As a first time buyer, how should I go about purchasing my first home?

January 13, 2009 6:19 AM

Despite the dismal outlook of the U.S. economy, I will be buying my first home within the next 6 months. I'm unsure where to start and would greatly appreciate any advice from the MeFi community.

First, I'd like to give a little background about myself. I will be finishing a four year graduate program in May and beginning work in mid June. I have been guaranteed a salary of just over $100k/year which will increase as my production increases. I will finish school with over $100k in student loan debt, but have no other debt. I've only had a credit card for a year so my credit history isn't extensive, but I pay my credit card bills in full each month and my most recent credit report classified my score as "fair". I owe nothing on my car and plan on driving it for at least 4 more years. I will have approximately $5k saved when I move. How can I get an idea of what I can afford? What steps should I take to make this transition as smooth as possible? I'd be sooo thankful for any house buying tips.

posted by CElijah to home & garden (18 comments total)

Your savings are completely inadequate. Under current mortgage terms for reasonably-priced mortgage product, and ordinary prudence, you should expect to have at least 15% of the purchase price of the home in cash -- at least 10% in down payment and closing costs and 5% in reserves. Unless you are contemplating buying a $35,000 house, it's too early.
posted by MattD at 6:35 AM on January 13 [2 favorites]

Closing costs are going to run $4000-$8000 for most houses in the $100k-$300k range, so unless you can work out some fancy financing where they roll the closing costs into your mortgage, you'll be flat broke once the sale is complete. Also, unless you can come up with a fairly substantial down payment, it's unlikely that a lender will give you a mortgage. Consider that:

1. You have a lot of debt.
2. You have no employment history.

That said, making $100k a year, you can save up closing costs and a down payment pretty quickly if you live modestly. Still though, saving the $30k or so you'll need may be a stretch in 6 months. Also, some lenders require that your funds be "aged" at least 6 months before they'll accept them for financing.
posted by electroboy at 6:47 AM on January 13 [1 favorite]

Second MattD, I don't know what housing prices are like where you live but $5k is nowhere near enough for a downpayment. I think even MattD's advice may even be a little too risky in this market, I would feel much more comfortable with a 20% downpayment with fees on top of that.

The reason why the downpayment is so important is that if you only have a 10% downpayment and your house loses 10% of its value, you could find yourself in a position where you actually have to pay money at closing to sell your house.

Closing costs are going to run $4000-$8000 for most houses in the $100k-$300k range, so unless you can work out some fancy financing where they roll the closing costs into your mortgage, you'll be flat broke once the sale is complete.

Another option is to have the seller pay your closing costs. I did recently when I bought a house, because for some reason the seller wouldn't budge on the price but was willing to pay my closing costs.
posted by burnmp3s at 6:53 AM on January 13

The big negative working against you is probably going to be a too-short/too-limited credit history. That, combined with a short working history and a credit score of only "fair" is probably going to rule you out of any of the unconventional loan programs like no-money-down, so go into this situation assuming that you NEED at least 5% down payment.

Your lender will probably request a shitstorm of documentation including bank statements from the past X months to make sure that all of the cash you have didn't just magically appear in the last week, so you're going to want a reasonable (say, 6 month) history of steadily increasing cash reserves.

Also, depending on your locality, you're going to need between $1000 - $5000 in what's called "earnest money." This is money that you hand over up front when you make an offer on a house. If your offer is accepted, that money goes toward the closing costs of the transaction, but you need the cash on hand when you make the offer regardless of whether you are borrowing the closing costs in your mortgage or having the seller pay them.

Add on your closing costs for making the transaction, which can run anywhere from 3-10% depending on the transaction. Talk to a realtor for a better idea in your area. Then, while you're saving for those initial costs, keep paying down that student loan and monthly CC balance to get your credit score from a "fair" to a "good" or "great."

On to figuring out how much you can afford:

Now you've been living in an apartment, working your daily grind for a few months, so how much money do you have leftover at the end of the day? That, plus your rental payment, is the absolute maximum you can afford for your total monthly housing cost. This includes your mortgage payment, your real estate taxes, and insurance. You'll have to talk to local experts to get a reasonable estimate on what those costs actually are. Once you have that, subtract them from your total monthly budget and you'll have your maximum affordable mortgage payment.

