Maintain 20% downpayment for has or invest and doctor loan

[JK]

-Background: 1.5 years out of training. Married (stay at home spouse) with 2 young kids. Early 30s. 1099 contractor in dermatology. Great income first year out. Student loans all paid off. Our current two year rental is due in September so we have been aggressively saving up a downpayment and started looking for homes the past few months. We currently have about 200k in Ally Savings account and the homes we have been considering have been in the 800k-1 million range (pre COVID).

-COVID update: Through dumb luck, we have been building up the house downpayment fund over the last 6-8 months and not investing anything. We normally do HSA and Backdoor Roth first week but given house savings we have not made any contributions for 2020. Obviously this has worked out in our favor through dumb luck given market drop. Downside is practice volume has dropped off considerably. Practice owner furloughed 80-90% of staff and now doing telemedicine only ~1 day per week. Expect income to be 5-10% of where it was before for the next month. Like everyone, unsure how things will ramp up financially beyond that. The good news is that we have ample savings in cash to weather the storm and I'm highly expecting the housing market to work out in our favor when COVID settles down (summer/fall?) and offer some great buying opportunities.

-Question: I was initially 100% committed to having 20% downpayment for our house as were essentially there and had continued earnings to cash flow expenses and other investments. Now, things are obviously uncertain on so many levels. I am debating about if it make sense to invest some of the money since markets are low. In general everyone says don't invest money you need in the next year (or more) but in this case I'm not talking about a big portion of it. Essentially enough to fill up HSA and possibly backdoor Roth x 2. And with that amount of money, if I'm short on 20%...the downside is just a doctor loan. Essentially, two options I am considering and seeking guidance:

Option 1: don't invest anything with uncertain income. Save all the money you have and plan on putting down 20% for the house as your originally planned.
Option 2: invest only enough for family HSA and Backdoor Roth x 2 to take advantage of good prices. If income rebounds over next few months even partially, should hopefully still have enough for 20% downpayment for home. If not, consider delaying purchase or simply just use a doctor loan for < 20%.

Thanks!

[Ekanive23]

Doctors loans and jumbo loans might dry up during this time period if not done soon. I discussed with a couple of WCI recommended brokers and they recommended locking in a contract ASAP, not just for rates, but because these programs might go away.

[Cubicle]

I dunno exact, 2 back door Roths & a family HSA is what? ~$18,000? I really want to tell you to:

1) contribute to the Roths & HSA
2) take a loan from family to replace the $18,000
3) continue with 20% down

If you can get a doctor's loan, then give back the $18,000 loan.

[White.Beard.Doc]

Times are very uncertain. Your income is gone for now. Any investment moves you make now could turn out very well if we have a quick recovery (unlikely) or horribly (more likely that hard times will continue for the next couple of years). No one knows with any certainty.

In your shoes I would hunker down, hoard excess cash, and wait 2 to 3 months to see where things are headed before making any financial decisions whatsoever. Stock values could stabilize, or they could fall another 30%. My best guess is we still have a significant way to go on the downside.

Finally, if I was an underwriter, I would stamp your mortgage application “Rejected”, based on your severe lack of sufficient current income. You don’t make enough money to qualify for a mortgage at this moment.

[Nysoz]

It really depends on your risk tolerance and what you expect the housing market in your area to do as well as the stock market. Also, how long you think you'll be without significant income.

If you think record unemployment is going to hurt the housing market in your area, people not being able to pay their mortgage for whatever reason, that may drive home values down. People owning 800k-1M houses shouldn't have that issue hopefully. Your current 20% down saved up may go further than you think.

The stock market is full of uncertainty. we are at a 25% ish discount from all time highs, but until we get a more defined course of disease progression, treatment, vaccine news, then it's going to continue to be volatile with maybe even another 25% decrease before recovery. that's before we even figure out the national and global impact of slowing the economy down.

With that being said, there's no harm in funding your roth ira and keeping cash in there. I think you can withdraw your contributions without penalty if you really needed to.

