How can we make our dream come true, and NOT turn into a nightmare later?
November 12, 2010 10:37 AM
What should we do now to prepare to buy a house in the next 6 - 12 months?
After some indecision, my partner and I have decided to buy a house. I would really like to do this as soon as possible, but of course we want all our ducks lined up and a few more months of preparation really won't make a difference in the long run.
Quick facts:
- We're moving to the general area in which we want to buy in January - we will be renting with either a 6 month or 9 month lease, and will use this time to scout out houses and nail down the neighborhood.
- We have a 20% downpayment sitting in the bank, but we'd rather put down 10% and keep the rest as a safety fund. We will of course attempt to add to this sum in the next several months, but with the move factored in it will probably not change much.
- Our mortgage will be the same or less than comparable rent in the area (for a small house) but more than we'd pay if we stuck to a 1 bed apartment (by about 30 percent.)
-We have little debt - I've got about 12k in student loans (will be deferred as I'm going back to full-time student status, and they are a low rate anyway. My school is paid for via scholarship and grants, but I could take out loans for living expenses if need be.) She's got a car payment with only a few thousand left that could be paid off in full if necessary. No credit card debt.
-We are gay so we can't get legally married. We still want to buy a house together. We both have good credit but hers is better. We want both of our names on the mortgage eventually.
- The house we buy will be somewhere in the range of $100k to $150k. My partner will make (assuming she gets a job, obviously all bets are off if this doesn't happen) somewhere between 25 - 35k. I will only be working part-time for the next two years so will make very little. Maybe 10 -12k. After I'm done with school (Dec 2012) I will have a lot of income potential.
- We are open to renting out a bedroom while I'm in school (and beyond) to help pay the mortgage. It's a reasonably desirable area near several colleges. But we want to be able to afford it without a roommate just in case. We are very okay with tight, frugal living, especially for a pre-ordained time period (until I'm done with school in Dec. 2012, or rather, until I get a job afterwards)
-I'm a very handy and crafty person, and so is my mom, who completely renovated her fixer-upper in 2009. My partner's never really tried but I think she'll be good at it. I'm pretty confident that I won't regret the "fixer-upper" part, as long as we can afford the mortgage (which will probably include some money for repairs.)
So, questions:
1. What can we do now and over the next several months to financially prepare for house ownership, besides of course trying to save as much money as possible?
2. I have been researching the crap out of this area for about a year, and know it very well (at least the numbers side.) I've also read a lot about what to look for in a house, especially fixer-uppers like we'll probably end up with. What else should I be researching? What books should I read?
3. Assuming all the above variables stay the same, will we have any trouble getting a loan? Can we afford this house? Given that we really really really want to be home owners and plan to stay in this area for a very long time, can we make it work on our reduced income for the next two years in order to take advantage of low interest rates and home prices?
4. Would it be better to apply for a mortgage jointly, or apply only in my partner's name and add my name on later?
5. I've read conflicting information - would it be better for us to buy in the spring/summer (more selection) or in the fall (better prices)? Does it really make a difference?
6. A lot of the houses we're looking at qualify for an FHA/HUD-203k loan with 3.5% down. Should we put an amount even less than 10% down so we have plenty of wiggle room and can pay our mortgage from savings for months? Or is it better to just put as much down as is comfortable?
If you think this is a terrible idea, then say so, but I'd really appreciate answers focusing on how we can make this work.
After some indecision, my partner and I have decided to buy a house. I would really like to do this as soon as possible, but of course we want all our ducks lined up and a few more months of preparation really won't make a difference in the long run.
Quick facts:
- We're moving to the general area in which we want to buy in January - we will be renting with either a 6 month or 9 month lease, and will use this time to scout out houses and nail down the neighborhood.
- We have a 20% downpayment sitting in the bank, but we'd rather put down 10% and keep the rest as a safety fund. We will of course attempt to add to this sum in the next several months, but with the move factored in it will probably not change much.
- Our mortgage will be the same or less than comparable rent in the area (for a small house) but more than we'd pay if we stuck to a 1 bed apartment (by about 30 percent.)
-We have little debt - I've got about 12k in student loans (will be deferred as I'm going back to full-time student status, and they are a low rate anyway. My school is paid for via scholarship and grants, but I could take out loans for living expenses if need be.) She's got a car payment with only a few thousand left that could be paid off in full if necessary. No credit card debt.
