San Francisco Buyers Don’t Want to Be “House Poor”

Posted by Arjun Dhingra

SF Buyers are making great salaries, coming into cash from signing bonuses, or receiving gift funds from family to come up with large down payments.  Sinking all of the funds you have available into a property is often times assumed to bhouse-poore the correct strategy when it comes to setting up your home loan and property acquisition. However, nobody wants to find themselves house-poor.

When you’re “house-poor”, it means that the majority of your wealth is tied up in your home; and, that you have little cash in the bank or in savings. Such is the case for many Bay Area home buyers from this last year, as data shows that 8 out of 10 homebuyers that financed their homes ended up emptying all of their liquid accounts to make it happen. While this put them into optimal financing, perhaps because a larger down payment can improve your interest rate, etc., there can also be downside to this strategy.

Ending up house-poor can be dangerous — especially when life’s emergencies occur, such as sickness or job loss.  With all your funds locked up in home equity, and with little or no money in the bank, coping with a sudden increase in expenses or loss of household income can put your finances in a downward spiral and result in the loss of your home.  You can’t just ask the bank to give your down payment back, after all, when you need those monies to help you pay your monthly bills.

The only way to get your down payment back from the bank is via a cash-out refinance. But, even then, there’s no guarantee that your request gets approved.

Click here to apply now.

This is why home buyers sometimes prefer to make small down payments. It leaves money in the bank for when emergencies occur.  And, in life, emergencies always occur. Depending on loan size, down payments can be as little as 3%.  Jumbo loans can also be done for as little as 10% down for a loan amount up to $1.5M on special financing.  Yes, some of these programs with lower down payments do come with PMI (mortgage insurance, paid monthly), but the trade off for not having to empty your savings can be worthwhile in many cases. Strategies for financing the mortgage insurance/PMI into the borrowers rate can also be arranged, by taking a slightly higher interest rate in exchange for no monthly MI payment.

Another strategy that has been popular in markets where values have been quick to rise has been to put down 5-10% on a home and preserve cash.  Monthly mortgage insurance is incurred, but only until the borrower decides to refinance when enough appreciation has set in for the home to put the borrower in position to dump the MI from their monthly payment. Bay Area homeowners that employed such a strategy by refinancing in as little as 6-8 months, in many cases, took advantage of higher values to remove their mortgage insurance.

For more information on down payments, mortgage insurance removal, and getting pre-approved, email me.