Trying to buy first house - Page 2

That assumes that the market you are buying into isn't already overpriced and due for a correction, in which case you could lose big time. Buying a lower priced home in an inflated market may not make you the most when you sell, but the chances of a huge loss are also lessened. You also need to take into account interest rates, which may allow a more expensive home now, but could force you to sell at a bad time if rates go up when you need to refinance. You need to know the market you are buying into.

I'm doing what Jeff did as well. We're putting 5% down, and doing an 80/15 split to get out of the mortgage insurance.

I'm set to close on my first house in two weeks with my fiancee. I know how you feel Andrew. I would have never gotten a good down payment saved up. I happened to get a nice chunk of change from my grandmother that was promised to my father before he passed a few years ago, so I was able to use that for earnest money/downpayment and closing costs.

5% might not seem to make a difference to your mortgage payment, but if we didn't have that 5%, we would have likely been priced out of the home we are buying. My situation is very similar to yours, with the two of us making a little over 100k a year. The fiancee has very little debt (under 3k in CC and that's it). I on the other hand have about 5x that, but the debt ratio between the two of us still allowed for a mortgage up to 278k at 5.75%. By putting down that extra $15k, we got a great 4BR/2 bath with full furnished basement, over .25 acre lot and attached garage in a very in-demand area of Naperville, IL, which is known nationally for the school district. The house has already appraised for 10k over the purchase price, and I expect it to be worth about $20-30k more by this time next year. So the down definitely made a difference for us.

Can anyone chime in with the debt ratio they use for mortgages? I've heard lots of different one, like 38% of your total gross income for both your mortgage and other monthly debt. Just curious...

There are two ratios actually, 28/36, but recently more lenders have not taken such traditional approaches to lending.

The first one's the maximum percentage of your monthly gross income that the lender allows for housing expenses. The second one is the maximum allowed housing expenses + debt (like cc debt).

Here's a link which explains it further-
http://homebuying.about.com/cs/mortg..._to_income.htm

The Motley food web site's another good one to use for this type of info, as is the Mortgage Professor's site.

-Pedro

It's much easier to do this in a less expensive area of the country which is 'up and coming'. Danbury, CT probably isn't seeing such 'Las Vegas'-type of home appreciation rates. YMMV. And anyone who already has 20 years worth of student loan debt should be careful when trying this method IMO.

-Pedro

A few points—most of them a bit disjointed and I hope that none of this will sound patronizing or a hearken back to the good old days when we walked 10 miles to school in snow above our waists, but…

•You might want to check out rent vs. own in your area. There was an article in the Wall Street Journal recently that claimed in some areas (notably parts of southern California) it is now more financially advantageous to rent (as opposed to buy)—on the order of 2 to 1.
•Get your credit cards to zero.
•Reduce your expectations. I know that this is hard, but you (I assume) are reasonably young. You can’t have everything the first day—or the first year or the first 10 years. For example when my wife and I were first married we could only afford Salvation Army furniture and a small, portable TV. Not really a problem to consider where to put the RPTV. I’m not trying to offend you, but if you are concerned about where to put this baby you should really think about what is important. Put together a budget, complete with entertainment (including buying DVDs) and see where your money is going—then adjust for what you want and what fits your lifestyle (RE Leila).
•I’m amazed at buying a home with zero down. This will shoot your interest through the roof. Since you are making six figures, go on a crash diet for one or two years and save a down payment. If you can’t put down 10%-20%, you can’t afford the home.
•Some of the above may be modified if you have some substantial, realistic upward salary expectations.
•Modify your initial home expectations (I read your first view—but really, consider something more modest and in not that good condition). Instead of going to see the Yankees, refurnish the kitchen and bathroom, etc. and sell at a profit. Then buy a new home.

There is hope. My wife and I began on a wing and a prayer and with only one salary. By now we are retiring and our new home is undergoing renovations for a couple of months before we move in. We were able to buy this home outright (even while making payments on the one we are currently living in).

But we began with a small, one-bedroom apartment located in a modestly undesirable neighborhood and very cheap used furniture. It takes time.

yeah lew, but aren't you like...ancient?

Well, Lew is retiring... but his advice is solid. I'm not quite to the retirement point yet but sometimes you got to start slow. We had student loan debt, and our major brak financially was having a Ford Ranger w/no A/C and no back bumper for our first car. From my mother-in-law, given to my then-fiancee...

We took all the debt info, piled it into a spreadsheet, and figured out to the penny how to reduce debt the fastest - depending on early payment penalties, interest rates, etc. And followed that religiously for 2.5 years.