-We are gay so we can't get legally married. We still want to buy a house together. We both have good credit but hers is better. We want both of our names on the mortgage eventually.
- The house we buy will be somewhere in the range of $100k to $150k. My partner will make (assuming she gets a job, obviously all bets are off if this doesn't happen) somewhere between 25 - 35k. I will only be working part-time for the next two years so will make very little. Maybe 10 -12k. After I'm done with school (Dec 2012) I will have a lot of income potential.
- We are open to renting out a bedroom while I'm in school (and beyond) to help pay the mortgage. It's a reasonably desirable area near several colleges. But we want to be able to afford it without a roommate just in case. We are very okay with tight, frugal living, especially for a pre-ordained time period (until I'm done with school in Dec. 2012, or rather, until I get a job afterwards)
-I'm a very handy and crafty person, and so is my mom, who completely renovated her fixer-upper in 2009. My partner's never really tried but I think she'll be good at it. I'm pretty confident that I won't regret the "fixer-upper" part, as long as we can afford the mortgage (which will probably include some money for repairs.)
So, questions:
1. What can we do now and over the next several months to financially prepare for house ownership, besides of course trying to save as much money as possible?
2. I have been researching the crap out of this area for about a year, and know it very well (at least the numbers side.) I've also read a lot about what to look for in a house, especially fixer-uppers like we'll probably end up with. What else should I be researching? What books should I read?
3. Assuming all the above variables stay the same, will we have any trouble getting a loan? Can we afford this house? Given that we really really really want to be home owners and plan to stay in this area for a very long time, can we make it work on our reduced income for the next two years in order to take advantage of low interest rates and home prices?
4. Would it be better to apply for a mortgage jointly, or apply only in my partner's name and add my name on later?
5. I've read conflicting information - would it be better for us to buy in the spring/summer (more selection) or in the fall (better prices)? Does it really make a difference?
6. A lot of the houses we're looking at qualify for an FHA/HUD-203k loan with 3.5% down. Should we put an amount even less than 10% down so we have plenty of wiggle room and can pay our mortgage from savings for months? Or is it better to just put as much down as is comfortable?
If you think this is a terrible idea, then say so, but I'd really appreciate answers focusing on how we can make this work.
1. Figure out your budget (based on a mortgage of $150k + property taxes + flood insurance + house insurance) including some savings. Save as much as possible between now and then. There will be closing costs + moving costs + random shit costs so be prepared with that money on top of your down payment. Run all your credit reports and correct any errors ASAP. Read up on FICO scores, and do everything you can to increase your scores between now and purchase time.
3. It's hard for us to say if you can afford this how. First we need your budget, your constant expenses, etc. There are lots of rules of thumb for whether people can afford a house, but I think the best thing to do is figure out your budget, your constant expenses, your savings, your other financial priorities, and then look at what's left over every month. That number is the upper limit to what you can afford to spend on your house. Subtract from that escrow costs like property tax, house insurance, flood insurance and a certain amount per month for random household surprise expenses. And the rest is what you can actually afford to spend on the mortgage.
4. Should definitely be possible to apply jointly.
5. I'd say just look, and if you find a house you love for a price that you think is fair, by that regardless of season.
posted by semacd at 11:09 AM on November 12, 2010
3. It's hard for us to say if you can afford this how. First we need your budget, your constant expenses, etc. There are lots of rules of thumb for whether people can afford a house, but I think the best thing to do is figure out your budget, your constant expenses, your savings, your other financial priorities, and then look at what's left over every month. That number is the upper limit to what you can afford to spend on your house. Subtract from that escrow costs like property tax, house insurance, flood insurance and a certain amount per month for random household surprise expenses. And the rest is what you can actually afford to spend on the mortgage.
