Mortgages and Home/Condo Buying

#1

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8/10/05 at 12:08pm

Todd K
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OK, I have been thinking about this a lot lately, and I'm sure there are a lot of people on the HTF who know about this sort of thing.

At some point I'm going to have to stop throwing money into the rent hole and buy somewhere to live.

What I'm wondering is, can I afford to do so?

There have been threads here before on the topic, but none that really address my financial situation (see below).

I live in the city so I'm more likely to buy a one bedroom apartment in a condominium building than anything.

I know nothing about this process so I'm just looking for preliminary input.

First of all, the bad news is that I have virtually no savings. However, I have absolutely no debt whatsoever. No student loans, and the balance on all of my credit cards is zero dollars. I make roughly $42K per year.

What things do they take into account when applying for a mortgage? Are there options available to me to get a loan for a downpayment? I have been paying rent all my adult life, so I know about home ownership as much as a five year old.

Thanks for any input.

#2

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8/10/05 at 1:08pm

Jim Sentry
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There are many programs that will allow you to put zero down.

First step contact a Mortgage Broker and get a copy of your credit report and find out what your credit scores are.

Generally you are allowed a house payment equal to 28-41% of your monthly Gross Income.

#3

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8/10/05 at 1:15pm

Jeff Peake
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Quote:

What things do they take into account when applying for a mortgage?

They take your credit score, and the ratio of your fixed monthly expenses to your monthly income. Usually a mortgage has to be less than 30%( i think) of you monthly income.

Yes you can get no-down mortgages.

I recently bought my first house. It cost me $0 out of pocket. The seller agreed to pay all closing costs, and I did a zero-down mortgage.

Also, to avoid mortgage insurance, you would need a down-payment, or a 2nd mortgage. A first mortgage that covers more than 80% of the appraised value of the house will require mortgage insurance. It can be rather costly. So its very popular to do a 80/20 mortgage, where you get a 2nd mortgage to cover 20% (what the down payment would have been in the olden-times).

I'm a rookie at all this stuff, but it was very painless to get a mortgage. We closed on the house 3 weeks after we made the first offer on it. It was easier than buying a car!

Jeff

#4

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8/10/05 at 2:11pm

Mort Corey
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In areas where housing prices have escalated in recent years it's often cheaper to rent. You can't depend on property values to increase forever. There are a lot of on line calculators that'll show you the bottom line of what it will REALLY cost you after taxes (both outgoing like property etc and the deduction you can claim on interest payments) In a condo, you'll have association fees on top of insurance and mortgage payments. HOA fees can be substantial and if the association board is lax, there can be substatial assessments should major property repairs become necessary.

IMO, and condo is the worst of both worlds. It's all the headaches of ownership but still living in an apartment and they usually are not as liquid when it comes time to sell. It might be right for you, just not my cup of tea.

Mort

#5

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8/10/05 at 3:30pm

DustinLC
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Quote:

I make roughly $42K per year.

x3 = $126,000

Use that as your guide to what price range you should be looking at and what the loan amount you are qualify to get.

Of course be warned that just because you're qualify for a certain amount doesn't mean you can afford it.

For most people at your income, a $126K place will serve them fine financially.

#6

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8/10/05 at 3:54pm

SethH
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If I were you I'd be a little hesitant to buy right now. I think there are certain areas of the country that are going to see a housing bust. I personally don't think it will be nationwide, but definitely in certain areas. The area you live in is one of the areas that I think could see a bust in the next couple years.

Of course, I could be wrong and prices will just be higher then, but it's something to consider.

As others have said, there are certainly ways to avoid downpayments, etc. I would, for the time-being, avoid ARM's because it appears that rates will be increasing for awhile.

#7

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8/10/05 at 5:05pm

Francois Caron
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Quote:

IMO, and condo is the worst of both worlds. It's all the headaches of ownership but still living in an apartment and they usually are not as liquid when it comes time to sell.

It depends on what you live in. My condo, a century old textile mill converted to lofts fifteen years ago, has doubled in value in only six years. I could buy a house in the country for cash with the money I'd get from selling this place even after I pay off the mortgage.