We also lived in apts for 3 years, moved from Texas to New Jersey and back. Finally had our first house built, with a lot of work from our side, for $112K. It sold for about $140 5 years later; but in the meantime we had sunk every bonus and extra money into it, after debts of course. Equity was nice, helped us on our next house, in FL. 3 years later we moved back, again with really nice appreciation and equity, plus a serious help from my new employer, who paid almost all the closing costs and points to boot - sale as well as purchase. Helped us move into a really nice house - where we are raising our first child. We'll be here for a while, no doubt.

That all happened over about 10 years. Patience helps, so does living in a fairly low-cost state, as well as no income tax.

Some options to consider. I'd have a real hard time moving to the East or West coast, given some of the real estate prices... so think about moving to a lower-cost area.

Mike

My friend in NYC mentioned rent control as contributing to that where he lives. YMMV.


Great advice, but therein lies the rub. In areas like Danbury, CT/etc. there simply isn't the housing stock available for what you've described. Everyone has to commute from the sticks. Nothing really there for the folks making OK money but have not yet real estate to work with/fix up. In my immediate area such starter properties/fixer uppers were sucked up in the mid 90s just before the real estate prices in Chicago jumped.

-Pedro

Ted, I’m not even a Boomer.

It's pretty common for the sellers to cover all or part of the closing cost if you negotiate this up front. Of course this is factored into the final price you pay for the house, but it saves having to bring the cash for closing costs to the table, and it doesn't make that big of a difference in your payment.

If you can avoid PMI with some of the 80/15/5 schemes or whatever that's fine. However in a lot of cases the appreciation in the value of the home will allow you to have the house reappraised in a couple of years and drop the mortgage insurance anyway.

Also, if the house needs some repairs you might get the seller to set up an escrow account for a few thousand dollars, you get the cash at closing. Of course this also gets factored into the cost of the house, but again, it won't make that big of difference in you payment.

I had a friend who did all the above.

She found a house in a (then) marginal neighborhood here in Atlanta that was listed for $68,500. She only had $3500 to pay down, but she found a bank that would finance with only a 5% down payment. She agreed to pay the full price for the house. She got the seller to pick up closing costs (about $2500), the seller agreed to put $2000 in an escrow fund for odds and ends that needed immediate repairs, and the seller also spent about $3000 on adding a central air unit to the heating system. She no doubt could have negotiated the price of the house down to about $60K, but by doing it the way she did, she was able to avoid laying out cash for closing costs, and she had a little money to fix some things up once she moved in.

She had a PMI payment of course, but after two years the house was appraised for around $120K and the bank that held the mortgage dropped the PMI since she owed less than $65K on the house.

Most people don't get their ideal house when they first start out. My advice would be to get what you can afford now and look to move up in a few years.

I very much disagree with that. Lots of people can easily afford the mortgage payments but can't come up with 10% - 20% down.

yep that does sound pretty old-school

The interest rates are so low now, that even with an increase due to no down payment, you should still come in at under 6%.

I agree that rolling equity over to cover a down payment on a 2nd home can really help you trade up. But for a first home that you will most likely sell in a few years it doesnt do much good.

Basic economics: Buy Low Sell High. A wise man once said "you make all your money in bear markets, but you don't realize it at the time."

Right now housing is very high. It's hot. The natural tendency for people is to get into it because it's so hot. But the reality is that right now is exactly the worst time to get into real estate. Look at the numbers and the disconnect between wages and housing prices, this is going to slow down and even go down.

Remember when tech stocks were the hottest thing around? Now it's easy to see with 20/20 hindsight that the tech bubble was a fluke, but at the time people thought that the tech stock runup was real and lasting. Naysayers were unable to understand the "change in the fundamentals", and were largely marginalized. Lots and lots of people bought into the market when it was high because it was high. That meant it was hot. That was the time to sell, not buy, and if you didn't own, it was not the time to buy.

The same thing's happening now. People will deny it and say I'm chicken little, but I look around and see the same kind of crazy speculation and nonsensical prices as I saw then. A $175 townhouse in NoVA selling for $610? IN just a few years? What person with a functioning brain doesn't understand that this is going to correct itself?

Rents are at historic lows across the nation right now, especially in places where the real estate market is really kooky. I say continue to rent (as a matter of fact try to lock in as long as possible a term) and save your money. Save your money in your 401(k) at least to the amount that your company matches. Remember when you are ready to buy you can take a loan out against this (usually up to half the amount) for the down payment on your house. Then pay off the credit cards, then fund a Roth IRA, then and only then buy the house.

