Update on our home situation
By glblguy
My wife and I just finished signing the contingency contract waiver on the new house we’re trying to buy. Oh wait, I’m getting ahead of myself. I haven’t updated you on the latest news.
On Sunday afternoon we received the call we had hoped we wouldn’t receive. The sellers of the house we a trying to buy in the mountains received another offer and accepted it. They now had a back-up contract and invoked the 72 hour kick-out clause in our contract. The seller’s seem like great folks and conveyed that they felt bad and really wanted us to have the house, but needed to sell it. I could understand that and appreciated their thoughts.
See, we signed a contract to purchase the mountain home that was contingent on the sale of current home. In order to get the sellers to accept a contingency, they wanted a kick out clause. A kick-out clause allows the seller to accept another offer if they receive one BUT we get 72 hours to respond and go into a non-contingency contract if we so desire. We had until Wednesday at 1:00pm to reply or the house would go to the other buyers.
Needless to say we were stressed. We had tons of questions floating through our heads: What if our house doesn’t sell soon? Can we afford 2 mortgage payments, and if so for how long? Even if we could, we don’t have enough savings to make the 5% down payment let alone the 20% we had planned to make with the equity from the sale of our home.
Options
We began to look at options. We had taken out a home equity line to pay for our house repairs. I was hoping the remaining balance coupled with the savings we had would cover the down payment. Nope, $3000.00 short and that didn’t include closing costs or moving expenses.
I then considered a bridge loan, but after doing some research decided not only would a bridge loan be hard to get right now, I just wasn’t comfortable. I really didn’t want to borrow money for a down payment nor to pay for closing costs.
I called the mortgage company that pre-approved me and asked if they had any options. They simply said no. With the current foreclosure crisis they wouldn’t loan out more than 95% of the homes value.
We were becoming hopeless at this point. See, most people say to look at a home as a financial transaction, but this home we want is so much more than that. We looked at more than 20 homes in the area and didn’t really like any of them. The moment we drove up on this home, we knew it was what we had been looking for. It’s the right size, the right amount of land, far enough out of the city, but not too far, it even had a dedicated office area in the basement where I could work from home with no distractions, and the the price was right. This house is the beginning of our new life, me working remote, us living in the place we’ve always wanted to live and away from the rat race of the city.
In the past weeks while waiting on our home to sell, this mountain home had begun to feel like home. Our kids made plans for which rooms would be theirs, my wife and I discussed where we would place our furniture. I had figured out the ideal place to put my desk and computer in the office so I could see the beautiful mountain view while I worked and watch the kids playing in the front yard at the same time. My wife and I had even begun to look forward to warm cups of coffee in the morning while sitting on the front deck looking at the morning mist surrounding the mountains as the sun slowly rose from behind them.
401k loan
There had to be a way to make this work…then it hit me. My 401k. I could borrow on my 401k, which in all but a few scenarios I wouldn’t recommend, but in this case it solved the problem. I had enough in my 401k that I could borrow for a down payment, pay the closing costs and even pay to move us. I would have enough left over to even make a good year’s worth of house payments on our other home if I absolutely needed to (don’t worry, I’d rent it before I’d do that). I also felt better in using my 401k money as at least it’s my money. Sure it will hurt my investments and slow the growth, but honestly it hasn’t been growing a whole lot lately anyway. I’m also convinced we’ve got a incredible deal on this house and will walk into it with more than 70,000 in equity from day 1.
Given my real estate agent’s expectation that my house will sell very soon, the 401k loan would only be short term, as I could pay it off with the equity remaining in my current home. Problem solved.
Opps, have to get approved again
I called the mortgage company back and they agreed that it a good option and one many people used. I asked him why he didn’t suggest that, and he said they weren’t allowed to make suggestions like that. Down payments and how they were obtained were up to the borrower. He then explained that since I would be keeping my current mortgage, that I would have to be re-approved, since he approved me the first time assuming I would sell my house first. Okay, a bit of a surprise, but a reasonable one…
They called me back the next morning with good news, we were all approved! My wife and I having learned a long time back to not rush into decisions decided to wait until tomorrow morning before faxing in the contingency contract waiver. We wanted to make sure we weren’t making a stupid decision or one that may put our dream at risk.
