Buy a house in LA: How I saved for a down payment

It's a vast understatement to describe buying a house in Los Angeles as challenging (cruel and downright laughable are more like it)—something my husband and I readily accepted, along with the facts that we’d be shopping in a seller’s market and our budget would likely be under $500,000.

All in all, we saved a little over $25,000 by the time we decided to apply for a home loan—not even close to hitting that “20 percent down” mark, but more on that later.

There were many other financial aspects that my husband and I pored over first, like whether we’d be “house poor” in an under-$500,000 house. Things like doubling our rent payment with a mortgage, heftier utility bills, saving for a rainy day fund, and if we could afford little (and expectedly more infrequent) indulgences all played into our decision. No organic free-range vegan baloney sandwiches for this household!

This isn’t typical millennial behavior, says LA-based certified financial planner Leighann Miko. (The founder of Equalis Financial, Miko recently landed on Investment News’ 40 Under 40 list.) Compared to clients from older generations, “the biggest behavioral difference I see is that there seems to be a disconnect between the reality of what home ownership costs in total versus the assumed cost,” she says.

“Even expenses as seemingly insignificant as utilities tend to double or triple,” says Miko. “Think about it: If you’re moving from a one-bedroom apartment to a three-bedroom house with a front and back yard, it’s a fair bet that your utilities will increase two-fold at a minimum.”

Another reality check for us very-entitled Gen-Yers: Saving for the down payment, which is one of the biggest financial challenges Miko sees among her millennial clients. “They earn a decent amount of money and can afford a substantial mortgage, but with rent so high, it’s hard to set aside savings for a down payment,” she tells me.

So how did we manage to save?

As mentioned previously, our rent is only $1,600, giving us freedom to squirrel away about $300 a month for several years without a definitive game plan. Admittedly, we didn't take extreme measures to curb our spending: We’re not major splurgers but we occasionally ordered in and enjoyed the finer establishments of LA’s two-dollar-sign foodie scene. (We did, however, draw the line at $10 lattes.)

And besides buying certain groceries in bulk, ditching cable, and cooking at home on most weekdays, we really didn't follow any other game-changing money lifehacks. Our down payment godsend came in the form of my husband’s long-term incentive bonuses at his job—and we’re very well aware that this isn’t typical for most people.

As for my own spending habits, as a freelance fashion editor my shopping sprees are surprisingly non-existent. Full disclosure: I receive enough “press samples” to keep my closet stocked (and hey, I’m not complaining), but this is also not the norm for most folks. In a previous life as a full-time copywriter, I was also much better at managing money. I obsessively checked my credit score and Mint.com, made spreadsheets for everything, and I took full advantage of the 401K matching program that my company offered.

That all went out the window when I made the freelance switch four years ago—and especially after work-from-home parenthood. But my monthly student loan payments are barely over $100 and I paid off my car two years ago, freeing up my income to cover bills, credit card payments, and contributions to my son’s college savings account.

In any case, our savings were enough for a 5 percent down payment. We ended up putting down the Federal Housing Authority (FHA) loan minimum of 3.5 percent to cover closing costs and then saved the remaining funds. That’s well below the 20 percent that’s long been considered the “magic number” for down payments. But even in today’s seller’s market, 10 percent is “the new 20,” says our real estate agent Trent Slatton of Berkshire Hathaway.

In addition, many realtors (including ours) and finance professionals note that so long as the buyer is fiscally responsible and comfortable with private mortgage insurance (PMI), putting 3 percent down isn’t the end of the world. (VA loans even accept zero down, depending on the buyer.)

Speaking of percentages, sticking to the 30 percent rule when it comes to divvying up your monthly income towards a mortgage still holds true. “Due to the cost of living in Southern California, many people have to spend more than 30 percent of their income towards their housing payment,” says HomeServices Lending's Gian Ceretto, our loan officer. “That is just a reality of life that most people accept.”

Miko agrees. “Rules of thumb are only as good as the particular situations they are used in,” she says. “It really depends on the particular situation. If there is no existing debt, especially student loans, or if the client lives a simple lifestyle with significant discretionary income to spare, more income can go towards housing.”

One worrisome thing she’s still seeing? Prospective buyers are still getting approved for mortgages that far outpace their spending habits.

“If a client earns $150,000 annually and spends all but $24,000, well that’s the all-in housing expense they can afford,” she says. “Just because the bank qualifies you for a certain amount, doesn’t mean that’s what you should spend.”

Ceretto is on the same page. Buyers should feel that they can “maintain their current lifestyle while taking on the full [Principal Interest Taxes Insurance] payment as well as the responsibilities of homeownership, or decide where they need to compromise,” he says. “Lenders generally like to see that buyers have some savings left over after the purchase, and I strongly recommend keeping some savings in the bank for unexpected expenditures.”

Unlike us, there are many LA home buyers who don’t have a partner or the advantage of two incomes. And if my husband and I were both on 1099s or had more debt, our story would’ve played out differently—also a reality for many Angelenos working in creative fields.

“Many of my clients are either freelance or work in the entertainment industry, which means unpredictable income, or as I call it, the ‘X factor,’” says Miko. “Unless there is a source of guaranteed income that could cover their mortgage and fixed expenses in the event of a gap in income, I recommend they have at least three months’ worth of cash in the bank, in addition to their regular emergency fund.”

Up next: How we obtained financing. Plus, stay tuned to this series to find out which neighborhoods we looked in (definitely nowhere in NELA), the first-world challenges we faced (do we want to be gentrifiers, because does anyone really?), and more.