I will freak out if I actually have to write a $550k check.
March 1, 2011 9:33 AM Subscribe
How much cash do you actually have to part with when buying a house? How many other fees and charges are there on top of the down payment?
I am looking to buy my first house, so I've never done this before. I've gone and saved up some money, and I'm actually proud of the fact that I have $35,000 in the bank -- it feels like an accomplishment. But I live in coastal California, and so the house I want to buy is approximately $550,000 (an exact final price isn't set). I should be able to avoid fees dealing with real estate agents, because I'm currently already living in this house and am going to attempt to buy it directly from my landlord. What else do I have to worry about? I hope I can put 5% down, which is about $27,500. That leaves me about $7,500 left in my savings account to cover all the other fees and things, "closing costs" (whatever those are), etc.
Does that seem possible? Can I actually buy a house like that? How much money will I need? Can I put just 5% down (I think I can, right)?
I have yet to talk to lenders about this. I'd like to have as much general knowledge as possible going into the whole thing.
What else do I need to know? Do I need more money?
I am looking to buy my first house, so I've never done this before. I've gone and saved up some money, and I'm actually proud of the fact that I have $35,000 in the bank -- it feels like an accomplishment. But I live in coastal California, and so the house I want to buy is approximately $550,000 (an exact final price isn't set). I should be able to avoid fees dealing with real estate agents, because I'm currently already living in this house and am going to attempt to buy it directly from my landlord. What else do I have to worry about? I hope I can put 5% down, which is about $27,500. That leaves me about $7,500 left in my savings account to cover all the other fees and things, "closing costs" (whatever those are), etc.
Does that seem possible? Can I actually buy a house like that? How much money will I need? Can I put just 5% down (I think I can, right)?
I have yet to talk to lenders about this. I'd like to have as much general knowledge as possible going into the whole thing.
What else do I need to know? Do I need more money?
I am in the process of buying my first home, and Michael Bluejay's Guide for first-time homebuyers was invaluable. I would start at the beginning and read the whole thing (for example: a buyer usually does not "pay" their real estate agent - he or she is payed out of what the seller makes on the sale), but one page you might find helpful is Closing Costs explained.
posted by muddgirl at 9:42 AM on March 1, 2011
posted by muddgirl at 9:42 AM on March 1, 2011
I can't remember the exact numbers for the house I just bought, if I can find the form I'll tell you, but 2 things to take into account:
1) Property taxes. I'm in a relatively expensive city in California, bought a house cheaper than yours, and just had to pay a ~$3000 property tax bill. I think this is handled differently if you are putting less than 20% down, but do not discount property taxes, find out roughly how much they will be.
2) Just so you know, the buyer never pays real estate agent fees, that is alway the seller's responsibility (even for your real estate agent). It is complete insanity to do this without some sort of agent, you will not get everything right without someone on your side telling you what to sign and when to sign it. Even if you're buying it directly from your landlord, you absolutely need an agent of some sort.
posted by brainmouse at 9:43 AM on March 1, 2011 [1 favorite]
1) Property taxes. I'm in a relatively expensive city in California, bought a house cheaper than yours, and just had to pay a ~$3000 property tax bill. I think this is handled differently if you are putting less than 20% down, but do not discount property taxes, find out roughly how much they will be.
2) Just so you know, the buyer never pays real estate agent fees, that is alway the seller's responsibility (even for your real estate agent). It is complete insanity to do this without some sort of agent, you will not get everything right without someone on your side telling you what to sign and when to sign it. Even if you're buying it directly from your landlord, you absolutely need an agent of some sort.
posted by brainmouse at 9:43 AM on March 1, 2011 [1 favorite]
You need to pay a lawyer, a real estate agent, you may need insurance before your mortgage will be approved, etc.
There are a lot of expenses involved in closing on a house. I don't think you have enough money to buy a $550,000 house.
posted by dfriedman at 9:44 AM on March 1, 2011 [1 favorite]
There are a lot of expenses involved in closing on a house. I don't think you have enough money to buy a $550,000 house.
posted by dfriedman at 9:44 AM on March 1, 2011 [1 favorite]
Depending on your credit, you may or may not be able to buy a house with five percent down; your monthly mortgage payments will be higher if you do, of course, and you'll also have to pay additional mortgage insurance for a few years until you have 20 percent equity.
For closing costs, $7,500 sounds like it's cutting it awfully close. We bought a townhouse in California for significantly less money than you're about to pay (about half, actually), and closing costs, fees, etc. cost us about $7,000. Some closing costs are negotiable, however, so look into that.
posted by infinitywaltz at 9:47 AM on March 1, 2011
For closing costs, $7,500 sounds like it's cutting it awfully close. We bought a townhouse in California for significantly less money than you're about to pay (about half, actually), and closing costs, fees, etc. cost us about $7,000. Some closing costs are negotiable, however, so look into that.
posted by infinitywaltz at 9:47 AM on March 1, 2011
You'll most likely have to pay a lawyer to handle the paperwork. Not sure how much this is in California, but it was about $1000 when I got my house.
You may need furniture.
You may have to pay a deposit on some utilities when they're put in your name.
Does the house need any repairs? How old is the roof? How about the furnace/air conditioner? You may have to pay a home inspector.
The biggest thing to note is that you're buying a pretty expensive house with very little down - just make sure you can afford it. You'll still have a life after you buy the house - you don't want a mortgage that takes so much money from you each month that you're living paycheque to paycheque, and unable to save any money for travel, or emergencies (health, car repairs, etc.)
posted by backwards guitar at 9:47 AM on March 1, 2011 [1 favorite]
You may need furniture.
You may have to pay a deposit on some utilities when they're put in your name.
Does the house need any repairs? How old is the roof? How about the furnace/air conditioner? You may have to pay a home inspector.