Whatever you do DON'T buy a house in this kind of market if you don't have a significant amount of money to put down. If (when) the house goes down in value you'll have negative equity and that's really bad. (I have a couple siblings who bought in the late 80s housing boom and ended up 5-10 years before they were even again).

If you plan on living in this home for over 15 years my advice would be different.

All the mortgage "rules of thumb" have been pretty much thrown out the window in the last 5 years orgy of American Consumer Debt. Pretty much anybody with a job who can sign their name can get a mortgage. Pundits will tell you that this is good because it means that "people who couldn't afford a house before can afford one now" and "it enables homeownership". Others will reply that there was a reason for those old rules in the first place and this is a big part of the reason that the housing market and mortgage industry is due for a major shake-up. I'd be in the latter camp. What happens when prices plummet 20% to get more in line with incomes and people are stuck refinancing their 80/15/5 ARMs for 80K more than the house is worth?

Not only that, but when they are refinancing that same house which they can just afford payments on now, only to find that interest rates are doubled when they have to refinance. There were a lot of people losing their homes in the 1980s due to 18% interest rates and refinance time. To add to the problem, with the rates that high, the housing market was dead, so not only did you need to sell, you needed to sell at a sizeable loss just to get out. Buying the most house you can afford when prices are already over inflated is courting disaster, especially at low interest rates. Do a "what if" scenario and see whether you could weather a sharp increase in rates (and payments), or a decrease in the market.

Philip is dead on when it comes to market realities. That doesn't mean staying out of the housing market, it just means planning for shifts in the market, and how you will sit when they occur. A 20% reduction on a 200K house is a lot more than 20% on an 80K property.

Exactly why I wrote that my advice would be different for a 15+year house. Try that kind of reduction on a $500K house.

I agree with the above that in a potential bubble" market it's safer to go with a smaller and cheaper single family or town house. The prices on these units are just more stable. We may see prices drop over the next couple of years, but I think we've reached a point where they won't go below a certain price base (e.g., I don't think we'll ever see the days of a 2 bedroom town home selling for $150,000 any more regardless of condition, the new base is at least $220,000 or $230,000 in my area)

So if you buy a $240,000 home, it's never going to drop below $230,000 around these parts. On the other hand, there is no base for large single family homes. Who's to say where you draw the line between $600,000 and $400,000? At that point, you're paying for luxury and it's a matter of what the market will bear.

exactly what i did as well. i had to bite the bullet and pay the pmi for the first year or so...but that was about it.

phillip makes some good points about going into a sale blind and ending up upside down on the house. i think my sister fell into a similar situation. so i think you'll really need to look into similar homes in your area. ask your realtor to run "comps" on similar homes in the neighborhood you're looking for. that will give you a good idea of what kind of equity you can expect.

right now, i'm (knocking on wood) doing okay. my first house appreciated quite a bit and my new home has appreciated over 30k -- and i haven't even moved in yet! that's the kind of crazy market we have here now.

to me, renting is simply throwing your money away.

-----

btw, about selling your gear, changing your lifestyle, etc. i think, in the long run, it's a good idea. yeah, you worked hard and have some nice stuff now. but you know what? it's just stuff. heck, taking it to an extreme -- i can argue it's just more materialistc junk you don't need, more stuff to weigh you down, etc.

believe me, there really is a wonderful feeling of pride and joy when owning your own home. even if it's a fixer-upper (something you may want to consider), it's nice to come home to *your* home.

anyway, i think any sacrifice you can make to get yourself into a home will be worth it.

There is a simple explanation for this phenonemon. In some markets (Southern California, Northern Virginia), speculative investors are buying up to 40% of all houses on the market, hoping to flip the properties for a quick buck. This is resulting in a LOT of landlords out there competing for renters.

Wow Ted...on a home theater forum this gets pretty close to subversive

Mort

i know...i better watch my back walking down the htf hallways!

man oh man only if you lived in MA. I just bought a BRAND NEW MINTY FRESH town house only about 20 minutes from Boston. I just talked to my agent and he said that he has about 70 out of the 90 sold.


they are starting in the 260 range

Directv will get it in HD starting this baseball season .. if that helps at all.

Tough call on the housing issues. The others have much better advice than I do.

I agree it's good to hear the feedback about the market such as it is-it's pretty obvious it can't be this much of a seller's market forever. But, the area I am buying into is doubtful to ever drop significantly. People moving in from out of state try to move there for the school districts. Most people who live there are not barely making it-the cars are the first giveaway I think. We'll see though....either way I'm very excited about the house and ability to finally crank up my A/V gear and home recording gear!

I guess the housing bubble hasn't burst yet (per CNN):