Shopping around a bit
Using our 401k is of course a bit risky, but when talking to a friend this morning, she informed me of something that made me feel better about it. Bank of America has a mortgage program that allows a borrower to put down 5% with not requirement for PMI. They also pay all closing costs and have a rate less than my current lender. Within minutes I was on the phone making the application. I’m awaiting a call back from them. I don’t expect any problems, but it’s always so stressful when you’re waiting for a reply on an approval. Going this route would allow me to borrow far less from my 401k (5% down and save $2000 on closing costs) and not have to suffer the penalty of PMI which would be close to $200.00 a month.
I called Bank of America and spoke with them about the offer, turns out due to the recent mortgage meltdown, they now require 15% down and the interest rate is now higher on this plan due to the risk. I ran the numbers, and looks like my original finance plan is the better overall offer. Oh well, it was worth looking into.
We’ll be saving our money like crazy until we close on the new house, doing everything we can to minimize the amount we need to borrow from our 401k, but if the math proves out it just won’t be enough. But hey, I am willing to try. If God feed thousands with one loaf and 2 fishes, maybe he can turn my small savings into enough.
A leap of faith
For many reasons, some of which I can’t share, this move is incredibly important to my family. I think the risk is worth it. My wife and I have prayed about this whole decision from the beginning. We’ve believed from the start that God was leading us to the mountains and would provide the means for us to get there. Now, that doesn’t mean this an excuse to do something stupid. I feel confident in this situation where I normally wouldn’t feel confident. For me, that’s usual a sign that God is leading the way. After you Father…
September 25th, 2008 at 7:20 am
It looks like you’ve done your homework. I hope it all works out for you. I don’t blame you for considering a 401k loan. Like you said, it is your money and you are using it for a good cause.
September 25th, 2008 at 7:32 am
I think the 401k idea is a good one – once you have decided to make the move (and you clearly have) then it’s important to do it the best way possible.
As a side note – in Canada you can borrow up to $20k per person from your RRSP (401k) for buying a house – it’s a pretty common practice up here.
Mike
September 25th, 2008 at 8:12 am
Good stuff! Good luck with the move. The 401k loan is a good idea when you’re up a against a wall. And it gives you some breathing room in case it takes a little longer for your current home to sell.
September 25th, 2008 at 8:40 am
You may still be able to avoid the PMI. Look into getting two separate mortgages. That’s what we did when we had only 5% down. One was for 80% and the other was for 15%, an immediate “second mortgage.” The latter had a higher interest rate, but it was far less extra than paying PMI. Our mortgage broker set it up for us–we didn’t work with the banks directly. Each mortgage was with a different company.
If you want to see what he can do, his website is http://www.nobullmortgage.com/ Haven’t worked with him in years, have no interest in his company, just know that we was always totally upfront with me, even when I found (when we almost bought a house 3 years ago and didn’t) that a local bank could give me a better rate than he could find nationally.
September 25th, 2008 at 9:16 am
Hope this works out for you–and if it is meant to be, it will. In your case the 401(k) loan is probably a good option as your employment seems pretty stable (after all, your employer was willing to let you telecommute after the move). If your employment was on more shaky ground I’d be against the idea because if you left or got fired you’d owe it all pretty quickly, which could cause some financial stress down the road.
September 25th, 2008 at 9:56 am
@AnnMarie,
Piggy-back loans as you refer to have gone the way of the dodo in the last year and a half. I don’t think anyone is doing them.
September 25th, 2008 at 10:35 am
To avoid PMI when buying our new house, we did an 80-10-10 loan. 80% was a mortgage at 6%, 10% was a home equity loan at 8.375%, and 10% down. Yes, we’re paying a bit more than if we had done just a 90% loan with PMI, but PMI is lost money. At least with a home equity, we can deduct the interest expense.