Three words: location, location, location.

#8

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8/10/05 at 5:47pm

Todd K
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Thank you all for this insight.

The DC housing market now is ridiculous. I have friends who've doubled their money buying and selling within 5 years. And let's say the housing bubble "busts." Does that mean values would increase at a lesser rate or would they actually go down? I can't see how that could possibly happen.

I'm not opposed to buying a house, but a condo would be ideal for me right now. Since as I said, I have little savings, I couldn't afford to keep up a house. I'm living in a condo right now (renting from owner) and it's a decent building. I'm starting to think that my landlady will want to sell this place and I'll either have to move or make her an offer. Right now I'm paying about 30-40% less in rent than what this place could be making and my rent hasn't increased in four years. I'm totally comfortable with this situation, I'm just nervous that she will force me to act soon.

So as to whether renting is cheaper than buying, isn't that just a short term outlook? I mean even if my monthly payment increases, it's going towards ownership rather than stuffing my landlady's pocket, right?

And on the same hand, can you negotiate such that your monthly payment is what you want it to be? That is to say, can they extend the length of the mortgage repayment so my monthy installments aren't as high?

#9

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8/10/05 at 6:16pm

SethH
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And on the same hand, can you negotiate such that your monthly payment is what you want it to be? That is to say, can they extend the length of the mortgage repayment so my monthy installments aren't as high?

This is true, but if you have to go beyond a 30 year mortgage to make it managable, I'd say you're looking at something too expensive and should start out with something less expensive. I know several people who have taken out 40 year mortgages recently, and I think it's pretty absurd, but I guess if they want to still be paying on their house when they're retired it's really none of my business.

#10

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8/10/05 at 6:40pm

Todd K
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Well, are you allowed to pay it back early? Say if I did buy a Condo, I certainly wouldn't want to live in one for the rest of my life. I'd either sell or sublet it.

So if I planned to sell before the 40 years is up, would that be OK? (Assuming the sale price is higher than the mortgage.)

#11

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8/10/05 at 7:39pm

Jason Hughes
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Single bedroom condos are a bitch to sell. The complex I live in has 80 units, half 2 bedroom and and 1 bedroom. There are about 7 or so single bedrooms for sale - nobody can get a bite. And this is a fairly attractive area and the condo complex is kept up very nicely.

The two bedrooms don't stay on the market for long...

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#12

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8/11/05 at 6:22am

Scott Merryfield
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Quote:

So if I planned to sell before the 40 years is up, would that be OK? (Assuming the sale price is higher than the mortgage.)

Yes, that would be okay. Actually, only a very small percentage of people ever live in their homes long enough to pay off the mortgage. The balance would be paid off from the sale of the property.

Quote:

And let's say the housing bubble "busts." Does that mean values would increase at a lesser rate or would they actually go down? I can't see how that could possibly happen.

Property values can and do drop in certain areas that have experienced a real estate boom, followed by a major economic downturn. California and Texas are two areas that quickly come to mind. It's not that common of an occurence, but it can happen.

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#13

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8/11/05 at 7:09am

MarkHastings
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Quote:

the bad news is that I have virtually no savings.

Most people only put 5% down. Depending on what you mean by 'virtually', 5% of $100,000 is $5,000. Even if you don't have all of that, it shouldn't be too much to save up that amount.

I'm not trying to be mean here, but I was talking to my uncle about stuff like this and we agreed that if you can't afford 5% down, then that's a good indication that you may not be able to handle a mortgage.

#14

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8/11/05 at 7:45am

Drew Bethel
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Try to get approved and lock in on a rate ASAP...rates are moving upward!

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#15

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8/11/05 at 7:59am

RichP
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Quote:

I'm not opposed to buying a house, but a condo would be ideal for me right now. Since as I said, I have little savings, I couldn't afford to keep up a house. I'm living in a condo right now (renting from owner) and it's a decent building. I'm starting to think that my landlady will want to sell this place and I'll either have to move or make her an offer

Can you make her an offer? Why not try that? You're already there, she won't have to deal with realtor commissions and such, and you don't have to move. That may be your best solution, why not give it a shot?

