Hi Money Minder,
Hey there! So, I’ve got a bit of a dilemma as a millennial living in a VHCOL area. My spouse and I have been house hunting on and off since 2019. It’s kind of funny because we passed up on a couple of houses we really liked back then, thinking we could find something better. Well, fast forward to now, and those same houses have skyrocketed in price – from 900k-1.1 mil in 2019 to a whopping 1.7-2 million. Now we’re left kicking ourselves for not jumping on them earlier!
We’re looking to buy a home within the next year, but we want to make sure we’re financially set. Our take-home pay after taxes is $15,700 per month. We don’t have any credit card debt since we pay everything off each month, but we do charge all our expenses on credit cards and then pay it back in full. Does that count as a monthly obligation? Should we switch to cash before getting pre-approved to show less expenses?
Right now, $2700 per month goes towards cars and student loans, but those will be paid off in the next 2-3 years. Child expenses add another $1800 per month, and our current rent is $2k. We’re saving at least $4k per month, so we think we can afford a monthly payment of around $6k.
We have great credit scores, $400k in liquid assets, and $200k in retirement accounts. We’re debating whether to put down more than 20% or use the extra savings to make bigger mortgage payments each month. I also have a real estate license that could potentially save us on closing costs.
So, the burning questions: how much house can we realistically afford? Maybe around 1.2-1.3 mil max? And how can we increase our chances of getting approved for the maximum amount possible? Should we adjust the student loan payment plan to show less money owed each month? Should we switch to cash for a few months before pre-approval to show less debt?
We’re open to any advice and insights you have. Thanks a bunch, Money Minder!
Rusty Homebuyer
Response from THE MONEY MINDER:
Hello There,
Congratulations on being proactive in your home search and financial planning! It’s understandable to feel a bit overwhelmed by the rapidly changing real estate market, especially in VHCOL areas. Your concerns about credit card usage and its impact on your mortgage affordability are valid. While paying off your credit cards in full each month is great for your credit score and shows financial responsibility, lenders still consider your monthly credit card spending as a debt obligation when assessing your mortgage eligibility.
To maximize your chances of getting approved for the highest mortgage amount possible, it might be beneficial to temporarily switch to cash transactions a few months before seeking pre-approval. This can create the impression of lower monthly debt obligations. Additionally, you could consider adjusting your student loan payment plan to a longer term to potentially reduce the monthly payment amount, thus freeing up more funds for your mortgage.
In terms of what you can afford, with your current income, savings, and expenses, aiming for a property in the 1.2-1.3 million range seems realistic. Remember that being house-poor is never a desirable situation, so it’s wise to stick to a budget that allows for comfortable living and future financial flexibility.
Regarding your real estate license, leveraging it to save on closing costs and gain a better understanding of the home-buying process could be a smart move. It’s worth exploring how you can utilize your license effectively in the state of CA.
Looking ahead, your potential for increased earnings in the future is a positive factor to consider when planning your mortgage payments. Your proactive approach to financial planning and willingness to make adjustments when needed demonstrate a strong commitment to responsible homeownership. Keep up the good work, and best of luck with your home buying journey!
All the best from THE MONEY MINDER.
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