The biggest thing to note is that you're buying a pretty expensive house with very little down - just make sure you can afford it. You'll still have a life after you buy the house - you don't want a mortgage that takes so much money from you each month that you're living paycheque to paycheque, and unable to save any money for travel, or emergencies (health, car repairs, etc.)
posted by backwards guitar at 9:47 AM on March 1, 2011 [1 favorite]
There are a lot of items to consider.
posted by kables at 9:49 AM on March 1, 2011
- Closing costs could end up eating all or more of the the $7,500, putting you at zero.
- You'll likely be required to have insurance on the house; upfront premiums could run $1,000 or more depending on the condition of the house and your coverage.
- There will likely be some required reserves.... lenders usually won't want you to go zero on the bank account; they'll want to know that you can cover at least a couple of mortgage payments. You can sometimes use 401k or other financial accounts to satisfy reserve requirements (without actually touching the accounts).
- Your lender may want you to fork over cash for a rate lock.
posted by kables at 9:49 AM on March 1, 2011
Response by poster: I was under the impression that you could hire a lawyer who specializes in real estate stuff to work for a flat rate, like backwards guitar says, as opposed to paying someone a commission on the sale price like with a traditional real estate agent arrangement.
I don't mean to imply that I'll just do it all myself, just that there's no "buyer's and seller's agents" eating up 6% of the cost of the home.
posted by tylerkaraszewski at 9:51 AM on March 1, 2011
I don't mean to imply that I'll just do it all myself, just that there's no "buyer's and seller's agents" eating up 6% of the cost of the home.
posted by tylerkaraszewski at 9:51 AM on March 1, 2011
Setting aside the finance and loan issues, in DC it takes about $10,000 to buy a house. There's a transfer fee that's somewhat unique to DC, I think, but then there are other taxes and registration fees and whatnot. Our agent made sure we set aside 10k apart from our downpayment and moving budget and such.
And that's all we spent to move in. Granted, this was 8 years ago in a very different real estate market, but we, essentially, got a 350k loan with no down payment.
posted by MrMoonPie at 9:52 AM on March 1, 2011
And that's all we spent to move in. Granted, this was 8 years ago in a very different real estate market, but we, essentially, got a 350k loan with no down payment.
posted by MrMoonPie at 9:52 AM on March 1, 2011
http://www.hud.gov/buying/comq.cfm
http://realestate.msn.com/BuyAndSell/FirstTimeBuyers.aspx
http://realestate.msn.com/
http://www.usatoday.com/money/economy/housing
http://www.bankrate.com/calculators/mortgages/
Are you really prepared for a monthly payment of $2,700, plus taxes, plus insurance (30 year fixed)?
I'd be surprised if a bank would lend you this money with only 5% down. Credit unions are more likely. Closing costs in my state include transfer tax, pre-paid interest, escrow on insurance and taxes, appraisal, inspection, points (a %age of the loan amount), local fees, title search/insurance. Do not skip an appraisal and inspection, even if you don't use a realtor.
You don't seem to have enough money for closing costs and down payment. However, if you really have the income to buy the house, a motivated seller may be able to work out a deal. I'm not sure this is a wise choice for you, but I don't have enough info.
posted by theora55 at 9:55 AM on March 1, 2011
http://realestate.msn.com/BuyAndSell/FirstTimeBuyers.aspx
http://realestate.msn.com/
http://www.usatoday.com/money/economy/housing
http://www.bankrate.com/calculators/mortgages/
Are you really prepared for a monthly payment of $2,700, plus taxes, plus insurance (30 year fixed)?
I'd be surprised if a bank would lend you this money with only 5% down. Credit unions are more likely. Closing costs in my state include transfer tax, pre-paid interest, escrow on insurance and taxes, appraisal, inspection, points (a %age of the loan amount), local fees, title search/insurance. Do not skip an appraisal and inspection, even if you don't use a realtor.
You don't seem to have enough money for closing costs and down payment. However, if you really have the income to buy the house, a motivated seller may be able to work out a deal. I'm not sure this is a wise choice for you, but I don't have enough info.
posted by theora55 at 9:55 AM on March 1, 2011
The only person who can tell you (a) whether or not you will qualify for a loan with only 5% down, and (b) the expected closing costs is a mortgage lender. It doesn't have to be the one you choose in the end, but I would highly reccommend getting pre-qualified for a loan of that amount, finding out the monthly payments, and how much closing costs/tax escrow will cost you in the end.
posted by muddgirl at 9:56 AM on March 1, 2011
posted by muddgirl at 9:56 AM on March 1, 2011
Also, be sure you understand when your property taxes are due and put the money aside to pay those as well (unless you'll have an escrow account through your lender that rolls up the mortgage payment with taxes and homeowner insurance).
Do you have a buyer's agent working for you, or a lawyer who'll work for you in the closing? Those folks should also be able to clear up any questions you have.
Only putting 5% down might also require you to take out mortgage insurance, so be sure you know how much that will cost as well.
posted by aught at 9:56 AM on March 1, 2011
Do you have a buyer's agent working for you, or a lawyer who'll work for you in the closing? Those folks should also be able to clear up any questions you have.
Only putting 5% down might also require you to take out mortgage insurance, so be sure you know how much that will cost as well.
posted by aught at 9:56 AM on March 1, 2011
You can also talk to the landlord/owner about their carrying back the mortgage.. That wipes out some of the various closing costs that a bank or traditional lender might require, though depends on the owner's financial situation and ability to deliver a clear title.
