My wife and I are about to close on our dream home. At first we thought – there is no way we can afford this. But we did. It has been a tough and stressful journey so I wanted to examine what we did in a case study so you can learn from our experience so you can afford your dream home.
The Dream Home Decision: Need vs Want
My wife and I work 40 miles from where we live. The commute was not bad. We worked in the same office park so we commuted together. When my daughter was born, she went to daycare right across the street from my office. In August of last year, my daughter started going to private school and things changed. We put her in private school because we had to. We could not get back to where we lived before 6:00 p.m. on a reliable basis to pick her up from after-school care. There was a great private school about 7 miles from our office that we agreed upon. In early October, we realized that our commute increased from 45 minutes each way to an hour and 15 minutes each way. That last 7 miles of our commute added a half hour of driving time each way . Life suddenly became stressful.
Just over 10 years ago, my wife moved to be closer to me while we were dating. She lived and worked in the city and I lived and worked in a suburb. The place where my wife lived was very close to our current office locations. While she lived at her apartment, she regularly rode her bike through one particular neighborhood. This was her dream neighborhood. Every house backed up to the woods. The houses were built 20 years ago and still looked great. No two houses looked the same. The neighborhood had two pools, an exercise room, tennis courts, a soccer field and a play ground. Shopping was just minutes away. The wow factor was overabundant. It just so happened that the school we chose for our daughter was right outside of the dream neighborhood. In fact, it only took 4 minutes to drive from car line to the front of the neighborhood.
But there was a catch! The cheapest houses were $100,000 more than what our current house was worth and money was already tight with the private school decision. The dream neighborhood would have to wait.
We needed to move though. Stress was building up.
The Dream Home: The Initial Budget
At the time that our search began, we were paying $1,100 a month for our mortgage. With our savings in gas, we estimated that we could afford an extra $200 a month for the mortgage payment. We also knew that by moving, we could go longer without buying a new car. With a 20% down payment, our house budget was $220,000. But how could we afford a $44,000 down payment. We had access to about $20,000 for the down payment. But that is far shy of the $44k we needed.
Luckily I had just finished ready Rich Dad Poor Dad by Robert Kiyosaki. One of Rich Dad’s tenants is never say I cannot afford it. That is being lazy. You don’t challenge yourself. Instead, say, “How can I afford it?” In Rich Dad fashion, I went to my advisers. I called my financial adviser at Merrill Lynch and he connected me with a mortgage consultant. I explained my situation and told him that I was interested in keeping my current home as a rental. He asked me the typical income questions and then asked me about my assets both inside and outside of Merrill Lynch. I told him about our 401k’s and he suggested a 401k loan. I learned that a 401k loan allowed you to make a loan to yourself that can be paid back over 20 years. I created a spreadsheet and figured out that by taking out a 401k loan and paying it back over 20 years, we would have $50,000 less in retirement. My retirement number is $4 million so $50k less was not a big deal. Once I factored in keeping the house, I realized that I would have earned $600,000 in rental income after the house was paid off and held an asset that was worth $600,000 as well. That addition of $1,200,000 in assets more than made up for the $50,000 loss in retirement savings. We were ready to go.
The next problem to conquer was the closing costs. We needed about $10,000 for closing on top of the $44,000 down payment. We had some cash in savings, but since things were tight, I did not want to touch our current savings if possible. So, I turned off my 401k contribution that allowed me to start stockpiling cash.
The Dream Home: Finding the Right House
The budget was set at $225,000 and we knew where the down payment would come from. My wife started looking more aggressively at Zillow and Realator.com watching for houses that came on the market. We knew the neighborhood we wanted but we could not afford it. We started looking at different neighborhoods around the dream neighborhood. We found many houses that met our criteria but none of them felt right. We took time after work each day to drive to different neighborhoods to see what traffic would be like after work. The driving led us to conclude that we wanted something very close to my daughter’s school. I did not want to spend an extra $100,000 only to get back 20 minutes each way.
With this in mind, we had settled on four neighborhoods other than of our dream neighborhood. The stalking began. All the sudden two houses came up in our dream neighborhood for $245,000. I called our mortgage guy and asked him if we could get approved for $245,000 and he said yes and sent us the approval letter. A mistake I made, that we did not discover until later, is not specifically asking him for how much we could be approved. We thought our ceiling was $245,000 which continued to limit our options. We called the Realtor that we used to buy our current house and asked him if he could represent us in the city where we were looking. He waffled back and forth for three days before telling us no. What! I’ve never seen a real estate agent turn down a client but it happened to us. I called a friend from Grad School who was a partner at Jacksonville Wealth Builders. While his company did not normally represent buyers like myself, he made an exception and assigned one of his agents to us. Four days had passed and one of the two houses already had an accepted offer on it. We learned that this is very common as hedge funds are coming into Florida buying up inventory in that price range.
