Trying to buy first house (1 Viewer)

[Mark Sherman]

thats a good thing.


what is your wifes payments? what year? how many miles how much is the insurance. You have to look at every conceivable thing that costs you money. I'd trade in the car and get something that might be used or a slightly lower model to bring the payments down or get rid of them all together plus the savings on insurance. A new House is going to make you more money than a car. remember Cars Lose Value and Houses only go up.

Man I feel like SUZE Orman

 

[Anthony_J]

I totally understand about the cash down. It's tough. I make a very good living by most standards and still couldn't come up with 20% down plus $6,000 closing costs in cash for a small $270,000 house 7 years out of college.

I had to save for two years to get enough cash to close (10% down plus closing). I'm lucky enough that my company pays decent cash bonuses every year so I had a one time influx into my bank account that I made sure not to touch. This year's bonus is going towards the incidentals involved in moving into a new place (which add up very quickly).

There is no secret other than to be very strict with your spending. Chances are that since you have a RPTV and are a member of this board you don't have the best spending habits to begin with. That's got to change if you want to buy a house (although I can't argue the merits of having a high tech, huge apartment should that be the path you choose).

Look at your spending habits - there are definitely places to cut. It's hard, and you will have to make sacrifices. The little things add up - forty bucks here, twenty bucks there, and next thing you know, you've spent $400 on nothing.

If you put $500-600 away per month, that's $20,000 in three years. If you factor in other potential windfalls (e.g., tax refunds of $1,000 every year) that's a potential $21,000 in cash to use in three year's time. Another tip - as you get raises every year, try putting that directly against savings. You'll never miss it and it's usually good for another $200-$300 savings per month every year.

 

[Claudia P]

Seems to me like you are receiving some good advice in these posts, Andrew.

I understand your frustration; I hated paying rent when I was starting out (why pay another's mortgage when I could have my own!). But, I pretty much did what you have been advised to do.

I rented a country house within 30 minutes of my city (cheap) that had all I needed for recreational pursuits within close proximity (the river was a 5 minute walk away where I swam, fished, kayaked, hiked). My friends loved my place so there was always a full house on weekends when they escaped the city. I worked for an airline then, so had a well paid job that gave me the best of two worlds (my country cottage & and overseas travel). I saved heaps. I ended up buying "the worst house in the best street" when I moved back to town, did it up and quadrupled my money within 10 years. 14 years down the track it is worth seven times what I paid for it. That street, btw, is in the best area of town and is now seriously sought after.

I fast-tracked payments by sacrificing the little things, paid the house off early and just recently used the equity to buy a rental... which I'm in the process of doing up... someone else will be paying my mortgage

Your dream home is unlikely to fall in your lap where you are - make a plan, make some changes and go for it!

 

[Mark Sherman]

Could not have said it better myself

 

[Jeff Peake]

I have lived in Boston for 5 years, renting at $1500/month. When my wife and I started looking for homes around the $300-$350k price range, we didnt find much of anything.

Crappy 2 bedroom, 1 bath capes go for $350 and up over most of Mass.

We ruled out down-payments straight away. I dont see a point in down payments on a first home. If you were gonna live there forever it makes sense, but to put a down payment on a house you will probably end up selling in 5-7 years doesnt save you much money.

Also, look into 80/20 mortgages. An 80/20 mortgage gets rid of the big mortgage insurance penalty.

We got approved for the mortgage, 80/20 with no down payment, and then started looking to buy. After 3 months, and not a single house that wasnt a pile of junk, we ended up buying a place in Atlanta. $275k for 5 beds, 3.5 baths, on a killer golf course in the northern atlanta burbs. No money down, and we got the seller to pay $6k in closing costs...making it a zero-cash closing (which was nice!).

We move next Monday.

Boston is a great city, we will miss most of it. But the commute is terrible, cost of living is way too high and the winters are brutal!

 

[Ted Lee]

i'm buying a new home that will cost me a good chunk of change. luckily, my current home appreciated about 140k in two years -- so i'm using that money as a down on my new home.

so, it's like i bought a nice home (but not a "dream" home), sat on it for a while (two years so i don't pay capital gains tax), then used the equity to put as a down on a nicer home.

maybe you can go that route? it's a good way to build the equity you'll need -- assuming the market over there is as crazy as it is here.

 

[Michael Varacin]

I'm in the same boat. Single, make a great salary, want to get into a house. Everything near work is huge money, out of my range. I went through a huge fit as well when I first starting looking.

Everything seems expensive, but I suggest really going out and looking. Don't just look at the adds in the paper. The higher value homes get the attention, because they can afford to be advertised. It's possible some cheap gems can be found even in high dollar areas - just look.

Other thoughts to consider. Most people "grow" into their homes. Meaning the first year or two the payment is a little tough. But if you can expect regular raises, every year will get easier.

Save a few dollars to make a mortgage and rent payment for a few months. Buy a home in an area you don't want to live, but can afford. In an up and coming area would be best. Rent it out. Use the money to pay the mortgage. In a couple of years, you will have equity in the home. Sell it, and use it for a down payment.

Interest only mortgage. A lot cheaper, but you will be counting on the home going up in value for an increase in equity. A little risk, but a possible way of getting into a more expensive home.

You also kind of want to get into the most expensive house you can afford. The higher the cost, the greater the gains in the appreciation. Plus the greatest tax break.

 

[Anthony_J]

Jeff - How does an 80/20 work? Is it a traditional 30 year mortgage covering 80% of the value and then a 20% 15 year loan covering the balance? Basically, the bank is providing both your mortgage and a loan for the down payment, right? How are the rates on those?

Ted brings up a good point, the hardest part about real estate is getting your feet wet. Once you own one place, cash for a subsequent house tends to come from the appreciation of your current place and/or the equity you've gained through your monthly payments.

Start small - buy a $140,000 one-bedroom condo or studio (they're usually readily available), live there for a couple of years and then flip it. In Connecticut, I'd imagine that you'd get somewhere in the neighborhood of $15,000-$20,000 on the sale after two or three years to put towards a bigger house. You have the cash to do the closing and I imagine that most banks are used to providing zero down mortgages for those types of units.

It's hard to save when you're stuck paying high rents. This mortgage will give you a housing payment around $1000 a month so you may see a savings there.

Think of it as downshifting before going into top gear.

 

[Jeff Peake]

There are lots of variaties of 80/20 loans from what I gather.

The one we got is a standard 30 year ARM (fixed for 5 years) on 80% of the value of the house. The other 20% is a home-equity 2nd mortgage that is basically like a credit card secured by your house. The rate is higher on the 2nd (we got prime + 1.125).

Since the 1st mortgage is only 80% of the price of the home, you dont get dinged with a big Mortgage Insurance penalty (saved us around $225/month).

 

[MarkHastings]

Finding a decent condo under $150,000 is virtually impossible in CT. Decent condos start at $180,000. The only way to get under that, is to either move into the really crappy ones, or move into the ones that are less than 800 Sq. feet.

And as far as homes, my real estate agent gave me the listing for a cape that was built in 1944, on .46 acres of land, 4 rooms, 1 bath, 2 car garage, 921 Sq. feet - - - it was $174,500

The catch: The house was ready to fall apart! It was unreal! A total tear down! :frowning: It was almost laughable.

 

[Jeff Ulmer]

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.

 

[Andrew Bunk]

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...

 

[Peter Burtch]

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

 

[Peter Burtch]

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

 

[Lew Crippen]

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.

 

[Ted Lee]

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

 

[Mike Voigt]

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

 

[Peter Burtch]

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

 

[Lew Crippen]

Ted, I’m not even a Boomer.

 

[Craig]

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.