Preparing For My House Down Payment

If you’ve been reading my blog lately, then you know I’ll be looking to make my first home purchase near the end of this year. 

Am I excited?  Yes.  Nervous?  You bet ya!!!  Nothing like making the biggest purchase in your life to get your blood going. 

So many questions are blasting through my mind:  Will I get a good deal?  Is this the right time to buy?  We’re in a pandemic so should I wait?  How much due diligence can I possibly do? 

But at the end of the day, I know that I’ve run the numbers.  I have my budget.  I know that per my lifestyle decisions discussed with my wife over the past year and our long-term goals, it is finally time.  We need the space to foster and we’ll be homebuyers in this for the long haul.  So, it’s time to make the leap. 

Also, as I’ve mentioned before, another big determinant in waiting such a long time before buying a house was that I wanted to accumulate a certain amount in paper assets first.  My rental situation for the past decade has been an absolute steal for the LA market and has enabled me to accomplish this goal.  Plus, knowing that our plan was also to have my wife leave the workforce and be a stay at home mom to foster, this was going to be one huge double whammy of increasing our housing costs while losing her income at the same time.  Ouch!  So, having those paper assets on track and both growing and compounding in the background, gives me great peace of mind that taking this new path is the right decision for us at this time. 

I think it’s also worth pointing out, here’s the hardest part for renting to be a winner:  you have to be investing those savings.  You can’t be buying other things with that excess cashflow.  People talk about this all the time on blogs when comparing buying vs renting, but I’m curious how many people understand how difficult this part is.  If you don’t have the diligence to do this, then homebuying will most likely be the winner each time.  Luckily for us, I have had this discipline hard wired into my brain from a very young age. 

Now, back to the topic at hand.  In order to free up the cash to make this down payment liquid and possible, it takes some active planning.  And let’s be clear, this is not investment advice nor a how-to article.  I’m just telling you about some of my thoughts and surprises that have transpired so far. 

Taxes.  Taxes.  Taxes. 

People harp so much about how to invest or how much you need to save each month, but I’m a big proponent on this blog that taxes will probably matter more in the long run than your actual investment strategy.  You have to understand the game in order to know how to play. 

And maybe at first, you’re like, who gives a fuck Q-FI?  I don’t make that much money, so it doesn’t matter. 

Trust me, it will matter.  The more your income grows, or you have to shift significant assets, taxes will become the most significant determinant in pushing back that holy and cherished FI date.  Please, pay attention to them. 

Alright, now let’s take a look at the housing reality facing me in So Cal. 

I live in a HCOL area in LA.  In order to put 20% down on a decent house with closing costs we’re talking in the $120K-150K+ range of cash.  I don’t know about you, but I don’t have $120K-$150K in cash just sitting around.  And to free up a chunk of change like that, there are going to be very high tax implications which means, timing is everything. 

Now, in my situation I have been very patient and deliberate, which is probably unique.  I’ve basically had my whole life to prepare for this moment.  Hahaha.  Ask my wife, and she’ll tell you she’s been waiting to buy a house for the past five years.  Ha!  And she’s still holding her bated breath as I write this, but we’re ready I tell ya!  Locked and loaded.  Don’t worry honey, it’s been posted on the blog, so it has to happen now!  Social accountability at its best. 

In my case, freeing up this cashflow was the result of selling stocks.  I made sure I used any losses to help offset the capital gains first, and then utilized only stocks that would qualify for the long-term capital gains rate to limit my tax liability at the end of the year.  Also, because this down payment amount would be so significant, I also spread the sale over two years.  Because if I didn’t then the sales would have bumped up my taxable income into a higher tax bracket.  And sure, the US tax system is incremental, but yes, it would have hurt.  So once again, timing and flexibility are everything. 

In addition, I understand most people don’t have this time frame.  I get it.  My situation is unique.  They decide they want to buy a house and 3-6 months later, boom, they have one.  But my point is, if you have the foresight and can anticipate what the tax hit might be, you can do some creative planning to limit that future liability as much as possible.  Please, think ahead whenever you can. 

Well, the down payment has been set and I’m on to the next phase of pulling all of my documents and getting the pre-approval process dialed in. 

And here’s where I’m hoping I can glean a little insight from my knowledgeable readers.  Are there certain types of lenders that you recommend for getting the financing or have had a great experience with in the past?  I’ve read a bunch of articles about shopping around between loan brokers, banks and credit unions and I think the main takeaway is that in any case, try to get at least 3 different options.  But there still seems to be no universally accepted route.  Both my wife and I are above 800 credit scores so getting the lowest rates shouldn’t be a problem. 

Anyway, if you have any good knowledge on what you recommend doing, please feel free to share with me below. 

It’s my first leap and I appreciate all the advice I can get! 

-Q-FI 

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P.S.  I’ll have a follow-up post once I go through the pre-approval process and see how it goes when comparing rates with lenders.  I’m not looking forward to this, but unfortunately, it’s a necessary evil.  Into the den of the beast I trudge… 

So, to my cherished readers, got any good advice for me?