As others have said, some closing costs are really in your interests, some are bank-imposed, some are junk fees..
posted by k5.user at 9:56 AM on March 1, 2011
As others have said, some closing costs are really in your interests, some are bank-imposed, some are junk fees..
posted by k5.user at 9:56 AM on March 1, 2011
I just found my numbers, on my ~$450,000 house in CA we had roughly $10,000 of closing costs in addition to the 20% down payment. This includes some property tax stuff and a year of homeowner's insurance (that was required by the terms of our mortgage), as well as a bunch of other stuff. We used redfin as our agent, and got about $5000 back from them, however, because they don't work on commission, and give you the difference between the 3% commission they receive and the flat rate they keep.
posted by brainmouse at 9:57 AM on March 1, 2011 [1 favorite]
posted by brainmouse at 9:57 AM on March 1, 2011 [1 favorite]
Generally speaking, the realtor fees are paid by the seller, so you aren't avoiding any fees by buying direct - the seller is the one avoiding fees. In theory this means that they will sell the home for less money, because they don't have to cough up the 6%. In practice it can mean any damn thing. I'd be worried that the house price isn't as good as you think it is (tell me you have some idea of comparables in the neighborhood).
As to whether 5% down will be enough, my instinct is to say that you aren't going to get a good loan with that. My wife and I bought a home recently and, not that I'm bragging, her credit is fantastic, mine is better, we were putting 40% down, and lenders were still being idiots. 5% down does not get you a great choice of loans at the best of times and this is not the best of times.
Get a mortgage broker and get pre-approved for a loan (I've used the same mortgage broker twice and I've been very happy with him). Get one who will give you all the information about closing costs and is willing to answer all your stupid questions.
Note that you can get a mortgage loan that offers points back to you (and if you don't know what that means then you really need to do some reading). If interest rates are low that can actually be a pretty good deal, as it reduces your out of pocket expenses and still leaves you with a good interest rate.
Remember that, whatever your motgage, you'll have an additional $600/month on property taxes.
posted by It's Never Lurgi at 9:58 AM on March 1, 2011
As to whether 5% down will be enough, my instinct is to say that you aren't going to get a good loan with that. My wife and I bought a home recently and, not that I'm bragging, her credit is fantastic, mine is better, we were putting 40% down, and lenders were still being idiots. 5% down does not get you a great choice of loans at the best of times and this is not the best of times.
Get a mortgage broker and get pre-approved for a loan (I've used the same mortgage broker twice and I've been very happy with him). Get one who will give you all the information about closing costs and is willing to answer all your stupid questions.
Note that you can get a mortgage loan that offers points back to you (and if you don't know what that means then you really need to do some reading). If interest rates are low that can actually be a pretty good deal, as it reduces your out of pocket expenses and still leaves you with a good interest rate.
Remember that, whatever your motgage, you'll have an additional $600/month on property taxes.
posted by It's Never Lurgi at 9:58 AM on March 1, 2011
It is sometimes possible to roll your closing costs into the amount of the home loan. This is how we got by with a fairly low down payment.
posted by Andrhia at 9:59 AM on March 1, 2011 [1 favorite]
posted by Andrhia at 9:59 AM on March 1, 2011 [1 favorite]
Since no one has mentioned it, FHA only requires 3.5% down. Might be worth looking into, if you are dead-set on buying the home. This would leave you with more reserves, which is always a good idea in case you need a new roof or whatever unexpectedly.
posted by rabbitrabbit at 10:04 AM on March 1, 2011
posted by rabbitrabbit at 10:04 AM on March 1, 2011
Response by poster: Answers are pouring in here faster than I can read them. I'm going to give a little more background info though, and then go back through everything everyone's said so far.
posted by tylerkaraszewski at 10:06 AM on March 1, 2011
- I expect that I'll have to pay mortgage insurance. I have no idea how much this costs. I guess I'm assuming it's probably not more than about $250/month. (this guess is based on pretty much nothing)
- I was figuring on roughly $5,000/year of property taxes.
- I know there are tax deductions associated with mortgage payments, which seem to, in effect, lower my mortgage payment by nearly 28% (my tax bracket) at the beginning of the loan. I assume I can adjust my income tax withholding to account for that, and assume this is done by filing a new, carefully crafted W-4.
- I have looked at a lot of other houses for sale in the area. Mostly online, but a few open houses and things. I haven't found anything I like better than this house for less money, or even the same price. Unless houses are regularly going for 10-20% below asking, this place doesn't seem like a bad deal.
- My base salary is $113k/year, plus bonus and stock.
posted by tylerkaraszewski at 10:06 AM on March 1, 2011
this guess is based on pretty much nothing
Again, I don't know why you're guessing. A mortgage lender can tell you this. Talking to a mortgage lender about their rates, their policies, and costs of the loan will not automatically sign you up for a loan. Even pre-qualifying will not sign you up for a loan, and in my case it was free.
posted by muddgirl at 10:13 AM on March 1, 2011
Again, I don't know why you're guessing. A mortgage lender can tell you this. Talking to a mortgage lender about their rates, their policies, and costs of the loan will not automatically sign you up for a loan. Even pre-qualifying will not sign you up for a loan, and in my case it was free.
posted by muddgirl at 10:13 AM on March 1, 2011
Be careful about your tax deduction calculation -- remember that you lose your standard deduction if you itemize, and that can eat up a lot of the difference.
posted by wyzewoman at 10:15 AM on March 1, 2011 [1 favorite]
posted by wyzewoman at 10:15 AM on March 1, 2011 [1 favorite]
Also: our mortgage broker was great at helping us estimate all of the costs that would occur at closing. She was doing it, of course, because she wouldn't have given us the loan if we didn't have enough. But start speaking to brokers -- they will know much more about the details than those of us here.
posted by wyzewoman at 10:16 AM on March 1, 2011
posted by wyzewoman at 10:16 AM on March 1, 2011
Kind of tangential, but when we bought a house in Maine we had to take a first time homebuyers class to qualify for the state tax credit. It ended up being fantastic because the class covered basically everything I had been stressing about. You might see if there's a program like that in your area.