Mortgage rates fluctuate DAILY, so don't bother looking at rates until you're ready to actually get a mortgage. Once you are ready, there are tons of online calculators that you can use to figure out a payment and amortization based on a ton of variables you can punch in. I like the one at bankrate.com, personally.

Keep in mind that this number is the absolute maximum you can afford, and if you plan on enjoying life in the slightest, you're going to need a cash buffer, so ideally you're going to be buying something you can comfortably afford.
posted by coryinabox at 6:55 AM on January 13 [1 favorite]

I can't really help you with the financial side but you should be able to afford a 100-125K home with no problem at all. I would say you could go higher but the sound of 1/4 million in debt just made me throw up in my mouth a little. Congrats on the job btw. 100k a year does not come easy.

As for searching for a house I saw 100's before I found the one I liked. I have seen it all:

1 - Find a good real-estate agent and become friends with him/her. I love my agent. She knew me and what would make me happy. On the same note, if you get an agent that tries to push you into something, find a new one. Some agents will try and get you in their slower moving homes just so they can get them off the company's books. Again if you get one of these agents tell them to fawk off. It is your home. You should be nearly completely happy with it. They don't have to live there, you do.

2 - Take your time! I searched for about 6 months before I found my home.

3 - When you find a home you like, check out the neighborhood and what is around it. I found a couple homes that I liked but they were in or near bad neighborhoods/schools.

4 - Inspect the home! I cannot stress this enough! Have an inspector go over the home you like with a fine toothed comb. If there is anything wrong with the home you want to know!

5 - Check bathrooms and the kitchen. You want to see how old stuff is. I just had to replace the toilet upstairs due to it being old and leaky. Also my kitchen needs a remodeling because the cabinets are from the 60-70's I think? They are old put it that way.

5a - If you are getting a fixer upper don't pay top dollar for it! My home wasn't but I knew a friend who got one and paid too much for it. She never fixed some of the problems as well.

6 - Ask about the roof too! I got lucky and have a fairly new one. However I have seen roofs before that need replaced and that costs a ton.

7 - Smell the home! You are looking for a moldy smell. If it has a moldy smell get the fawk out and don't look back!
7a - Check the basement for this smell too. One time I was checking a house that the owners had moved out of and they forgot to turn off the water. This floored the basement completely!

8 - Have fun seeing homes with your agent. There was this one home, Good Lord! The owners took out a few walls on the first floor and turned it into a (for lack of a better term) barbarian king looking hall? The whole house btw was dark and eerie. The colors were very dark brown or wooden. The kitchen was shrunk down to about 8 foot by 12 foot. Yeah you couldn't turn around in it! Anyways, the up stairs rooms had no closets and were locked from the outside?!?!? The closets were in the upstairs hall. In order to get to them you had to crawl in the dark in like a 4 foot by 4 foot walk way. I joked that a troll was going to eat me if I went in there so I don't know how nice the closets actually were. The downstairs was even worse. They had another kitchen down there and a 70'sish wooden looking den. Behind a curtain there was your typical cement old home basement look where the water heater and dryer/washer were. However this room had a hole/pit in the floor. Reminded me of silent of the lambs. Agent said it was more than likely for a sump pump. (If a basement needs one of those walk away.) To the right of this home was perhaps the creepiest thing of the whole house (best for last huh?) There was a room with a toilet in the middle of the room. No sink, no mirrors, nothing but a toilet. The room looked like something out of a turkish prison. AND of course it locked from the outside!?!?!?! I looked at my agent and said lets get the hell out of here before leather face chops us up and serves us for dinner!

Next home I want to tell you about is one that was perfect in every way. The landscape was unique, the inside was roomy, the ceilings were tall. The kitchen remodeled. Everything seemed great except for a slight point in the middle of the house. By point I mean like the top of a roof. After touring the whole perfectly beautiful house, we found out why the middle of the floor was like this. Down in the DIRT basement, there was a fine powder on the walls and on the ground near the walls. The foundation of this seeming perfect home was falling apart.