#16

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8/11/05 at 10:51am

Todd K
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I will try to haggle with her if it does come down to it. (though part of the reason I'm nervous is because she's a little kooky and not so good with the english). I really have nothing to lose in that regard.

#17

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8/11/05 at 10:56am

Todd K
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Also, can you co-sign a mortgage with someone else?

For example, I was still in school when I rented this place, so my father co-signed the lease. Is such a thing possible with a mortgage or is that frowned upon?

#18

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8/11/05 at 11:04am

Jeff Peake
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you can get someone to co-sign.

if you credit score is too low, adding someone else on the loan application with a higher credit score will help (they will average the 2 scores).

Its always a bad idea to cosign someone else's loan, so even if its your dad you may only want to ask him if you really need it.

you should just go down to a mortgage place and see what you qualify for. It takes only a few minutes to get a pre-qualification done, and it makes looking for a house alot easier as you know exactly what you can spend.

#19

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8/11/05 at 1:06pm

Jim Sentry
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If the cosigner is not going to be occupying the property you will be forced into a slightly higher rate.

If your area is experiencing rapidly appreciating home prices I would go with the mortgage insurance rather than an 80/20.

Lenders are required to drop MI when the mortgage reaches 78% of the Appraised value (except for FHA loans). Most do it when the ratio is 80%.

So, in 2-3 years your payment could decrease.

#20

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8/11/05 at 1:42pm

Todd K
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Should I also get a credit report done? Right now I have a balance of $140 on one card that I plan to pay off on Monday. Should I observe any waiting period before I get the credit checked after paying that off, or is it good to have a tiny amount of balance? Arrrgh, I just wish someone would give me lots of money without asking so many questions. I'm good for it!! Really, I am.

#21

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8/11/05 at 1:56pm

Greg_R
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$140 won't make a big difference (unless you are late paying it).

One big piece of advice: avoid banks for your mortgage loan! There are independent mortgage brokers who can get you a significantly better deal. Be aware that with $0 down you will have to pay mortgage insurance until you pay %20 of the loan off. Many people take out a 5yr loan to cover this so they are actually paying everything into the house (vs the insurance company's pockets). Be aware that the 5yr loan will be at a higher rate.

Also, get a good inspector -AND- have a knowledgeable person that you trust look over the house thoroughly. Construction practices these days are HORRIBLE and you might get stuck with a dud (causing a lot of $$$ and grief before the lawsuit is settled). There are things in my house that I can't believe passed inspection.

Greg
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#22

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8/11/05 at 2:04pm

Justin Lane
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Quote:

If your area is experiencing rapidly appreciating home prices I would go with the mortgage insurance rather than an 80/20.

That is good advice. I am going through the home buying process right now and the difference between a 95% conventional loan with PMI versus an 80/15/5 loan at about 170K, was a whooping 14 bucks. You can do away with PMI usually after a couple years upon house apprasial, and whatever equity you have built up. A much better option IMHO then the 80/15/5 option which keeps you locked into a higher payment for the life of the loan due to a higher rate on the 15% portion of the loan.

J

#23

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8/11/05 at 8:05pm

Todd Hochard
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I'm betting the going rate on your condo is over $300k. Can you afford $1800/mo on $42k salary? Not really. That doesn't keep people in this area from getting mortgages that suck up more than one entire two-week paycheck each month. And, strangely, there's no shortage of banks willing to pony up at those debt-ratios here. Crazy.

Nevertheless, this is the market reality in the DC area, so I've recently found out. I was sickened by what I had to pay for my home- which is certainly nice, but not nearly worth what I paid for it, in my mind. Magically, in 8 months, I've gained $130k in equity. ???

The market here makes me nervous, for sure. Good luck. I haven't been here a year, and I'm already planning my escape to the Raleigh/Durham area.

(The market where I used to live- Orlando- is getting equally stupid. I don't get it, really.)

Todd

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#24

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8/12/05 at 4:23am

SethH
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Should I also get a credit report done?