I also recommend a realtor.
posted by selfnoise at 10:18 AM on March 1, 2011
I also recommend a realtor.
posted by selfnoise at 10:18 AM on March 1, 2011
My base salary is $113k/year, plus bonus and stock.
Not sure if you will be able to find anyone who will loan you the money to buy a house that is 5x your income.
Go talk to some mortgage people. They can run the numbers for you.
posted by rabbitrabbit at 10:21 AM on March 1, 2011 [3 favorites]
Not sure if you will be able to find anyone who will loan you the money to buy a house that is 5x your income.
Go talk to some mortgage people. They can run the numbers for you.
posted by rabbitrabbit at 10:21 AM on March 1, 2011 [3 favorites]
As above speak to a lender. Most lenders work with two different kinds of loans. One is conventional loans which pretty much require a 20 percent down payment or close to it. If you can't do that most will try and do what is called an FHA or VA loan. You can get these loans with a 5 percent or even less down payment but must pay Mortgage Premium insurance. There are limits on how much you can borrow with these loans. I think it depends on what part of the country you are in but for instance in Arkansas the limit you can borrow with these loans is around 270K. Probably higher in places like California.
posted by Justin Case at 10:23 AM on March 1, 2011
posted by Justin Case at 10:23 AM on March 1, 2011
Lots of good advice here, but I didn't see any reference to a "good faith estimate" or "GFE." This is a document a lender will provide that describes (with some exceptions related to increases) the fees that you will have to pay at closing of a real estate transaction. This phrase may help you search for examples for your local area.
Generally, though, I think of closing costs (and related costs payable prior to closing) as falling into following seven areas:
1 - down payment
2 - state and local transfer/"stamp" taxes (usually, these are based on the purchase price and easy to figure out from the internet)
3 - interest charge (basically interest payments based on the date you close until your first mortgage payment is due)
4 - prepayments of property taxes and insurance (property taxes may be offset by credits from seller, but you may have to prefund an escrow account for taxes and insurance)
5- payments to your advisors (lawyer and inspectors)
6 - loan fees/ origination charges/credit checks (fees to pay to the lender to get the loan)
7 - title insurance and related title costs, including survey, recordation, doc fee and similar
A GFE for your area will help you understand how much these might be and whether the sellers pay some of those per custom in your area.
posted by iknowizbirfmark at 10:36 AM on March 1, 2011
Generally, though, I think of closing costs (and related costs payable prior to closing) as falling into following seven areas:
1 - down payment
2 - state and local transfer/"stamp" taxes (usually, these are based on the purchase price and easy to figure out from the internet)
3 - interest charge (basically interest payments based on the date you close until your first mortgage payment is due)
4 - prepayments of property taxes and insurance (property taxes may be offset by credits from seller, but you may have to prefund an escrow account for taxes and insurance)
5- payments to your advisors (lawyer and inspectors)
6 - loan fees/ origination charges/credit checks (fees to pay to the lender to get the loan)
7 - title insurance and related title costs, including survey, recordation, doc fee and similar
A GFE for your area will help you understand how much these might be and whether the sellers pay some of those per custom in your area.
posted by iknowizbirfmark at 10:36 AM on March 1, 2011
I was under the impression that you could hire a lawyer who specializes in real estate stuff to work for a flat rate, like backwards guitar says, as opposed to paying someone a commission on the sale price like with a traditional real estate agent arrangement.
I don't mean to imply that I'll just do it all myself, just that there's no "buyer's and seller's agents" eating up 6% of the cost of the home.
Yes, you are right that you can get a lawyer to do this for a flat fee - usually it is pretty low, around $500 - $800. Your situation might require more leg work on the part of the lawyer, but it's still reasonable to think that you can get a good lawyer for under $1k. I'm always shocked by how cheap residential real estate lawyers compared to the highway robbery that real estate agents have managed to craft into residential real estate.
With respect to the buyer's and seller's agents, you are right as long as your landlord doesn't list the house on the MLS or otherwise enter into contract with a real estate agent for the house. If that happens he is paying that 6% regardless of whether you get an agent involved or not.
We used redfin as our agent, and got about $5000 back from them, however, because they don't work on commission, and give you the difference between the 3% commission they receive and the flat rate they keep.
I really like Redfin, but in fact all of the compensation Redfin the company receives comes from traditional real estate commissions. You may be thinking of the fact that their individual agents are supposedly not compensated based on the commissions that they generate - they use customer satisfaction and other metrics (but I'm sure an agent of theirs who isn't closing transactions still isn't going to last long). It may vary by area but in my area they keep half of the commission that they get and rebate the other half to you (at least for buyers). It's possible they have other models in other areas, like the flat fee you're talking about.
Obviously, it might not help OP very much to bring in a real estate agent here, assuming that his or her lawyer can do what needs to be done (which is true in some areas and not true in some areas), but that means that OP should expect a 6% discount to the true value of the home because of the money the owner is saving.
posted by iknowizbirfmark at 10:47 AM on March 1, 2011 [1 favorite]
I don't mean to imply that I'll just do it all myself, just that there's no "buyer's and seller's agents" eating up 6% of the cost of the home.
Yes, you are right that you can get a lawyer to do this for a flat fee - usually it is pretty low, around $500 - $800. Your situation might require more leg work on the part of the lawyer, but it's still reasonable to think that you can get a good lawyer for under $1k. I'm always shocked by how cheap residential real estate lawyers compared to the highway robbery that real estate agents have managed to craft into residential real estate.
With respect to the buyer's and seller's agents, you are right as long as your landlord doesn't list the house on the MLS or otherwise enter into contract with a real estate agent for the house. If that happens he is paying that 6% regardless of whether you get an agent involved or not.