4. Should definitely be possible to apply jointly.
5. I'd say just look, and if you find a house you love for a price that you think is fair, by that regardless of season.
posted by semacd at 11:09 AM on November 12, 2010
3. I just put some numbers into a calculator (150,000 with 10% down, 1.25% property tax, 4% interest rate because rates are really good right now) and some PMI because if you only put 10% down you'll likely have to pay PMI and it comes out to $850 a month + insurance. So maybe $900 a month. Does that square with your budget, including savings? Then you probably can afford it.
posted by semacd at 11:16 AM on November 12, 2010
posted by semacd at 11:16 AM on November 12, 2010
Here's the thing - I know we could afford, in the simplest sense of the word, to pay $900 a month for our mortgage. After we add in groceries, utilities, health insurance, and a car payment, we will still get by, but without much wiggle room. (We'd also have some savings and my student loans to fall back on if need be.) That's fine with me - to me, it's part of being in school, and I really don't mind it. But will a bank raise its eyebrows at us if our mortgage will be closer to 40% of our income than 30%?
When I was in undergrad, my rent was just about 50% of my income, and I suspect it was that way for a lot of my peers. We got by fine. But of course a bank wouldn't like that very much.
posted by ohsnapdragon at 11:26 AM on November 12, 2010
When I was in undergrad, my rent was just about 50% of my income, and I suspect it was that way for a lot of my peers. We got by fine. But of course a bank wouldn't like that very much.
posted by ohsnapdragon at 11:26 AM on November 12, 2010
To build on what kat518 said, we're in a similar situation and got similar advice about reducing reliance on credit cards. If you're like me and like getting credit card rewards over using cash/debit, you can just pay off most of your card balance prior to the statement closing date. From what I can figure, this should have a positive effect on one's credit score, since it only appears that you use a small fraction of the card's credit based on what gets reported at each statement's close, but your purchases on the card still contribute to rewards earned.
This may have already crossed your mind, but putting down less through an FHA loan may give you a little extra to cover the costs of appliances if you expect to need to buy them.
posted by Terriniski at 11:28 AM on November 12, 2010
This may have already crossed your mind, but putting down less through an FHA loan may give you a little extra to cover the costs of appliances if you expect to need to buy them.
posted by Terriniski at 11:28 AM on November 12, 2010
I think the points made by "semcad" in #3 and #5 are excellent. I think buying a home you can afford and enjoy is much more important that buying the most expensive home you can afford--recent history indicates that making your home your only/primary long term investment is questionable. I am very impressed at the diligence and thoroughness you have shown in your activity to date. I would encourage you to consult an attorney before entering into any binding financial commitments on the home--you want to make sure both of your interests are protected in a fair and reasonable manner the face of possible unknowns ( death, separation, disability, sudden wealth, etc). Wishing you the best.
posted by rmhsinc at 11:29 AM on November 12, 2010
posted by rmhsinc at 11:29 AM on November 12, 2010
Well using the rule of thumb for affordability, that a house should be about 3 and no more than 4 times your income a house around 100-140k would be ideal as far as affordibility goes. I would not look at the house in terms of an investment though. It is more like a low interest bearing savings account that requires maintenance.
That is how I determine housing affordibilty-in terms of oppurtunity cost. Is the value of owning a home worth what I am giving up in using that money for investments.
The first thing is to determine what i would pay in rent to have the living space I desire. Than can I afford that as a share of my income (somewhere around 30% is ideal). If that number is good than I see what a house that also meets my criteria will cost. If the monthly payments are about equal or less for 30 year fixed mortgage than I would say it is better to own in terms of finances. If the payments are higher than rent it definately isn't a good idea financially as you will also have maintenance costs and futher imposes oppurtunity costs because breaking a lease is way easier than selling a house (usually) if moving becomes a necessity.
Things you shouldn't worry about as far as money goes:the mortgage interest deduction is not likely to make any difference to you as interest rates are really low, you are in a really low tax bracket and it won't make any difference in your tax returns.
things you may not have though of but could make a difference: what does taxes and insurance run for the house? this can sometimes really add up. This ties in with your question about how much to pay down: if you pay more than 20% down than you get to pick your own insurance and pay your taxes how you want to (i use a sinking fund for this), and you also avoid mortgage insurance. This last bit can really save some money if mortgage insurance will apply to you.
If you apply jointly for mortgage they use both credit scores but they also use both incomes. You may not make a lot but that extra 10k you bring in adds about 30k of purchasing power at the underwriters desk when you apply for the loan. If your credit score is higher than 720 you are both in pretty good shape, if lower for valid reasons (not high debt or bad credit history) such as a short credit history it may not hurt much. Loans are being manually underwritten again and borrowers really scrutinized. While it makes getting a loan time consuming right now this is on of the best consequences of the financial crisises as banks are being forced to actually do their jobs again. Local credit unions are really good for this kind of thing btw.