Last house I'll tell you about is the 3foot basement ceiling home and why you should never see a home when the owner is there. The house was hohum but this owner was showing it off like it's the greatest thing since sliced bread. He wouldn't let us walk around and explode anything without him being in the room. Also the owner was very "you don't need to see the basement" We go down there and the ceiling was only 3 feet tall. Have you ever trying to walk in a 3 foot basement? And the whole time the owner is trying to say that we can rent a cement breaker and fix it ourselves. He also showed us a "New" bathroom sink he had put in. Lame. Do not see a home when the owner is there. Ever! They are worse than car sales people. They won't let you see the whole house either. That was the last time I wanted to see a home with the owner present. Sometimes this is unavoidable. It is not rude to say, please let me and my agent walk around and explode if I have any questions I will ask you.

Hope you can pull some useful info from my ramblings. Good luck!
posted by Mastercheddaar at 7:08 AM on January 13

I disagree about your savings being completely inadequate. They aren't great, but at least you have something, unlike a lot of people who expect to be able to get 100% financing.

With an FHA loan, you need a minimum of 3.5% down. So with your savings so far you could afford approximately $150,000 house.

Regarding closing costs, this is something that you can negotiate with the seller to pay part of or all of. Having them do this ultimately raises what you would pay on the house since they have to cover it somehow but it is a way around it if you get the right seller. I recently purchased a house where I put 3% down for an FHA (the rules changed in October to require 3.5) and the sellers paid all my closing costs.

My best advice for you is to seek out a mortgage broker. This person will be able to help you get pre-approved and help you identify what you can and can't afford, what you need to do to afford what you want, and identify all the different financing options available.

After you know what you can afford, seek out a buyers agent. They work for you, not the seller and can take a tremendous amount of stress off you when looking for a home.

You must get at least pre-qualified to even look at homes many times since buyers don't want people who can't afford their home to look at it and waste their time.

Since real estate is highly dependent on where you are located, it would have been really, REALLY helpful if you had included your location.
posted by deebs at 7:12 AM on January 13

Explore = explode.... just read that. Obviously owners frown on blowing things up!
posted by Mastercheddaar at 7:14 AM on January 13

Rent cheap and scummy.

Save as much as possible, as fast as possible.

Rethink in a year or so (the recession is here for a while).

Also, it sounds harsh, but you are looking for people who really need to sell to get your best price (deaths, divorces, defaults).
posted by mandal at 7:18 AM on January 13 [1 favorite]

How can I get an idea of what I can afford?

Everyone tells me the best first step toward buying a home is to get pre-qualified. You do this by talking to a) a mortgage broker with experience in FHA mortgages (the ones deebs was mentioning) and b) maybe also your own long-time bank.
posted by salvia at 8:18 AM on January 13

With an FHA loan, you need a minimum of 3.5% down. So with your savings so far you could afford approximately $150,000 house.

Again, this is just my personal opinion, but I don't think doing this would be wise. According to Zillow the national average decline in house prices was 10% over the last year. Obviously this year was a pretty bad year, but what are you going to do if you still owe $144,000 on your mortgage and the house is only worth $140,000?

1 in 6 homeowners in the US owe more than their house is worth, and a lot of those people will end up defaulting if for whatever reason they need to sell. A decent downpayment is a good way to avoid being another one of the horror stories.
posted by burnmp3s at 8:32 AM on January 13

Agent said it was more than likely for a sump pump. (If a basement needs one of those walk away.)

Depending on locality, topography and weather this may be unavoidable and not necessarily a bad thing.

I'll join the chorus and say that I don't think you are in horrible shape or great shape. However with that said, do you really want to leave college and start a high powered career/job (assuming from the salary) and jump right into home ownership? Home ownership can be stress and time consuming when you start out. When you are starting your job, don't you want to be able to dedicate some time to it and the relationships that you will build there. Plus renting for a bit will give you the lay of the land (i.e. which places work well for your commute, where your friends live, what parts of the city you like to hang out in, etc.).

Good luck and congrats!
posted by mmascolino at 8:53 AM on January 13

The very first thing to do is go to the bank. It's free and you'll know exactly what you can afford after you do it. You're going to have to go eventually and it's a hell of a lot easier to hear them say no dice before you've fallen in love with a house. On the flip side, you may be able to afford more than you think. Also, you're in a much better position to make an offer once you've talked to a bank. There is some time-consuming paperwork you can get out of the way before the clock starts ticking on a commit date, etc.
posted by originalname37 at 9:21 AM on January 13

I would have to know where you want to live.