We used redfin as our agent, and got about $5000 back from them, however, because they don't work on commission, and give you the difference between the 3% commission they receive and the flat rate they keep.
I really like Redfin, but in fact all of the compensation Redfin the company receives comes from traditional real estate commissions. You may be thinking of the fact that their individual agents are supposedly not compensated based on the commissions that they generate - they use customer satisfaction and other metrics (but I'm sure an agent of theirs who isn't closing transactions still isn't going to last long). It may vary by area but in my area they keep half of the commission that they get and rebate the other half to you (at least for buyers). It's possible they have other models in other areas, like the flat fee you're talking about.
Obviously, it might not help OP very much to bring in a real estate agent here, assuming that his or her lawyer can do what needs to be done (which is true in some areas and not true in some areas), but that means that OP should expect a 6% discount to the true value of the home because of the money the owner is saving.
posted by iknowizbirfmark at 10:47 AM on March 1, 2011 [1 favorite]
Not knowing much of anything, I budgeted $10,000 in fees, taxes, etc. that were going into buying the house that wouldn't be applied towards the down payment. This turned out to be a reasonably accurate estimate.
I assume you have a pre-qualification letter from a lender. When you plan to put a bid on a place, ask your lender/broker for a Good Faith Estimate, and it will include all of the fees involved.
posted by deanc at 11:01 AM on March 1, 2011
I assume you have a pre-qualification letter from a lender. When you plan to put a bid on a place, ask your lender/broker for a Good Faith Estimate, and it will include all of the fees involved.
posted by deanc at 11:01 AM on March 1, 2011
Depending on how property taxes are paid in your area you could need significantly LESS cash. Property taxes are often paid in arrears, meaning that taxes incurred last year are paid this year. For a house that has (as an example) $7,500 in property taxes, the seller would need to bring $7,500 plus the pro-rated version of this year's property taxes to closing.
Much of it will depend on your escrow agreement with your lender; if they require escrow almost all of this money goes right to them.
posted by true at 11:19 AM on March 1, 2011
Much of it will depend on your escrow agreement with your lender; if they require escrow almost all of this money goes right to them.
posted by true at 11:19 AM on March 1, 2011
I was figuring on roughly $5,000/year of property taxes.
I know there are tax deductions associated with mortgage payments, which seem to, in effect, lower my mortgage payment by nearly 28% (my tax bracket) at the beginning of the loan. I assume I can adjust my income tax withholding to account for that, and assume this is done by filing a new, carefully crafted W-4.
My base salary is $113k/year, plus bonus and stock.
In LA, the rule of thumb is that property tax and associated levies (etc) can equal 1.25% of the purchase price, or in your case, $6875 per year. (The base rate is 1%.)
Intemized tax deductions will lower your taxes only by the amount of your deductions which exceed the standard deduction, which is now $5,800 for single filers and $11,600 for those married filing jointly. In any case, this 'savings' won't really alter your loan possibilities.
In all honesty, I don't you can't you can afford this house now. Based on your PMI estimate, the property taxes for LA, the likely home owner's insurance and the (relatively high) interest rate you'll get for only having 5% down, my calculations are that you could easily be paying $4000 a month for this house. That's $2969.54 at a 5.5% loan per month, $572.92 in property taxes, $150 insurance and $250 PMI. (You may not live in LA, and these figures may change a little, for better or worse, but they're probably close to accurate.)
Your tax rate is not really 28% - it's really only 28% on everything you make over $137,300. Let's assume you make (with bonuses) $150,000 per year. Subtract your personal exemption and standard deduction amounts, that works out to $140,500 of taxable income. Only $3,200 of that is taxed at 28%. Roughly speaking, you should be able to deduct around $34,300 "extra" (meaning, beyond your standard deduction) of property taxes and interest in your first year of ownership (less in subsequent years, as the percentage of interest you're paying monthly goes down.
That works out to:
$3200 at 28% = $896
$31300 at 25% = $7825
Your savings, in this case, would equal $8721 per year, or $726.25 per month. In essence, this means your roughly $4000 mortgage / tax / insurance bill will be lowered by a little more than 18%, not 28%.
There are many "rules of thumb" about buying a house. One is that one should not pay more than two-and-a-half times one's income on a house. (This generally does not include variables such as bonuses.) In your case, that amount is $325,000 - you'd be buying about 69% more than you should. Another is to buy at no more than 28% of your gross monthly income. In your case, that's around $3000, so you'd be paying 33% above what this rule says you should do. And because you have so little extra money, and the market is pretty unstable - many expect another drop in home prices - the banks are acting conservatively, and you should be, too. With the figures you're talking, a slight dip in the market could put you immediately underwater.
A lot of things can change these figures - where you want to buy exactly, the amount of other debt you have (credit cards, student loans), actual insurance rates for your area, and so on. And you're underestimating closing costs, which are likely to be at least $10,000. Not to mention that many creditors are asking for two to six months "extra" money in the bank after all is said and done. For you, with a low down payment, this could be more than $20,000 extra, after your 5% down and closing costs.
You'd be smart to keep on saving for a couple of years. By managing 20% (or even 10% down), you'd save loads of money. Not to mention the fact that the market is weak enough that it won't be skyrocketing anytime soon, anyhow, so you're not losing out by waiting.
posted by Dee Xtrovert at 11:50 AM on March 1, 2011 [5 favorites]
I know there are tax deductions associated with mortgage payments, which seem to, in effect, lower my mortgage payment by nearly 28% (my tax bracket) at the beginning of the loan. I assume I can adjust my income tax withholding to account for that, and assume this is done by filing a new, carefully crafted W-4.
My base salary is $113k/year, plus bonus and stock.
