Home buying advice needed (1 Viewer)

[Brett_H]

All,

My new wife and I are looking to buy our first home sometime soon and we could use some advice on how to proceed. We've already taken a first time home-buyers class, so we're familiar with the terms and we know generally how the banks will determine how much you can afford. We plan on ordering credit reports on ourselves before getting pre-approved so that there are no surprises. We don't have much saved for a downpayment, and the recent wedding has left us with some debts that we would like to eliminate. However, I'm going to have a somewhat substantial holiday bonus coming my way soon, and this has brought up a bit of a dilemma.

There seem to be two ways that we can go about things:

1. Use any holiday bonus money to pay down debts and then begin saving for a downpayment.
Pros: This would presumably allow us to qualify for a larger loan since we'd have less monthly bills/debt.
It's going to be winter soon, and we're under the impression that there's not going to be much out there to buy before spring.

Cons: Increases the time it takes to buy a house, possibly by a significant period of time depending on how fast we're able to save for a downpayment.
We run the risk of interest rates going back up, but I'm thinking they're going to stay low for the foreseeable future (hopefully until at least next summer).
We'd be paying rent (throwing away money) for a longer period of time.

-or-

2. Pay down what we can, but use the holiday bonus and whatever we manage to save ourselves as a downpayment.
Pros: Get us into a house sooner.
Allows us to be able to maybe buy something over the winter, when prices are (hopefully) lower due to it being the slow season.
Takes advantage of current low interest rates.

Cons: Might not qualify for a large enough loan for the size house we want because of debt.
Move into a house with a higher than anticipated debt load and not be able to do as much as we'd wanted to upon moving in. (not a huge deal, but paint, carpet, etc. can get expensive quick)

So, any "experts" (or seasoned amateurs!) out there care to offer advice? If I've left anything out, let me know and I can post more detail.

Thanks,
-Brett.

 

[Jason Handy]

Brett,
My wife and I are getting ready to close on our second hoouse next week; I thought I would chime in with our experiences and $0.02.

I think you need to answer a few questions for yourself.

1) What are the home specs we want (# bedrooms, square footage, garage?, basement?)

2) What are homes selling for in the neighborhoods you are considering?

3) Do you want to build new or buy existing?

Sorry, this got cut off too early before i was finished. Determine how much the house you want to buy will cost and then speak to a lender. He/she can go over the various options you have. The argument for case #1 is that you will definitely qualify for a bigger loan and therefore more house, but unless you put down 20%, you are hit with PMI, which can be over $100 a month and has the undesired effeect of reducing how much you qualify for.

I think your second option is a better way to do it. You will still need to scrape together at least 5% + closing costs, and you would take out two mortgages, an 80% primary mortgage, and a 15% second mortgage. Sometimes, you can immediately roll the second mortgage into a home equity line of credit, which offers variable rates as low as prime (currently 4.25%). After buying the house, pay off the high-interest debt as fast as possible.

Does this make any sense?

Jason

 

[Max Knight]

My wife and I just bought our first house (condo). I would say do some math. Figure out how much house you can afford in each of your two scenarios. Then start looking around. If you find something right away that fits scenario number 2, just go for it. If you don't find anything that fits scenario number 2, then you won't worry about going with number 1.


You can figure out how much house you can afford at any rate, the real issue is finding a home that you like!

 

[Dave Morton]

Most financial advisers would recommend you lower your current debt. If you have huge numbers on your credit cards, this may be held against you with regard to the amount of the loan you are able to receive.

I believe you can get your own credit report and see what shows up prior to going to get pre-approved. Also, talk with the lending agent prior to them doing a credit check. They would be the best ones to guide you.

My thought is that current rates will remain until summer next year. Of course, this can all change but the current trend indicates that it will not change, given the current state of the economy.

Just my $0.02.

 

[Dennis Reno]

You probably already know this, but just in case...

Keep in mind that lenders will not only look at your current debt, they will also see how much credit you have available through existing credit cards. I would suggest canceling all but one or two credit cards. Order a credit report about 90 days after that to check that the cards no longer show up on your report as active.

 

[Marc S Kessler]

I don't know what it's like in your part of the country but in some places you may find incentives offered to first time home buyers. These can be lower thresholds for down payments without PMI or very attractive interest rates.

 

[Brett_H]

All,

Thanks for the replies/opinions given so far, they're all appreciated. To clarify a few things....

Jason,

I think your second option is a better way to do it. You will still need to scrape together at least 5% + closing costs, and you would take out two mortgages, an 80% primary mortgage, and a 15% second mortgage. Sometimes, you can immediately roll the second mortgage into a home equity line of credit, which offers variable rates as low as prime (currently 4.25%). After buying the house, pay off the high-interest debt as fast as possible.

I'm not quite sure I follow you on the two-mortgage thing. If we have 5% down, wouldn't you just mortgage the remaining 95% of the home?
We're going to be buying an existing home. 2-3 bedrooms, 2+ baths, style is sort of flexible with the exception of no ranches.