We asked our agent to show us two houses in our dream neighborhood. The one house that was on the market for $245,000 and a foreclosure that was listed for $299,000. The $245,0000 house was overpriced by about $25 a square foot. We went in with an offer at $195,000 which was just below the average price per square foot and required a new roof. We received a counter offer for $225,000. We countered back at $205,000. We did not hear back right away and started talking. The house was a bit smaller than our current house, but that was not a problem. However, the rooms were much smaller and we would likely have to buy all new furniture. That would be costly. That Monday we withdrew our offer. The second house we looked at was listed at $299,000 and needed a lot of work…I loved it. It was a two story house that needed $50,000 worth of work just to move in. This included a new roof, all new floors, a new master bathroom and kitchen (they were literately falling apart). But my wife hated it and we started calling it the scary wallpaper house because there was a very large bug crawling up one of the walls in the living room.
A few weeks later, we found the house we are now buying. It went on the market as a foreclosure. It is a great looking house that needed a lot of cosmetic repairs. The bones of the house were great. The house was listed for $289,000 so we put an offer in for $237,000. At this point, we knew we could go up to $255,000 by dipping more into our savings. Each offer took a week for the bank to respond. It was nerve racking. The bank came back at $287,000. We knew the bank would be anxious to get the house off of their books at the end of the year, so we were patient. We went back at them at $237,000. Yes, you read that correctly. We did not increase our offer at all. This was the advice of our agent who had bought many foreclosures in the past and I loved it. That offer got rejected, so we went up to $240,000 and that offer was rejected. Next came the surprise.
My wife called me on Veterans Day and a house in an adjacent neighborhood came on the market for $249,000. The house looked great and it was well under valued. My wife and I had a discussion before we made an offer and set a strict limit as we knew a bidding war would likely ensue. We went in at list price and was informed that there were three other offers on the table. We increased the offer by $4,000 with a promise to close in 28 days because a fast closing was important to the seller. I tried to get a hold of my mortgage guy to see if $245,000 was the maximum amount for which we could be approved. He did not get back with me. This was not the first time I had trouble communicating with him. We lost that house but I quickly found a new mortgage guy at US Bank. At this point, I found out that we had a much higher ceiling in what we could borrow. It was time to be more aggressive with our dream house.
A month of negotiations had gone by on our dream house and the end of the year was getting closer. I met with my agent at the house for another look around. We set a target price on the house at $260,000 and I handed the negotiations over to her. She came back with a final offer from the bank at $265,000 and the requirement to close before the end of the year. We accepted it!!!
The Dream House: Making the Budget Work
If you recall from earlier decisions our monthly payment was supposed to be $1,300 a month. A house at $265,000 with a 20% down payment leaves us with monthly payment of $1,600 (HOA dues included). Where did I get the additional money? With a current payment of about $1,100 a month we needed to find $500 to pay our mortgage. Here is how we did it.
- A shorter commute led to gas savings = $200
- The neighborhood had a gym, so we could cancel our Gym Membership= $58
- I will start applying the yard pest and weed control myself = $50
- Cut back spending on my blog = $50
- Refinance a student loan = $75
- Discontinue DirecTV = $100
While some of these items were painful like the student loan and the television, they were necessary to achieve our dreams. I’ll gladly pay an extra two thousand dollars in student loan interest over 10 years in order to eliminate stress from my life and achieve my dreams now. Making good financial decisions in life is very important, but the purpose of good financial decisions is to allow you to live out your dreams.
Dream Home: Lessons Learned
- Stretching yourself financially is very stressful. You and your spouse will fight. Just make sure you keep talking the entire time and keep your end goal in mind.
- You reap what you sow. My wife and I have been very prudent in our savings. We put almost 1/3 of our money earned in savings each year and keep our expenses low. This allowed us to find money for a down payment and start stock piling cash for the closing costs and repairs. We do this by paying our selves first. Sign up for our email newsletter and one of your free gifts will be 7 practices to put into place to start paying yourself first.
- Use advisers. Without reading Rich Dad Poor Dad, I would not be here today. I would have simply said I cannot afford it. Without talking to a mortgage adviser, I would not have known to take out the 401k loan.
- Fire under preforming advisers. It killed me not to use the adviser for my mortgage that gave me the 401k loan advice. I felt that he should be paid for it. But due to issues that were impacting my goals, he was not being as responsive as he should have been to my questions. I dreaded the decision but don’t regret it.
- Get your team together early. Because we did not have a good real estate agent on board early, we lost out on an opportunity. If you do not regularly use a particular adviser, make sure to engage the person as early in the process as possible.
- Ask how much? Not knowing how much we could be approved for hindered our dream home buying. From the beginning, know for how much you can be approved and figure out how much you can afford on a monthly basis.
- If something is important, keep it front and center and be patient. Having a home in our dream neighborhood came to be the most important factor for us. The other neighborhoods just did not feel right. When you are making a big financial decision, you want everything to feel right. Otherwise, when the dust settles, you are going to regret your decision and blame your spouse for your joint decision.
- Being financially prudent is more than just the size of your bank account. You work hard and save money so you can be happy. Sometimes you have to compromise your ideal financial values to achieve happiness. If not, we would all end up like Mr. Scrooge and Mr. Potter.
Time for you to play Monday Morning Quarterback. What would you have done differently? Post your comments below. Your comments could help a fellow reader get into their dream home.
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