Need some advice on buying first home.... (1 Viewer)

[Alan Erceg]

Ok figured I could ask for some advice here....

I recently got engaged(I did a thread about that a while back..LOL), we have now started looking at houses.

I myself am 21, my fiance is 23. We dont plan on buying for about a year or a year and a half right now. Wedding in July of 2007 as of now.

Neither one of us make a huge amount of cash, about 30,000 or so a piece.

What is a good down payment amount on a first house? 20%? I was reading about PMI...and I thought I read that you would not have to pay PMI if you put down 20% or more for an intial down payment. The houses/townhouses we were looking at were in a brand new plan and started at about 110,000$. Putting 20,000 down on that brings it down to about 90,000 which is in our price range. It would put us at a monthly payment of between 700 and 800 dollars this is calculating with approx 7.5% interest rate.

Both her and I have good credit. Her a little bit better only because she is more established. So I dont know if it would be better to get the house in both of our name, or only get it in one.

I guess what Im asking is for some advice on a down payment, and if we are shooting to high as far as a downpayment goes.

I dont want to live paycheck to paycheck if at all possible, just looking for some advice from some people who have bought houses in the past, and let me know if I am leaving out any other expenses when buying a house(closing cost etc..)


THanks for any help/suggestions...

 

[Craig]

Definitely avoid the PMI if you can. A lot of people will use an 80-10-10 financing scheme where they put 10% down, do a second mortgage for 10% and have the 80% as the first mortgage.

You need to get whatever you buy inspected by a certified inspector that you hire. Even if it's brand new, still have it inspected. Even if it comes with a homeowners warranty, still have it inspected. It should cost around $250-$300, and you should get an extensive written report after the inspection.

As far as closing costs, you can usually get the seller to pay part, or all, of the costs. Of course it's really factored into the selling price, but it can save you from having to bring cash to the table at closing, and that's cash you can put to other uses.

Existing homes actually can be a safer buy than new homes, serious flaws will be more apparent. With a new home you never know until later on, so don't pass up an existing home if it appeals to you.

Try to find out which areas are having the fastest appreciation in values. Profits from a home are free of federal income tax if you live there for at least two years, and this can be a huge benefit. A friend of mine who was nearly broke managed to scrape together a 5% down payment on a $68K bungalow about six years ago, the house is now worth about $100K more than what she paid for it, and it's all tax free. Location, location, location is what the real estate agents always say.

Finally, don't be too rigid in what you'll pay if you see what you think is a good deal. I passed up a really good house that was $208K about 6 years ago because I had limited myself to $200K as the max I'd pay. Looking back, the $8K is really negligible, and I could have afforded it, but I was determined to stick to my self-imposed limit.

 

[Alan Erceg]

Craig thanks for the insight..

We arent hard set on a price..but we have a range between 80 and 110k or so. If it comes down to something we really like then we are willing to go over that...

So putting down 20% would then infact eliminate the PMI? Thats what I am most concerned about....

As far as the home inspector...I had never though of that, that is a good idea. thanks!!

any more suggestions/comments ....keep em coming..

 

[Craig]

The 20% down should eliminate the PMI totally. Actually, if the house increases in value a lot the bank should drop the PMI once you have the house reappraised. However since the PMI is almost pure profit, some banks will give you a hard time, although I think it's now the law that they have to drop the PMI if you can prove you now have sufficient equity. My friend who bought the $68K house had enough equity after two years that the bank dropped her PMI without any hassle.

In some states you can get a buyer's broker who will work as your realtor. This can be an important point, because in most states the realtor actually is obligated to represent the seller's best interest, even if it's 'your' realtor. Don't be fooled into thinking just because you're working with a realtor and the seller has their realtor, that you're best interests are being represented, because in most cases they're both obligated by law to look after the seller's best interest. An actual buyer's broker should look out for you, but from what I understand, in some states they can call themselves brokers and still be obligated to the seller. Try to find out how it is in PA.

 

[Philip_G]

You can avoid the PMI with zero down as well with an 80/20 loan.
Definitely get a realtor working for you, they split the comission with the selling realtor so it costs you nothing and you've got someone on your side.

 

[Alan Erceg]

Philip what do you mean by an 80/20 loan?

Also no one seemed to answer if it would be better to put the house in only one of our names or to go with both...didnt know if there was a disadvantage either way..

 

[Philip_G]

it's an 80% primary mortgage and a 20% secondary, sorry.

I'd find a good mortgage broker and get the finances in line, get the loan ready then you know exactly how much you can spend, then go shopping.

 

[Keith Mickunas]

Unless you have bad credit it would probably make more sense to get the house in both of your names. If you try to get it in one person's name only, you'll only be approved based on that person's income. They'll only allow you to have a monthly payment (insurance and taxes included) plus other debt equal to a certain percentage of your income. Based on your numbers I make a bit more than you two plus I have excelletn credit and no debt, and my banker said $180k would be about the max I could get for a loan. So if you tried to qualify for a $90k loan on one of your incomes, you'd be pushing it. Having more income would help. At least that's how I believe it would work.

Once you're married I don't think it matters much, your credit will be combined for all practical purpoes.

I went with a adjustable rate mortgage and 5% down. I have PMI, but I didn't want to deal with the second mortgage. Maybe it wasn't the wisest decision, but it's what I wanted to do. PMI in your price range would probably be about $60 a month. If you do an 80-10-10, 80-20 or 80-15-5, you'll have a short term mortgage for that smaller amount at a slightly higher interest rate. The advantage is the interest will be tax deductible, so in most cases you'll come out slightly ahead. However your first few years you'll have a slightly higher mortgage payment, if I'm not mistaken.