Get a subscription to Fine Homebuilding magazine. I find it a tremoundous resource and is the only magazine I keep back issues of. I am 'fixing up' a 100 year old victorian house that has been well maintained but indifferently renovated and some of the techniques and technology they discuss in the magazine are a huge help.
Start buying tools you will need when on sale or they pop up on craigslist (the above magazine also has really usefull tool reviews). Start becoming aware of home renovation project prices-like how much a furnace or water heater is, how much a roof costs, how expensive is rewiring a room, so when you are looking at fixer uppers you can evaluate what it is going to cost to fix it up.
Price your houses by square footage for comparision. This is the best way to evaluate a good buy from overpriced junk. I also add in the estimate renovations to this number and compare that to what a brand new turnkey home in the same town (go tour a homebuilders model home and get their pricing range) is per square foot to decide what I am willing to pay for home.
Good luck and I have decided I am a homebody and generally get great enjoyment from fixing up a home and this adds quite a bit to what I am willing to pay for home. It is more rewarding than several other hobbies for me, but if you don't find the same value in this, be sure you adjust your affordability calculations accordingly.
posted by bartonlong at 11:38 AM on November 12, 2010
That is how I determine housing affordibilty-in terms of oppurtunity cost. Is the value of owning a home worth what I am giving up in using that money for investments.
The first thing is to determine what i would pay in rent to have the living space I desire. Than can I afford that as a share of my income (somewhere around 30% is ideal). If that number is good than I see what a house that also meets my criteria will cost. If the monthly payments are about equal or less for 30 year fixed mortgage than I would say it is better to own in terms of finances. If the payments are higher than rent it definately isn't a good idea financially as you will also have maintenance costs and futher imposes oppurtunity costs because breaking a lease is way easier than selling a house (usually) if moving becomes a necessity.
Things you shouldn't worry about as far as money goes:the mortgage interest deduction is not likely to make any difference to you as interest rates are really low, you are in a really low tax bracket and it won't make any difference in your tax returns.
things you may not have though of but could make a difference: what does taxes and insurance run for the house? this can sometimes really add up. This ties in with your question about how much to pay down: if you pay more than 20% down than you get to pick your own insurance and pay your taxes how you want to (i use a sinking fund for this), and you also avoid mortgage insurance. This last bit can really save some money if mortgage insurance will apply to you.
If you apply jointly for mortgage they use both credit scores but they also use both incomes. You may not make a lot but that extra 10k you bring in adds about 30k of purchasing power at the underwriters desk when you apply for the loan. If your credit score is higher than 720 you are both in pretty good shape, if lower for valid reasons (not high debt or bad credit history) such as a short credit history it may not hurt much. Loans are being manually underwritten again and borrowers really scrutinized. While it makes getting a loan time consuming right now this is on of the best consequences of the financial crisises as banks are being forced to actually do their jobs again. Local credit unions are really good for this kind of thing btw.
Get a subscription to Fine Homebuilding magazine. I find it a tremoundous resource and is the only magazine I keep back issues of. I am 'fixing up' a 100 year old victorian house that has been well maintained but indifferently renovated and some of the techniques and technology they discuss in the magazine are a huge help.
Start buying tools you will need when on sale or they pop up on craigslist (the above magazine also has really usefull tool reviews). Start becoming aware of home renovation project prices-like how much a furnace or water heater is, how much a roof costs, how expensive is rewiring a room, so when you are looking at fixer uppers you can evaluate what it is going to cost to fix it up.
Price your houses by square footage for comparision. This is the best way to evaluate a good buy from overpriced junk. I also add in the estimate renovations to this number and compare that to what a brand new turnkey home in the same town (go tour a homebuilders model home and get their pricing range) is per square foot to decide what I am willing to pay for home.
Good luck and I have decided I am a homebody and generally get great enjoyment from fixing up a home and this adds quite a bit to what I am willing to pay for home. It is more rewarding than several other hobbies for me, but if you don't find the same value in this, be sure you adjust your affordability calculations accordingly.
posted by bartonlong at 11:38 AM on November 12, 2010
But will a bank raise its eyebrows at us if our mortgage will be closer to 40% of our income than 30%?
