cosigners and you will have the loan anyhow. Could you weather the credit storm of just walking away from the old mortgage? What’s the downside to that? Selling the house loses you money. Keeping the house and renting it loses you money. You don’t want the house anymore. Your credit will take a hit, but the big purchase will have happened already. So, you stop paying your old mortgage and wait for the house to be foreclosed upon.

Where is the hole in my logic? It seems risky. It’s a solution much better suited for people who really owe more than the house is worth. And, I doubt I could ever stomach messing up my credit like that. But, other than that it’s a solution that fits with solving the problem. Plus. Horses! Neat! None of this will be a worry once you start training horses that are winning triple crowns.

12

California’s not a non-recourse state. That means that the mortgage holder can very easily get a deficiency judgment against you if you walk away.

13

This is incorrect - California is a non-recourse state for purchase money loans. It isn’t if it was a refinance. But even with a refinance loan, to get a deficiency judgment, the lien holder would have to go through a judicial foreclosure. That’s much more expensive and time consuming than a trustee’s sale foreclosure, so it almost never happens.

14

As to the dilemma for the OP - it depends a lot on how you feel about your local market. If you think things have bottomed out where you are, you might not find a better time to buy. It might be worth the pain of selling on the other side.

The decision about selling on the other side is also somewhat dependent on how you feel about the future of the market. Assuming that you can rent your current property for about $900 less than your current mortgage, that’s $10,800 a year. I’d assume more than that because you could wind up taking time to find a tenant, you might be between tenants for a few months down the line, etc. If it’s more like 12-13K per year, then what you need to do is decide if you think that the house is going to regain that much value between now and the time you decide to sell it. In some markets, it might. Some markets might still be in decline for another year or two.

15

Ruffian, I hate putting it this way, but you’re planning on doing what put so many people under water recently. You don’t sound like you can afford to do this. If you had your current house sold, committing to the new one might make sense. But you’re putting all of your assets and credit on the line, and any unseen costs or market fluctuation could sink you. If you time and money, put it into your current house, in the most economical ways possible, and increase it’s future value for the time when you can sell. Until then, continue to save for your dream house. Relative property values will stay about the same even if property inflation occurs again, so you won’t lose by waiting.

16

Thank you for the correction. Now you’ve got me wondering, is it hard to refi in California? I’m in Michigan (also a non-recourse state), and re-fi’ing is as easy as pie.

17

First thing I’d do is check that assumption. Call a dozen banks, credit unions and mortgage companies – a mix of local and national. Credit is hard to come by, but perhaps not * that * hard.

18

We’re certainly seeing a lot of them with the interest rates so far down. It’s not really much different than doing a purchase loan (not as impossible as the news media makes it sound, by the way). You still have to qualify based on real income, as opposed to a few years ago when they were doing almost all stated income loans. And the property has to appraise as well.

19

I think you should talk to a mortgage broker. I got a mortgage this past summer with a low down payment. Your credit has to be good, and they ask for a lot more proof of EVERYTHING than they used to, but it still may be doable. If you are able to afford to kick in on part of the mortgage to (potential) renters, I’m wondering if you can price your current home to sell instead of listing at the top of its range.

It may work. At the very least, it can’t hurt to try.

20

FHA loan not an option on that type of property? We just bought our house with 3.5% down, using an FHA loan.