New Down Payment Savings Goal

Since my condo deal fell through, I need to re-evaluate whether I still want to buy a condo, the area, etc., but this also gives me time to re-adjust my savings goal and to save more cash.

For the first condo deal, I funded my down payment with money from the following savings buckets:

  1. My down payment savings account (~$55,000)
  2. My vehicle replacement savings account (~$3,000)
  3. My taxable investments (~$5,400)
  4. My emergency reserves for the remainder

In borrowing from these savings buckets, I decided that:

  1. I was willing to let my emergency reserves go down to $10,000 to be able to buy a condo at that time.
  2. Since my car is not even 2 years old, I was willing to borrow from the vehicle replacement savings bucket.
  3. It was the right time to cash in some stocks I had and to switch from the ETF version to the index fund version, so I was willing to lend myself some of my taxable investments for the two months until a bonus came in.

So basically, I was saying that I was willing to have only $10,000 in easily accessible savings after purchasing a condo with 20% down. Thinking back, maybe I was a little crazy and overeager.

Looking forward, I am setting four requirements for being financially ready to purchase a property:

  1. My down payment savings account must have the full 20% or more down payment AND $10,000 to cover closing and moving costs, so that I still have more than adequate cash savings around if something goes sour.
  2. The proposed starting equity in the condo (purchase price minus loan amount) must work out to no more than 40% of my net worth, so that my net worth is somewhat diversified.
  3. I must continue to max out my 401(k) at $17,000 per year and invest at least $5,000 elsewhere. This means that I am allowed to use money I would have otherwise invested in a taxable account to sweeten the down payment, so long as that doesn’t mean the equity I would have would violate rule #2.
  4. The monthly housing costs must be no more than $2,000 including mortgage payment (principal and interest), HOA dues, property taxes, and proposed ongoing maintenance such as replacing appliances, ignoring any tax breaks. Ideally, the HOA dues and the property taxes would add up to less than $800 per month.

If you work backwards from rule #4, you can come up with the maximum loan amount and thus the maximum purchase price if I’m putting 20% down and the minimum down payment amount (since I could go for a higher valued property by putting more down to keep the same loan amount). If the HOA dues and the property taxes add up to less than $800, that also gives some more budge room on the maximum loan amount calculation.

With these variables, this puts the maximum mortgage payment between $1,100 and $1,200 and at a rate of 3.5% amortized over 30 years, the maximum loan amount between $244,000 and $267,200, with the minimum down payment being between $61,000 and $66,800 and at 20% down, the high end of the purchase price range is $305,000 to $334,000.

Thus, my new down payment savings goal is $66,800 plus $10,000 to cover closing and moving costs for a total of $76,800. From my February net worth update, you saw that I currently have $62,600 in my down payment savings account, which means that I need to save $14,200 more. Assuming no raises, no extra bonuses, no increases in my company’s stock price, and no further funds from my parents, it would take me until January 2013 to reach this goal. A stretch deadline on this goal would be July to August of this year. That also assumes that I don’t increase my travel budget at all, which I am also working on revising…

I’ve made a pretty specific list of my requirements for inside the condo. I’ve also done some thinking about the neighborhood that I would want to live in. Based on my research, a realistic cost estimate of what I’m looking for is between $340,000 and $450,00. Right now, the upper-bound on my range with my current savings level is $263,000. If I want to buy something on the higher end of that range, I need to save for another FOUR YEARS to be able to keep the monthly housing costs under $2,000. I would probably be able to afford the lower end of that range by early next year, which means that I will need to do another decision matrix for how long of a lease to sign when this one is up.

All things considered, I learned a lot with the condo deal falling through and I think I’m much better prepared for my next condo buying experience, whenever that may be in the future. I’m also going to be in a far better financial situation by the time I do actually decide to buy a place again.

I also think that, emotionally, I should sit tight for 4-6 months before starting to look again after the hassle and stress of the deal falling through and needing to move anyway. I’ve even turned off my Redfin emails! Also: my new landlord even replaces light bulbs! So little maintenance to do! So I’m going to keep saving money with the $76,800 goal in the back of my head, but not fret about the amount until, emotionally, I feel like buying a place is the right decision again. I have a feeling that when my current rental lease comes up for renewal, I will be re-signing a lease for some amount of time, but I will make the length decision at that point (around late May, so another 2 months from now).

Readers, do you think that my new requirements are too conservative or my original ones too lax?