[CordMcNally]

In a few months do you think a mortgage company is going to look at your paystubs and give you a loan for the amount of money you want? On the flip side, would you look at your paystubs and want a loan for the amount of money you want? I would think the answer to both of those questions are going to be 'No'.

[ChristopherMD20]

I am in same position as you, but we pulled out of a deal for $855k home last month. We have the added benefit of living in our paid off condo.

How is your relationship with your landlord?
Do you plan to live in the area where your practice is for a long time? Do you have family in the area?
Are you 100% productivity based?

I bet your landlord loves having a solid renter who is paying their rent on time. You could use this to your advantage if you need some more time to wait for a great deal.

FWIW- We pulled out of our dreamhouse because of uncertainty, but mostly because we could not justify in our minds making a luxury purchase when we felt we could put our money to better use (investing for our future family, helping our family members who are almost certainly going to struggle, being more charitable, random acts of kindness). Our goal savings for downpayment is $160k. Our plan right now is to put $5k/month into a taxable brokerage account. We continue to max out HSA, backdoor rothx2, 403b x2, 457b. We do have some excess cash over than $160k, but we have established a "drip" methodology for when to put more money into our taxable account (based off of S&P index going both up and down with fixed parameters). We have said we are not buying a house until at least Summer and have shut off Redfin app.

If I were you, I would go with Option #2.

[CordMcNally]

I bet your landlord loves having a solid renter who is paying their rent on time. You could use this to your advantage if you need some more time to wait for a great deal.

I would actually use this to your advantage now. Call your landlord and just reassure them that they'll continue to receive rent from you but also bring up the possibility of going month to month later in the year.

[Peds]

-Background: 1.5 years out of training. Married (stay at home spouse) with 2 young kids. Early 30s. 1099 contractor in dermatology. Great income first year out. Student loans all paid off. Our current two year rental is due in September so we have been aggressively saving up a downpayment and started looking for homes the past few months. We currently have about 200k in Ally Savings account and the homes we have been considering have been in the 800k-1 million range (pre COVID).

-COVID update: Through dumb luck, we have been building up the house downpayment fund over the last 6-8 months and not investing anything. We normally do HSA and Backdoor Roth first week but given house savings we have not made any contributions for 2020. Obviously this has worked out in our favor through dumb luck given market drop. Downside is practice volume has dropped off considerably. Practice owner furloughed 80-90% of staff and now doing telemedicine only ~1 day per week. Expect income to be 5-10% of where it was before for the next month. Like everyone, unsure how things will ramp up financially beyond that. The good news is that we have ample savings in cash to weather the storm and I'm highly expecting the housing market to work out in our favor when COVID settles down (summer/fall?) and offer some great buying opportunities.

-Question: I was initially 100% committed to having 20% downpayment for our house as were essentially there and had continued earnings to cash flow expenses and other investments. Now, things are obviously uncertain on so many levels. I am debating about if it make sense to invest some of the money since markets are low. In general everyone says don't invest money you need in the next year (or more) but in this case I'm not talking about a big portion of it. Essentially enough to fill up HSA and possibly backdoor Roth x 2. And with that amount of money, if I'm short on 20%...the downside is just a doctor loan. Essentially, two options I am considering and seeking guidance:

Option 1: don't invest anything with uncertain income. Save all the money you have and plan on putting down 20% for the house as your originally planned.
Option 2: invest only enough for family HSA and Backdoor Roth x 2 to take advantage of good prices. If income rebounds over next few months even partially, should hopefully still have enough for 20% downpayment for home. If not, consider delaying purchase or simply just use a doctor loan for < 20%.

Thanks!

- no one should be thinking about 20% down given current/foreseeable rates.
- rental can go month to month so wouldnt super worry about that
- would immediately do bdrIRA x2, hope you didnt stop 401k, etc.
- only once your work goes back to normal would consider a house.