I’m so glad you were able to get the house. Like I wrote, you have to decide if the house is worth risking everything. From the sound of your situation, I also believe it was. Good luck to you! I’m sure you’ll have that house sold soon enough.
September 25th, 2008 at 10:40 am
The part that would make me most nervous: if you lose your job, for whatever reason, or want to leave your job, your company can demand IMMEDIATE repayment of the entire 401k loan balance! Have you looked at this aspect of the deal? I hope so, and good luck.
September 25th, 2008 at 12:25 pm
I did the same thing (used 401k loan) with our current house – we bought it w/$10k in equity b/c it was priced below market value.
We got a 80-15-5 mortgage: 1st mortg at 80% with one bank-fixed rate, 30 yr term; 2nd mortg at 15% with a different bank-variable rate HELOC {you can write off the interest on taxes}; 5% down-negotiated closing costs to $2k and borrowed 5% down pmt from 401k. I got laid off 5 months later so I had to payback the 401k loan within 60 days. I received a VERY generous severance pkg – only used 15% of my severance pkg to cover that 401k payoff.
Took a month off from finding a job (had a 60 day non-working notice – still get paychecks but don’t have to show up to work); got the new house in order; found a job making $5k more the day after I received my severance check.
God did indeed provide for us! I will pray for you and your family.
September 25th, 2008 at 12:26 pm
Oh, be sure to include the 401k loan payment in your budget! So you could be looking at Mortg 1 payment + Mortg 2 payment + 401k loan payment = total house payment.
September 25th, 2008 at 1:06 pm
401k options is a horrible idea.. you will be taxed about 40% by the government all for something you “want” not necessarily need. There is no guarantee you will sell you exiting house, there is no guarantee you will find good tenants but there is a guarantee of penalty and fees from the government for your actions. And you’re justifying this purchase, this is no different from impulse buying. You cannot afford this home, you have to borrow to even achieve 5%. Focus selling your house before buying another one.
September 25th, 2008 at 4:09 pm
Good luck with all of this, glbl. Its hard out there even for people with great credit/income to get a somewhat unconventional mortgage nowadays. That’s why we have put our house hunt on hold, as all my income is freelance and banks wont touch us right now! Good luck!
September 25th, 2008 at 4:32 pm
I’m kinda like Dominique – given the amount of people I’ve seen do the two-house payment deal, its not likely I would have came up with the the same solution. However, at the end of the day, we’re still friends. Gratz on the new house! Its called “personal” finance for a reason.
That 70k equity on Day 1 makes me drool. Ok your wife may shoot me for this question. But is there any chance you can find out the second buyers name and flip the place? 70k would go a long way on the snowball….
We need pics and more posts about the house!
September 25th, 2008 at 5:46 pm
Thanks for the comments folks and I appreciate the encouragement.
For those concerned, I got a 401k loan so no tax penalty. Getting a loan is different than a hardship withdrawal. I also did all the necessary math including factoring in the payments on the 401k loan. I can afford the payments, although it will stop the debt snowball until we sell our other house. I’m okay with that though, we’ve been going at it pretty aggressively for a while now.
@Dominique – I’d ask that you not assume I “want” this, there is a great deal of need behind it as well, but it’s a little more personal than I would care to share.
September 25th, 2008 at 6:31 pm
This is what happens when a purchasing decision becomes emotional. I think you are doing the best you can do under circumstances where emotions are driving your thought processes. I hope it works out for you.
Just FYI – I know how you feel. My wife and I have had deals on the “perfect house” fall through in the past. But you know what? Another “perfect” house always comes along.
Good luck.
September 25th, 2008 at 8:27 pm
I’m glad you found a way to work it out! Best wishes with your move. And I’m so glad that I’m at the end of the process, rather than at the beginning. I’ll commiserate with you from the sidelines. ;)
September 29th, 2008 at 10:39 pm
Eesh, still makes me nervous. Here’s to hoping your first house sells really, really quickly.
April 13th, 2010 at 12:38 am
I have never seen sucha s post that could change my point of view. I’m not into working out. My philosophy: No pain. No pain.