In LA, the rule of thumb is that property tax and associated levies (etc) can equal 1.25% of the purchase price, or in your case, $6875 per year. (The base rate is 1%.)
Intemized tax deductions will lower your taxes only by the amount of your deductions which exceed the standard deduction, which is now $5,800 for single filers and $11,600 for those married filing jointly. In any case, this 'savings' won't really alter your loan possibilities.
In all honesty, I don't you can't you can afford this house now. Based on your PMI estimate, the property taxes for LA, the likely home owner's insurance and the (relatively high) interest rate you'll get for only having 5% down, my calculations are that you could easily be paying $4000 a month for this house. That's $2969.54 at a 5.5% loan per month, $572.92 in property taxes, $150 insurance and $250 PMI. (You may not live in LA, and these figures may change a little, for better or worse, but they're probably close to accurate.)
Your tax rate is not really 28% - it's really only 28% on everything you make over $137,300. Let's assume you make (with bonuses) $150,000 per year. Subtract your personal exemption and standard deduction amounts, that works out to $140,500 of taxable income. Only $3,200 of that is taxed at 28%. Roughly speaking, you should be able to deduct around $34,300 "extra" (meaning, beyond your standard deduction) of property taxes and interest in your first year of ownership (less in subsequent years, as the percentage of interest you're paying monthly goes down.
That works out to:
$3200 at 28% = $896
$31300 at 25% = $7825
Your savings, in this case, would equal $8721 per year, or $726.25 per month. In essence, this means your roughly $4000 mortgage / tax / insurance bill will be lowered by a little more than 18%, not 28%.
There are many "rules of thumb" about buying a house. One is that one should not pay more than two-and-a-half times one's income on a house. (This generally does not include variables such as bonuses.) In your case, that amount is $325,000 - you'd be buying about 69% more than you should. Another is to buy at no more than 28% of your gross monthly income. In your case, that's around $3000, so you'd be paying 33% above what this rule says you should do. And because you have so little extra money, and the market is pretty unstable - many expect another drop in home prices - the banks are acting conservatively, and you should be, too. With the figures you're talking, a slight dip in the market could put you immediately underwater.
A lot of things can change these figures - where you want to buy exactly, the amount of other debt you have (credit cards, student loans), actual insurance rates for your area, and so on. And you're underestimating closing costs, which are likely to be at least $10,000. Not to mention that many creditors are asking for two to six months "extra" money in the bank after all is said and done. For you, with a low down payment, this could be more than $20,000 extra, after your 5% down and closing costs.
You'd be smart to keep on saving for a couple of years. By managing 20% (or even 10% down), you'd save loads of money. Not to mention the fact that the market is weak enough that it won't be skyrocketing anytime soon, anyhow, so you're not losing out by waiting.
posted by Dee Xtrovert at 11:50 AM on March 1, 2011 [5 favorites]
You need to talk to a mortgage broker. Your area might have closing costs that are based off of the sell price of the house (for example in Philadelphia i had to pay a "transfer tax" that was 1 or 2% of the sell price). So if you had to pay a 1% transfer tax on a 550k house, that alone is $5,500. PMI is based on the amount of your loan as well.
posted by WeekendJen at 11:59 AM on March 1, 2011
posted by WeekendJen at 11:59 AM on March 1, 2011
I'm closing on a house at the end of March. Here's what the Closing Costs Worksheet looked like for my situation. Purchase price is $172,000 and we're putting 20% ($34,400) down. Hennepin County in Minnesota.
Loan Origination Fee (@ 1%): $1,376
Processing Fee: $350
Underwriting Fee: $250
Document Prep Fee: $175
Appraisal Fee: $390
Credit Report: $11.75
Tax Service Fee: 85.00
Federal Flood Cerdification: $17
Title Company General Fees: $820
Title Insurance Premium - Lenders Coverage: $454.08
Title Insurance Premium - Owners Coverage: $325.42
Recording Fees: $142
Mortgage Registration Tax (@ $2.40 per $1000): $330.24
Conservation Fee: $5
Plus we'll be prepaying:
1 year Homeowner's Insurance: $900 (Or less. We're shopping around.)
3 Months Property Taxes: $618.83
Interest per diem: $18.63 to a maximum of $559
We were able to get the sellers to contribute 3% as closing costs (which basically means we're rolling $5160 into the cost of the mortgage). Of course, YMMV.
posted by Coffeemate at 12:15 PM on March 1, 2011 [2 favorites]
Loan Origination Fee (@ 1%): $1,376
Processing Fee: $350
Underwriting Fee: $250
Document Prep Fee: $175
Appraisal Fee: $390
Credit Report: $11.75
Tax Service Fee: 85.00
Federal Flood Cerdification: $17
Title Company General Fees: $820
Title Insurance Premium - Lenders Coverage: $454.08
Title Insurance Premium - Owners Coverage: $325.42
Recording Fees: $142
Mortgage Registration Tax (@ $2.40 per $1000): $330.24
Conservation Fee: $5
Plus we'll be prepaying:
1 year Homeowner's Insurance: $900 (Or less. We're shopping around.)
3 Months Property Taxes: $618.83
Interest per diem: $18.63 to a maximum of $559
We were able to get the sellers to contribute 3% as closing costs (which basically means we're rolling $5160 into the cost of the mortgage). Of course, YMMV.
posted by Coffeemate at 12:15 PM on March 1, 2011 [2 favorites]
IAMNYL(ender)
Apply for the loan at one or more lenders, it's the best way to figure out what you'll end up paying. Having said that:
Your monthly payment will be around 3k, this is ~30% of your take home which is a bit higher than typical, but not out of the norm. This is probably the most critical piece to figure out, what can you afford and depends on your monthly disposable income. Big car payment, paying off credit cards? This could be too much. No car payment, no debt, then maybe not a problem.