[JBME]

I agree with peds. Put off the idea of getting a home for now. Leverage with landlord to get a month to month lease signed since you’ll be a model tenant who can still consistently pay rent. Yes the market can and probably will go down but who knows. What you do know is that today it’s discounted around 25%. I’d do not just backdoor roth x2 and hsa but I get the impression you didn’t contribute to a solo 401k for 2019. Hopefully you haven’t done your 2019 taxes yet. Contribute the max to your solo 401k too. That’ll put a serious dent in your down payment but you can build it back up quickly I think once work starts up again.

put off a home until next spring. In the grand scheme of things that’s not a big delay

[Tim]

There is no reason not to maximize your tax savings or your plan. The change is solely your income. That simply means delay the home purchase. Once the income problem is solved, back on track, just later. Option 2 but never buy a house without completely solving the stable income issue. Two months or 2 years, your plan is dependent on a stable revenue stream. Without that, not worth considering. Who knows? Maybe you move. The HSA and retirement savings aren’t because of bargains, it’s maximizing the tax advantages long term.

[Zaphod]

if i were you i would try to execute plan A but after seeing what happens with the housing market.

the likelihood (at least to my eyes) is that there are going to be some deals out there. we can't have record unemployment with an unaffected housing market, at least I don't see how we can.

that $1M house you're looking at might go for $800k then you'll be sitting very pretty.

i'm not sure what's going to happen w/ lending, suspect a doc who had a temporary covid-induced income reduction is going to be viewed just like a doc was viewed in Feb. the lender might want like a full year of paystubs but i would think they would be smart enough to see that you were banging along doing great and then oh wait no income in march, april, may i wonder why? surely they are going to adjust underwriting process for this.

As a 1099 it'd be nearly impossible for them to get a loan without 2 years of tax returns anyway. Agree with the rest, just not smart right now.

[White.Beard.Doc]

Thinking more about this, you could likely do well by waiting until next spring, rather than pulling the trigger this fall.

By early next year, the direction of several things we become clearer, your income potential post coronavirus, the state of the housing market, and you will know if you can show 2 years worth of 1099 based income tax returns that would allow you to qualify for the loan you would need for a million dollar home purchase.

And you can wait to make the 2020 retirement account investments later this year, once your income starts flowing again. The usual rules about early in the year for those contributions are often good advice, but not necessarily now with the world economy turned upside down.

[citizenone]

I'd hold off on dumping that much into your HSA, backdoor roth accounts right now.... Why? You didn't mention having an emergency fund, I'm assuming it's all the same pot of cash with the down payment? Well, you may have to tap into it this year. You have a non-working spouse and two kids to take care of with potentially limited income. Also not sure how much your savings rate or monthly expenses are, so this also makes it tricky to answer. Things are very uncertain and having cash/liquid assets on hand is essential in times like these.

What I would do is push back the home buying time horizon at least into next year and contribute to that HSA and backdoor roths later this year once things get a little clearer re: your income and the economic fall out from all this.

Yes, you can buy a home with less than 20 % down with doc loans (but may pay a higher rate, so maybe not ideal) and with non-doc loans (but pay a pmi, which is not a good idea). But what's the rush? Let's just wait and see what happens, plan to renew your apt lease if need be, maybe ask for mth to mth deal?

If you buy a home and your practice dries up, how easy is going to be to find another job near your new home? And if push comes to shove and you have to move in <5 yrs in what may be a bad housing market, you're in trouble. Breaking a lease? Easy as cake. Selling a $1 mil + home in a troubled market? Good luck.

Yes, they're may be great housing deals to be had, but if this is your primary home you're going to spend $1mil on, you must make sure you 1) love the area / have ties , 2) love your current job situation and 3) have great job security or at least reasonable alternatives near by (yes, I know no one can know this for sure, but still something to think about).

And, as always, do not try to time the market. In the future, I think having a financial plan and sticking to it in times like these is essential. Easily said, but tough to execute.