Sometimes I meet people who work hard but aren’t saving anything – and they want to buy a a home.
Let me tell you: It doesn’t work that way. Few truly important things in life are that easy, actually.
If you want to buy a home in Silicon Valley, you have to embrace the “new frugality” and start saving your money for the down payment, the closing costs (estimate 1% of the purchase price, but more if you also pay points on your loan), and improvements you’ll want to do to the property. (Many homes have $10,000 to $20,000 worth of needed repairs when sold. Not to mention curtains, paint or floor coverings that you like, etc.) Real estate isn’t cheap, and the taxes, insurance and upkeep will require that you have a reserve account to pay these things after you purchase the townhouse, condo or house.
How much should you be saving? As much as humanly possible. Yes, that means probably giving up a lot of ski trips in winter, lavish nights out on the weekends, dinners and maybe even coffees out. When you do buy a house, you will probably be spending 33% or more of your gross income (total, pre-tax) on the property (mortgage, interest, taxes and insurance). Try living on what’s left now – see how you do. If you can’t live on just 67% of your gross income, you might reconsider whether you can or want to sacrifice that much to purchase a home here in Santa Clara County.
Yes, there are lower down payment options like FHA backed financing, but with a tiny down payment (6% or so) you will have very high payments and to top that off, your interest rate will be higher.
If you really want to buy a house, you need to sacrifice and save. Aim at 25% down so you can afford to fix it once you’re in and pay lower interest rates. Or if FHA is the way you want to go, more like 8%. Save, save, save.