We've already consolidated our credit cards and closed the unnecessary ones. We're down to two, and those are fairly under control. Anyone know what a "favorable" balance to credit limit ratio is as far as credit cards? I know it's bad to be maxed out (duh!), but also it's supposedly not good to have a 0 balance as that's too much buying potential.

At any rate, we're probably going to be stuck paying PMI no matter how you slice it. I seriously doubt there's any way we'll be able to save up the 15% downpayment that I've heard thrown around as the minimum down to avoid PMI. Maybe by the time we buy our 2nd house....

Thanks again!
-Brett.

 

[BrianB]

At any rate, we're probably going to be stuck paying PMI no matter how you slice it. I seriously doubt there's any way we'll be able to save up the 15% downpayment that I've heard thrown around as the minimum down to avoid PMI. Maybe by the time we buy our 2nd house....

That's what the second mortgage is for, Brett. You take one mortgage for 80% of the price of the house, and a second mortgage for the rest - 20%. You don't pay PMI because you're not getting a loan for 100% of the house.

Doesn't suit everyone. It wasn't for us, we're in the process of buying our first house too.

 

[SteveA]

Whatever you do, don't pay PMI. You're flushing money down the toilet that way. Get an 80-10-10, 80-15-5, or 80-20 combo. The amount of extra interest you'll pay on the 2nd loan (which will be at a higher rate than the first) will almost certainly be less than getting one loan w/ PMI. Also, since your money is going toward interest on the 2nd loan rather than PMI, you get a bigger tax deduction. Mortgage interest is deductible, but PMI is not.

 

[James Q Jenkins]

Just from a practical standpoint I would think that it will be more difficult to pay down those credit cards after you've bought the house. Buying a house means big cash expenditures, so you'll end up with no cash, a huge mortgage, and the credit card debt on top of it all if you buy the house without paying down the CCs first.

I'm not a financial advisor nor do I play one on TV so I could be totally full of it.

 

[Moe Maishlish]

Interesting thread, and applicable to myself as well...
I'm a single guy, and I'm planning on buying a house in the next 1-2 years... except I'll be buying one in Canada.
Does anyone have any first-time-home-buyer advice for a single 27 year old Canadian guy? I already know about the $20k RRSP benefit and 5% down-payment for first time homebuyers...
Moe.

 

[James Slade]

Moe I am also in T.O. and wanting to buy a house in the next year or so, I am 26. I am just starting my research. If you ifnd anything valuable for someone in T.O. please pass it along. (There are some substantial differences between the U.S. and Canada in this situation)

 

[JohnE]

What the heck is a PMI? Probably a dumb question, but I've never bought a house.

 

[MikeAlletto]

I think its Principle Mortgage Insurance. The P may be wrong though. I'm gonna be seriously starting looking for a house after new years...I'm pretty excited about it, but I'm already having nightmares about buying the wrong house and all I've been doing is research! I'm gonna be a mess in a few months

 

[Danny R]

I always mention this anytime someone asks about it, but I highly recommend doing what we did, and purchase a VA forclosure. You don't have to be a vet to take advantage of these houses, but you get most the advantages of a VA loan (closing costs only to purchase, no PMI insurance, easy load qualification)

There are often 10 or so of these houses each week in cities, with others scattered about your state. These houses are secret auctioned and go to the highest bidder, but often they are targetted only by investors who want to make some profit, so a person looking for a personal purchase can overbid them but still grab it at below neighborhood values. (Our neighbors houses run for $145K and we got ours at $135K.)

Almost any realtor can handle these, so you can find one that doesn't have a large commission cost and enhance your chances. (The high bidder is based on highest dollar amount going to the VA. If you bid $100K and your realtor takes out 10K, then you are only really bidding 90K. The guy bidding $100K but who's broker only takes out $5K overbids you.

Unlike HUD homes, these are often in good shape, and in average neighborhoods. Ours had absolutely no problems, with new carpet and paint.

The advantage of going to the VA are several. No PMI (this is mortgage insurance JohnE, and protects the bank against you forfeiting on the loan) is needed, and only a couple thousand dollars is needed for closing costs (most of this is just the first months mortgage payment). Also your title is guaranteed by the US government, so no title searches or title surprises will ever come up.

Go to your state VA website for details, and look for their property management section.

 

[Tim Abbott]

What the heck is a PMI?

Private Mortgage Insurance. PMI probably shouldn't carry the stigma that it does. In some cases, it can actually be cheaper to purchase a home with PMI than with an 80/10/10, 80/20 etc. It depends on the market conditions, length of the loan, your credit, etc. PMI is something that you probably want to avoid, but don't rule it out completely if it ends up being cheaper in the long run. Typically Upfront PMI is a much better choice than level premium PMI.

Also, a good lender should be willing to crunch some numbers with you in regards to which scenario makes the most sense. If you have good income and good credit, I might lean towards paying off the debt. It would depend on the specific numbers in your case, though.

Good luck.