In most cases banks are obligated to remove the PMI once you reach 22% equity. If you have 20% down (or one of those other loan options) there won't be any PMI. If your house appreciates then you can have the PMI removed if you prove you owe less than 80% of it's current value. But that will require paying for an appraisal and arguing with the bank unless they accept the tax appraisal, which usually is lower than the actual value.

There are a lot of options out there. Some banks offer seminars and the like for first time home buyers. I know my credit union does. You might want to look out for something like that. Or meet with your bank's loan officer to see what options they have, not that you would necessarily want a loan from your bank, but it's a place to start.

And I wouldn't worry much about saving for 20%. That's a hell of a lot of money, especially for someone your age. You'd be paying rent while saving for that, and that's just bad. Having no down payment and paying PMI would still be better than paying rent. Get in now, while the interest rates are still reasonable if you can.

 

[SethH]

Find a company that will underwrite your loan manually (which means not using your credit score). You can get the same (or better) rates and it's based more on your job and history of rent and utilities payment than on your credit. You may want to plan on a slightly higher interest rate because you won't be buying for another year. Interest rates are going to rise over the next year pretty consistently unless there is some tragedy that slows our economy again. I would guess interest rates will go up at the very least 1 full point, possibly as much as 2 full points between now and summer of 2006.

 

[Alan Erceg]

Keith,

Both her and I still live at home right now. So alot of expenses are taken care of. I dont live at home for free and neither does she, but basically we both do half with our parents. Thats why saving 20% doesnt seem to be to hard to do. We figured if we started to put 400$ a month aside right now by the end of next year we could have just under 20,000$ saved up. We dont plan on getting married till July of 2007 or so, so we have plenty of time to get money together. It may not end up being that much but that is what we are shooting for. By that time as well both my car and her car will be paid off, as well as most of our school loans.

Keith,

Not sure exactly of what her credit score is, mine is in the mid 700's right now, and her credit from what I believe is stronger than mine based on she has had longer to build it up and has good payment history on her car, school loans etc...


Im personally excited about buying a house, its something I have always wanted to do...Its just gonna be quite a bit of work it seems. I believe we are going to go through the same mortgage person her sister did when she got married, so we should be in good hands...

Thanks again for the comments and keep em comin...

This is the one type of townhouse we were looking at that was in our range...


I'll have to look for some pictures of the actual houses as well...

 

[Keith Mickunas]

Alan it sounds like you're pretty well set. Both of you have good credit (700 is nothing to sneeze at as I understand it) and if you don't have a lot of expenses that makes things easier. Considering interest rates are likely going to be rising I would still recommend getting into a house sooner than later if you're dedicated to doing it. Of course paying off the car and school loans will help you qualify for a larger loan.

A house payment on a home that costs around $110k will be very doable with your incomes, regardless of the downpayment. You should be able to find calculators online or a local mortgage person who can give you some estimates as to what the insurance and taxes will be on such a place to give you a pretty good idea on the overall costs. Also there are special programs for first-time buyers and recent college graduates as well as for people in certain income brackets that you might be able to take advantage of.

Another way to look at is this, you could save $20k over the next two years to invest in a house, or you could buy this year and start investing in that house now. In two years you can expect that the place you are considering will be more expensive and interest rates will rise. Requiring more money up front to get past the PMI as well as larger payments.

Of course, if you're not comfortable about buying a house now for any reason, don't. But since you're inquiring here, I can't help but encourage you to look at all your options and consider buying sooner rather than later. It's impossible to predict what the situation will be like at the end of 2006.

 

[Alan Erceg]

Keith,

I see your point in buying sooner rather than later. Its something I will have to bring up.

I guess the biggest obstacle right now as far as buying right away is that my fiance lets see is pretty picky about houses. I only want a few main things, a garage, central air if possible, and the house has to be able to have high speed internet(Cable or DSL)hooked up to it. She is picky about the little things though. So I have a feeling that it will be a long process unless she decides that what she wants is what we have been looking at..

So you think putting less down now and buying could potentially be the same as saving up the 20 grand and buying later due to higher interest rates?

 

[Philip_G]

If you can afford it I'd strongly suggest buying a single family house. Townhouses kind of suck as I've come to find out the hard way.

 

[Paul_Tesh]

Alan,

One very important factor you need to take into consideration as far as the time frame to purchase your first house is the interest rate. Right now, it's all-time record low in the history.

You certainly can avoid PMI if you have 20% down. But the PMI won't be there for the whole life of the loan. Once you build up your equity to 20%, you can request the lender to eliminate the PMI. On the other hand, the low intest rate will be fixed forever if you go with the fixed interest rate mortgage plan.

Definitely, you should not rush yourself into buying a house as it is likely the most expensive thing you will ever buy in your life. But you should think about how much the interest rate can affect your montly payment. The difference between a 5.25% vs. 7.5% interest rate can make you save literally over ten thousand dollars for the life of the loan. Having 20% down to avoid PMI is ideal, but taking advantage of low interest rate should not be completely disregarded.

I would suggest that you play with numbers on many websites that have mortgage calculator (Keyword 'Mortgage Calculator' on google). Varying the interest rate and other numbers will give you an idea how much you would save on your house monthly payments.