You'll most likely have to pay at least 5% of the loan value. You can usually roll closing costs into the loan, but you will still have to fork over ~5% in cash (so around 27,500) regardless. Also, it's financially better to pay the closing costs outright, but its hard on cashflow (fwiw, I almost always rolled the closing costs into the mortgage for the houses we bought ... chiefly because the loan interest rate was so close to what I got on savings accounts, ymmv). Keep in mind there may be some expenses that you won't be able to roll into the loan as well. But this would all be spelled out in a Good Faith Estimate
Definitely have someone to help you navigate through this (i.e. Real Estate Attorney). And Research the home buying process. There's lots of resources on the web and at the library.
Research the house, you should know its appraisal value for county taxes and market value, as well as how much it sold for originally.
There are huge advantages of having lived in the house, you know it's condition, its furnished, no moving expenses, no wait for previous owners to move out, the owner doesn't have to worry about you getting out of an existing mortgage first, so your approach does have its advantages. In this situation I'd skip the real estate agent, home inspection, and possibly the 1 year insurance thingy that you can get owners to buy for you (I can't remember its name, but it covers appliances and things like that for a year or so). I think that should translate into at least a 6% reduction in price (owner may see it differently though, it's a negotiation after all).
Finally, as has already been stated several times, most of your direct questions would be answered in your Good Faith Estimate.
On Preview:
I disagree somewhat with Dee Xtravert. If everything were to stay constant, than yes, waiting may be a better choice. However, you have to factor in several unknowns: will the house go up or down in value? will interest rates rise or stay flat (I wouldn't count on them decreasing)? will you have saved up enough to overcome either of those increases?
So I agree with the fact as presented, but disagree that the conclusion is to unequivocally wait. It works in your favor to wait as long as the money you can save grows faster than the cost of the house + any growth in interest rates.
posted by forforf at 12:17 PM on March 1, 2011
Apply for the loan at one or more lenders, it's the best way to figure out what you'll end up paying. Having said that:
Your monthly payment will be around 3k, this is ~30% of your take home which is a bit higher than typical, but not out of the norm. This is probably the most critical piece to figure out, what can you afford and depends on your monthly disposable income. Big car payment, paying off credit cards? This could be too much. No car payment, no debt, then maybe not a problem.
You'll most likely have to pay at least 5% of the loan value. You can usually roll closing costs into the loan, but you will still have to fork over ~5% in cash (so around 27,500) regardless. Also, it's financially better to pay the closing costs outright, but its hard on cashflow (fwiw, I almost always rolled the closing costs into the mortgage for the houses we bought ... chiefly because the loan interest rate was so close to what I got on savings accounts, ymmv). Keep in mind there may be some expenses that you won't be able to roll into the loan as well. But this would all be spelled out in a Good Faith Estimate
Definitely have someone to help you navigate through this (i.e. Real Estate Attorney). And Research the home buying process. There's lots of resources on the web and at the library.
Research the house, you should know its appraisal value for county taxes and market value, as well as how much it sold for originally.
There are huge advantages of having lived in the house, you know it's condition, its furnished, no moving expenses, no wait for previous owners to move out, the owner doesn't have to worry about you getting out of an existing mortgage first, so your approach does have its advantages. In this situation I'd skip the real estate agent, home inspection, and possibly the 1 year insurance thingy that you can get owners to buy for you (I can't remember its name, but it covers appliances and things like that for a year or so). I think that should translate into at least a 6% reduction in price (owner may see it differently though, it's a negotiation after all).
Finally, as has already been stated several times, most of your direct questions would be answered in your Good Faith Estimate.
On Preview:
I disagree somewhat with Dee Xtravert. If everything were to stay constant, than yes, waiting may be a better choice. However, you have to factor in several unknowns: will the house go up or down in value? will interest rates rise or stay flat (I wouldn't count on them decreasing)? will you have saved up enough to overcome either of those increases?
So I agree with the fact as presented, but disagree that the conclusion is to unequivocally wait. It works in your favor to wait as long as the money you can save grows faster than the cost of the house + any growth in interest rates.
posted by forforf at 12:17 PM on March 1, 2011
ALSO, before you exchange any money, have a structural report undertaken by a qualified engineer (try and have the owner pay for it). I know you live there already, but these sorts of reports can expose problems and issues that may cost thousands to fix down the track.
posted by smithsmith at 12:23 PM on March 1, 2011
posted by smithsmith at 12:23 PM on March 1, 2011
Response by poster: Also:
I am reading and digesting everyone's comments, I haven't looked through all the links and everything yet.
posted by tylerkaraszewski at 12:33 PM on March 1, 2011
- I have no other debt, no credit cards, car payments, student loans, etc.
- Last year I grossed ~$175k, but that of course can vary year-to-year with stock prices and such. I expect a small (3-4%) raise this year, but as I haven't seen it yet, I can't rely on it.
- I am already taking an itemized tax deduction instead of a standard deduction because my california state income taxes paid make it worthwhile (I paid about $12k in state income taxes for 2010).
- If I wait to buy the house, I could potentially have something more like $45-50k in cash by July, given when I expect to get my annual bonus and the way that our company ESPP works.
I am reading and digesting everyone's comments, I haven't looked through all the links and everything yet.
posted by tylerkaraszewski at 12:33 PM on March 1, 2011
I disagree somewhat with Dee Xtravert. If everything were to stay constant, than yes, waiting may be a better choice. However, you have to factor in several unknowns: will the house go up or down in value? will interest rates rise or stay flat (I wouldn't count on them decreasing)? will you have saved up enough to overcome either of those increases? So I agree with the fact as presented, but disagree that the conclusion is to unequivocally wait. It works in your favor to wait as long as the money you can save grows faster than the cost of the house + any growth in interest rates.