 

[Ashley Seymour]

Almost any realtor can handle these, so you can find one that doesn't have a large commission cost and enhance your chances. (The high bidder is based on highest dollar amount going to the VA. If you bid $100K and your realtor takes out 10K, then you are only really bidding 90K. The guy bidding $100K but who's broker only takes out $5K overbids you.
By law, VA limits realtor commissions to 6%. You could negotiate with the realtor for that 5% or even less however.
If you get a new loan, there will be PMI or MIP (FHA version) unless you put the 15-20% down mentioned above. VA would pay for almost all closing costs if they were included in the bid (see below for a partial list.)
VA has a unique program in that it will finance the purchase for a owner occupant for 5% down and a 2.25% funding fee (the equilavent of PMI) but without the monthly .5% extra payment factor. You do not have to be a veteran and could even purchase as an investor with 10% down plus funding fee. The rate today is 6% and compares favorably with other sources of financing. The VA will not charge title insurance, loan origination fee, appraisal fee, document prep fee and a few other small ones. You will pay the one year insurance premium, approx two months reserves for insurance and taxes, recording fee (probably less than $50) and interest from the day you close till the first of the next month.

 

[Jim J]

We went throught this a little over a year ago.

We started with one mortgage company on the 80-15 deal. It really makes a lot of sense. I actually had to explain it to my realtor. (That should have been my first clue that she wasn't top notch). Anyway, I ended up getting something cheaper with a tradional 95% LTV and PMI (even factoring tax implications)

Make sure you work with a realtor that you know and trust. We had some disclosure issues. blah blah

As for paying down the current debt, well, remember the amount you can afford is determined by one of 2 things. The housing payment can't be more than (something like) 30% of your gross income. and your TOTAL debt can't be more than (call it) 36% of your total income. So if your current debts' monthly payments are less than 6% of you gross income (you'll need check the exact figures), it may make more sense to save for the down payment.

Over at realtor.com they have calculators to tell you these things. It will tell you what you limiting factor is. Such as 'You need to lower your monthly debt or increase your income' Or 'You need a bigger down payment' etc.

good luck

 

[Stacie]

When we bought our first home two years ago, we paid 3% down (through a special program for first-time buyers) and we do pay PMI. The second mortgage option wasn't viable for us, since the house we wanted to buy put us at the top of the monthly payment we qualified for, and we would have been paying more with the second than we pay with PMI.

Fortunately, our home's value has gone up approximately 35% since we bought it, so we're currently in the process of refinancing, through which we're getting a lower interest rate, cash out to pay off our car loan, and no PMI. Pretty good deal after only two years, though if you're getting a mortgage now, I don't suppose you can count on rates going much lower!

My advice for Brett: pay off the debt first. You don't need much in the way of a down payment these days, and you'll qualify for a larger loan (maybe significantly larger) with less monthly debt. We had a reasonable chunk of cash going into our homebuying process (nowhere near 20% down, but still a decent sum), and we determined partway in that paying off one of our car loans (at $250 a month) allowed us to up the price bracket in which we were home shopping by $30K -- and that was when mortgage rates were quite a bit higher than they are now.

That said, if you can afford the house you want at your current level of debt, it might make sense to act as soon as you can. Just depends on what you want and how much it costs.

Good luck!

 

[Jeff Ulmer]

My $.02.

Getting into the housing market sooner than later is good, however be extremely careful of overbuying, especially on your first house. IMO if you don't have at least 10-20% for a down payment, you can't afford the house. These low money down schemes are a trap for homebuyers, and while they may work out when rates are down, any significant jump in the interest rates may mean a forced sale (been there, done that), which always coincides with a bad selling market. This is not a good situation to be in. You need a house that will allow some flexibility with your finances for any unexpected expenses. Could you comfortably handle a sudden $10,000 expense under your proposed home buying scenario, or still afford it if one of you lost your job?

Also, beware of extremely long amortization periods to lower payments. All these do is sap money in interest (which is calculated in advance), and slow any equity building. All mortgages have fixed interest/principle ratios that change over time. For example, on my first mortgage, I paid over $12,000 in interest the first year to $1000 principle. With a shorter amortisation period the principle amount would have gone up significantly.

I would also opt for a variable, below prime mortgage. While these don't have the security of a fixed rate, the difference in accrued interest charged is significant, and generally would require a huge rate increase to actually put you in a losing situation, since while the rates were lower you were paying off more principle, thereby lowering your lending costs, even if the rates went up.

Make payments as frequently as possible, at least twice a month. Again this attacks your principle faster.

Keep in mind that you are only buying your first house. This should not be looked at as something you will live in forever, but more as a stepping stone to what you will eventually want. Home owning is a learning experience. You will find that once you own a home, you will begin to discover what does and does not work for your lifestyle, and your needs will change. This provides great knowledge for what to look for in your next purchase. If you buy wisely, your investment will allow you to go into a subsequent purchase with a solid financial base, plus the experience to find a house that truly suits your needs.

To reiterate: Don't overbuy. Find something that suits your immediate needs and that doesn't strain your budget. Shorten the amortisation as much as possible, even if it means buying a less expensive house. The equity you make on that property can be used the next time you buy a house.

Good luck!