I really cannot believe people have not asked this question yet.
posted by Zambrano at 9:26 AM on January 13

Re sump pumps, Depending on locality, topography and weather this may be unavoidable and not necessarily a bad thing.

If a house's basement is routinely wet -- like more than "a few days in the spring when all the snow melts" -- that house is ultimately doomed. You will not pass it down to your grateful children, unless you die pretty soon.

Money and effort can delay the problem. Enough money and just the right circumstances can sometimes fix it entirely. And, of course, with a reasonable amount of house expertise (available for rent from your inspector) you can make a pretty good guess how long your house has got. So if you plan to own it less than that amount of time, no worries.

But really, a wet foundation is the one single flaw that will always eventually wreck a house. That moisture percolates up through the whole structure, rendering insulation ineffective, rotting all kinds of seemingly unrelated wooden pieces, warping and weakening structural elements... I have to agree with the original advice to just walk away. It's always possible to find a place that doesn't have a wet cellar, and unless structural and foundation remediation is a major hobby of yours, it's well worth it to try.

Kind of a derail, on this side issue, but file it under "any house-buying tips." Also I nth the people who are saying "don't buy one yet." Save more down-payment money and wait to see where the market bottoms out.
posted by rusty at 9:41 AM on January 13

There was a room with a toilet in the middle of the room. No sink, no mirrors, nothing but a toilet.

That's actually pretty common around here. So much so that's it's called The Baltimore Throne. Likewise the low basements. A lot of places start out with just a crawl space that sometimes gets dug out and finished with concrete, sometimes not. Not really a deal-breaker, but you have to factor it in to the price.
posted by electroboy at 10:27 AM on January 13

In the current market, alternative financing options are increasingly available because sellers are highly motivated to secure buyers for their properties.

* Look for lease-option-buy opportunities. They afford you time to save cash, build credit, qualify for a loan, assume a seller's existing loan, or even negotiate an owner-financed deal. While you're leasing, a percentage of your monthly rental fees are credited toward your home's purchase price.

* Look for other owner-financed arrangements. In these scenarios, the owner uses your payments as an investment. While the stock market fluctuates or nosedives, the owner has a guaranteed return from you*, and can charge higher interest rates than can financial institutions.

* barring default
posted by terranova at 10:42 AM on January 13

Work on your credit score over the next six months. Request all three credit reports (equifax, transunion, experian), and go through them all to see if there are any errors. If there are, contest those errors online and - if possible - contact whoever placed the incorrect info on your credit reports and ask them to correct it. Your score is probably that low because you have such a short credit histroy not because of the student loan debt. But you could ask your credit card company to increase your available credit; they may refuse since you have such a short credit history, but if they agree then your score should go up a bit (greater available credit ratio). You could also read up on other ways to increase your credit score. In general, "new" accounts are not good for credit, so I wouldn't suggest opening a bunch of new accounts, but I could be wrong.

I agree that six months is probably soon for you; you'd be better off with a better credit score and a higher down payment. You may not even be able to get preapproved in six months. But if you're hell bent on buying six months from now, I suggest you start looking regularly, so you get the feel for the kind of home you'll want to buy when the time comes, and for your local market. You could check out ziprealty and - depending on your locale, redfin - they both have excellent online info. They both also give some cash back at closing - could help you with the down payment.

Get pre-approved. But do try to really figure out what you can afford (i.e., do a budget, see what your regular expenses are, allocate a certain amount to savings, etc. and see what chunk of what remains you can afford to spend on a mortgage + taxes + utilities + homeowners' insurance + general maintenance). If you're in the DC area, shoot me an email - I have a great mortgage broker to recommend. But in general, check with a bunch of different mortgage brokers - one gave me MUCH better package than anyone else.

Buy a homebuying for dummies type book - lots of good tips in there. And check out this Ask Mefi - question if you haven't already - it's a gem.
posted by semacd at 12:18 PM on January 13

Go talk to a mortgage broker. Or to a longtime realtor who has relationships with good mortgage brokers. He or she will tell you what you need to do to get into spiffy homebuying condition. And that advice will be tailored to your specifics and your area.
posted by St. Alia of the Bunnies at 1:50 PM on January 13