Based on what our mortgage broker told us last week, yes. We're planning on spending about 26% of our income on the house that we'll eventually buy and he suggested that was a really favorable amount. He also said that lenders start to get worried at about 40% (and he was specifically talking about the Bay Area where housing is already considered to be more expensive so higher percentages are expected) and in today's lending climate if you're planning less than 10% down and will devoting over 40% to housing costs each month, you may not be judged a good risk.
posted by otherwordlyglow at 12:32 PM on November 12, 2010
Based on what our mortgage broker told us last week, yes. We're planning on spending about 26% of our income on the house that we'll eventually buy and he suggested that was a really favorable amount. He also said that lenders start to get worried at about 40% (and he was specifically talking about the Bay Area where housing is already considered to be more expensive so higher percentages are expected) and in today's lending climate if you're planning less than 10% down and will devoting over 40% to housing costs each month, you may not be judged a good risk.
posted by otherwordlyglow at 12:32 PM on November 12, 2010
One piece of practical advice is to go to as many open houses in the area during this period. Not only will it help you build a standard as to what a 100k house is like compared to a 150k house, but you will also have a better feel for the neighborhoods when you do start looking for real. You may also find a real estate agent you feel comfortable with this way.
As for the financial side, the banks may look at your past income as a baseline for your future income. Your temporary employment status during the school period will be relatively short compared to the term of the mortgage.
posted by Yorrick at 5:38 PM on November 12, 2010
As for the financial side, the banks may look at your past income as a baseline for your future income. Your temporary employment status during the school period will be relatively short compared to the term of the mortgage.
posted by Yorrick at 5:38 PM on November 12, 2010
Seconding the idea of going to open houses. I did that a few years before I finally ended up buying a house, and it really helped me decide what I did and did not want.
For savings, I read some advice I liked once (I think from one of Suze Orman's columns, but I'm not certain). Calculate how much your monthly payment will be (mortgage+insurance+taxes). Subtract from that total how much you are paying for rent right now. Put the money that remains in a savings account for at least six months. If you can do this comfortably, you are ready to buy, and will have some extra money saved up for down payment and closing costs.
posted by weathergal at 8:06 PM on November 12, 2010
For savings, I read some advice I liked once (I think from one of Suze Orman's columns, but I'm not certain). Calculate how much your monthly payment will be (mortgage+insurance+taxes). Subtract from that total how much you are paying for rent right now. Put the money that remains in a savings account for at least six months. If you can do this comfortably, you are ready to buy, and will have some extra money saved up for down payment and closing costs.
posted by weathergal at 8:06 PM on November 12, 2010
Take a look at this extremely detailed rent vs buy calculator. You might also want to read this 5 part series.
posted by T.D. Strange at 7:01 PM on November 13, 2010
posted by T.D. Strange at 7:01 PM on November 13, 2010
Thanks everyone for the advice. It's good to hear that it should be somewhat doable. If I'm just strict about not looking at houses out of my price range, I should be able to find a place I like and will grow to love. I'll be studying all the resources suggested.
In case anyone has location specific advice, we're looking at two different areas of Atlanta primarily: West End/Westview, and East Atlanta. We'd also consider Kirkwood, East Lakes, Capitol View, Adair Park, and Ormewood Park.
posted by ohsnapdragon at 12:06 PM on November 14, 2010
In case anyone has location specific advice, we're looking at two different areas of Atlanta primarily: West End/Westview, and East Atlanta. We'd also consider Kirkwood, East Lakes, Capitol View, Adair Park, and Ormewood Park.
posted by ohsnapdragon at 12:06 PM on November 14, 2010
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I would hesitate to put down less than 10 percent but I understand where you're coming from. It sounds like you're pretty disciplined financially so I would point out that if you do put down 3.5 percent and find that things are working out well for you income-wise, you can always pay more than the minimum on your mortgage.
Without knowing where you're looking, is there any way to find a realtor who might specialize in sales to GLBT buyers? I think there are people in my area like that and it might be advantageous because they would know the ins and outs of getting a mortgage jointly or separately.
posted by kat518 at 10:54 AM on November 12, 2010