If you wait until 9/1 you can get free reports from all 3 credit bureaus. These will be available through www.annualcreditreport.com. These will not provide a credit score, but will allow you to check out your report.

#25

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8/12/05 at 5:03am

Todd K
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OK, I have to ask now, what's the difference between a credit report and a credit score?

Todd, you're probably right. How did you calculate that $1800 figure? It does sound about right, but is there any way to stretch out the mortgage to reduce that monthly payment? I couldn't afford that much, but I am willing to pay more than the recommended monthly percentage, at least up to 50% (of my net income, not gross).

That is a nice bit of equity you've built up. I'm still wowed but what people are willing to shell out here though, but mostly in the city.

#26

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8/12/05 at 5:36am

Scott Merryfield
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You can use this mortgage calculator to figure out monthly payments based on different loan terms.

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#27

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8/12/05 at 6:42am

MarkHastings
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Quote:

what's the difference between a credit report and a credit score?

I'm sure someone will give you a MUCH better explanation, but I believe that the score is what is determined by the report.

The report shows all of your history with loans, credit cards, bank statements, etc.

Any sort of late payments, bad credit card use, etc. get calculated into some kind of credit 'formula' and you are given a number. That number is your 'score'. Most banks will look at your score and know wether you're a risk or not.

#28

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8/12/05 at 1:11pm

Jim Sentry
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When a credit report is run for a mortgage loan an inquiry is made to the 3 credit reporting bureaus.

Each bureau, along with providing detailed payment history, generates a credit score.

Of these 3 scores the Lender generally uses the middle score.

Generally in order to qualify for a tradional conforming loan that middle score must be at least 620.

A mortgage broker will be able to pre-approve you for a loan and run a credit report withhout any charge to you.

They will also go over the Lending Programs which might best suit your need.

#29

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8/12/05 at 1:53pm

AjayM
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Quote:

I'm betting the going rate on your condo is over $300k. Can you afford $1800/mo on $42k salary?

$1800/mo on $300k? Dreamer!

Now figure in Condo Association fees, taxes, and PMI (or 2nd mortgage in an 80/20). So add at least $200-400 to that figure. Down here $1800/mo will get you into a $220-250k property with minimal downpayment.

Quote:

Todd, you're probably right. How did you calculate that $1800 figure? It does sound about right, but is there any way to stretch out the mortgage to reduce that monthly payment? I couldn't afford that much, but I am willing to pay more than the recommended monthly percentage, at least up to 50% (of my net income, not gross).

There are options, but don't expect much relief. You can look at interest only loans, ARM's, LIBOR, etc which will change your initial payment down a little bit so your monthly payment in total (with taxes and everything else paid) may get you down to $1800'ish/mo on a $300k mortgage. But that monthly payment will go up over the course of the loan, sometimes as short as a few months after purchase all the way up to a few years after purchase.

Quote:

So as to whether renting is cheaper than buying, isn't that just a short term outlook? I mean even if my monthly payment increases, it's going towards ownership rather than stuffing my landlady's pocket, right?

That depends on lots of things. But the simple thing is can you afford the $2k/mo mortgage (well the bank isn't going to give you a mortgage that big anyway)? If not then it doesn't really matter, it makes no sense at all to make yourself "house poor" just to say you "own" something. What is the difference in cost between renting and owning?

For instance down here in S. FL we also have a big RE market, you can rent a 2/2 1600sq/ft townhouse with a 2-car garage for around $1500/mo. That same $1500/mo will get you a 2/1 900sq/ft condo in a "lesser" neighborhood when purchased (and it will need $10-15k worth of work).

#30

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8/12/05 at 2:06pm

MarkHastings
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Using the calculator (from Scott's post) - a 30 year ($300,000) mortgage at 7.5% came out to $2097.64 a month.

So, yeah, add in the condo fees and depending on your downpayment, your looking at a minimum of $2K

Quote:

$1800/mo on $300k? Dreamer!

but it would be at a 6% rate, but like gasoline, who's seen those low of numbers this year?????

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