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17 thoughts on “New Down Payment Savings Goal

  1. I do not think they are too, conservative although I am also leaning on the side of conservative for our house purchase. I want our equity in the house to only equal 40-50% of our net worth. I also have a number in my head for a max monthly payment- the problem with this is that, even with enough savings for a down payment, the more expensive the house, the more expensive the property taxes.

    We’re not planning to take out a jumbo mortgage but our realtor told me that if you take a jumbo you need to have at least 10% of the mortgage amount in cash reserves- so if you take out a $500,000 loan you need to have $50,000 in reserves beyond all closing costs. This seems like a good thing for everyone, not just jumbo borrowers, if you ask me. So by this metric you might have been a little agressive in your previous numbers.

    And yes, take a break. House hunting is so all consuming and it sounds like you have a great set up in your current apartment.

    • I agree with you on the property taxes. I found the same thing with HOA dues. I think I’m really looking at a hard cap of $450,000 based on property taxes and HOA dues, no matter how much of a down payment I save up.

      I’m close to the 10% metric with the new numbers. I calculated my maximum mortgage amount at $267,000. My general reserves are at around $24,000 and then I have almost $4,000 set aside to replace my car, so I have about $28,000 in cash reserves. Awesome!

      Definitely taking a break! It’s quite lovely :) It’s so amazing having my weekends and weeknights back to myself at long last!

  2. I think neither are too conservative nor too lax – I think it’s important to do what works for you! I agree that it’s a great idea to take a little breather; it’s an emotional process and it’s good to be able to clear your head!

    • I figure that I take a break emotionally, continue to save towards the goal and then when I feel ready emotionally, I’ll probably have enough cash. Or if I want to do something else, I have a TON of options! Cash is king!

  3. In my line of work, we have a saying that goes to the following tune, “we measure with a micrometer and cut with an axe.” Being an analytical person, I have stepped back from over-thinking too much. Sure, you don’t want to jump out of the plane without first making sure your chute is attached, but at some point you either take the leap, or keep checking to make sure everything is right. Personally, I don’t think your original situation was bad (I wouldn’t call it ideal either). Well, as long as you have the ability to build the emergency fund back up, continue saving for your other goals AND you are HAPPY.

    Either way, it sounds like taking a break is well welcomed & deserved.

    • I’m definitely trying to step back from thinking too much. Now that I’ve run the numbers and I’ve set a goal, I’m going to keep on saving. The more important part now is the emotional side. I’ll evaluate where I am on the emotional side when it comes time to renew the lease on my apartment. I could hit my savings goal between July of this year and January of next year, so really it comes down to when my heart is ready to start looking at condos again.

      I think that my previous situation left me with not quite enough in cash reserves to feel completely comfortable with the situation, which is why I’m not going to touch my reserves this time. Maybe I would touch the car replacement funds or some of my taxable investments that are still in cash though. We’ll see on that one when I find a place!

  4. When I was looking for a house, I came to a number that I felt comfortable with for the down payment. Thus, I ended up putting 23.8% down. Not too much over 20% but it’s at least something.

    • I think that’s probably what I’ll end up doing as well :) My mom thinks I’m crazy and that I should just put 20% down, but I’m going to put down the amount I decided I was going to regardless of what 20% is on the particular place…unless the place is really “cheap” and I want to spend $10k or something on renovations.

  5. Sounds like you have a pretty sweet rental deal going!

    Re the numbers – sounds very above board to me. Are you planning to stay in your city long term?

    • I’m paying about $1675 to rent a 700ish sqft 1 bedroom apartment and a parking spot, per month. That is a tad expensive overall, but comparable for the areas of the city that I want to live in.

      I plan on staying in this city for the foreseeable future, including the next 10 years or so. It has lots of great job opportunities in my field and isn’t too far from my parents.

  6. By current Canadian standards? Far too conservative. Using the historical, low-risk principles to which our grandparents adhered as the yardstick, too lax.

    If you’re looking to buy a condo in Toronto or Vancouver, wait a year or two. You won’t regret it.

    • Agreed. I definitely think Toronto and Vancouver are in for a market correction and soon. I live in the States, where I think we’ve already seen the worst of the market corrections.

      • That’s awesome. Do it up. I want to buy a condo in Florida and, if Toronto doesn’t correct its irrationally exuberant stupidity soon, I will.

        • I’m surprised how cheap condos are in Midwest places like Des Moines. I guess my problem would be finding things to do during winter and could I ever adapt to the cold? :)

        • Iowa, no thank you! No offense to anyone who does actually want to live there, but it’s so not for me.

          I’m not surprised that condos would be cheap there :P

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