Interest rates could definitely go up. But many economists feel that this would - at least in the next few years - be offset by the extent to which it pushes prices down, and this is especially true in areas most hard-hit by the housing meltdown. Like California. Here is an article about it, but there are loads of them all over the place, and I had a hard time finding anything credible stating their likelihood to rise in the next year.
If Tyler kept saving, applied his bonus to the downpayment and housing prices fall another 20%, which many experts think is fairly likely (many say 20% to 30%) . . . there should have enough for a 20% down payment, and a bit of savings for a house now worth $440,000 instead of $550,000. He'd benefit from not paying PMI, getting a better interest rate and not having gone underwater! (Insurance would be slightly less, too. And your property tax would be 20% less!) By my math, he'd pay around $2700 a month, instead of $4000. (The difference could be a little less if interest rates rise, which could happen. But even if they rose 1.5% - and that would be quite dramatic - it would only mean $325 extra a month - he'd still be ahead by nearly $1000 a month, plus he'd have a lot more security.) This is an optimistic, but not unfounded, scenario and much more likely than one wherein price unexpectedly skyrocket and interest rates also climb.
Your monthly payment will be around 3k, this is ~30% of your take home which is a bit higher than typical, but not out of the norm.
His monthly payment would be much higher than this, I don't know where you get this figure from. At a 5% fixed rate loan for 30 years, his base payment would be around $2800. And I'm not sure he'd qualify for a rate like that with only 5% down and without substantial extra savings. This doesn't include property tax, PMI and house insurance. I calculated this to be roughly $4000, which was a fair average (could be a couple hundred less, could be many hundred more, depending on the tax rate and extra insurance - California's rates tend to be very high.) In any case, his payment would likely be closer to 40% of his gross pay, which is exceedingly high. Throw in the fact that he wouldn't likely have enough for closing costs and wouldn't have extra money on hand (which the bank would invariably require) and I really don't see how this makes much sense.
Tyler, I'd wait until I had 20% down and extra savings. If prices start rising, it'll be a slow-gaining process; they're not going to go up 10% overnight, so you can always jump in the market before it gets too heavy, if it ever does.
posted by Dee Xtrovert at 1:22 PM on March 1, 2011 [1 favorite]
Interest rates could definitely go up. But many economists feel that this would - at least in the next few years - be offset by the extent to which it pushes prices down, and this is especially true in areas most hard-hit by the housing meltdown. Like California. Here is an article about it, but there are loads of them all over the place, and I had a hard time finding anything credible stating their likelihood to rise in the next year.
If Tyler kept saving, applied his bonus to the downpayment and housing prices fall another 20%, which many experts think is fairly likely (many say 20% to 30%) . . . there should have enough for a 20% down payment, and a bit of savings for a house now worth $440,000 instead of $550,000. He'd benefit from not paying PMI, getting a better interest rate and not having gone underwater! (Insurance would be slightly less, too. And your property tax would be 20% less!) By my math, he'd pay around $2700 a month, instead of $4000. (The difference could be a little less if interest rates rise, which could happen. But even if they rose 1.5% - and that would be quite dramatic - it would only mean $325 extra a month - he'd still be ahead by nearly $1000 a month, plus he'd have a lot more security.) This is an optimistic, but not unfounded, scenario and much more likely than one wherein price unexpectedly skyrocket and interest rates also climb.
Your monthly payment will be around 3k, this is ~30% of your take home which is a bit higher than typical, but not out of the norm.
His monthly payment would be much higher than this, I don't know where you get this figure from. At a 5% fixed rate loan for 30 years, his base payment would be around $2800. And I'm not sure he'd qualify for a rate like that with only 5% down and without substantial extra savings. This doesn't include property tax, PMI and house insurance. I calculated this to be roughly $4000, which was a fair average (could be a couple hundred less, could be many hundred more, depending on the tax rate and extra insurance - California's rates tend to be very high.) In any case, his payment would likely be closer to 40% of his gross pay, which is exceedingly high. Throw in the fact that he wouldn't likely have enough for closing costs and wouldn't have extra money on hand (which the bank would invariably require) and I really don't see how this makes much sense.
Tyler, I'd wait until I had 20% down and extra savings. If prices start rising, it'll be a slow-gaining process; they're not going to go up 10% overnight, so you can always jump in the market before it gets too heavy, if it ever does.
posted by Dee Xtrovert at 1:22 PM on March 1, 2011 [1 favorite]
You have barely any savings and not enough guaranteed income to be seriously considering buying such an expensive house. Learn from the mistakes of the recent bubble and keep renting until you have a decent down payment, and buy within your income bracket. Is the rent you're currently paying the same or more than your monthly cost of ownership? If not you have really no business buying no matter what other houses in your town might be going for.
posted by ch1x0r at 2:45 PM on March 1, 2011
posted by ch1x0r at 2:45 PM on March 1, 2011
There are other ongoing costs you may not have considered.
You will be responsible for the maintenance of the house. If you think "Well, it can't cost much, the landlord never seems to do anything" then that means a whole lot of repairs are overdue. I've heard people suggest 1% of the price of the house annually for the average cost of upkeep. Of course, these expenses don't come up evenly. It's entirely possible that a month after closing, the boiler breaks and the roof starts leaking and the builder says "holy heck, this roof is all wrong, your chimney stack is not resting on anything, and you need THIS and THIS and THIS" and before you know it you have spent $20,000.
For that matter, you might just have some random personal expenses - medical bills? car repair?
If you're buying on your own, and especially at such an enormous income multiple and with almost no equity, you're also very vulnerable to losing your house if you lose your job. Thus, you really either need insurance against becoming unemployed, or you need a realistic savings cushion that can sustain you through a job search.
I did just buy a house where I had very little cash on hand after closing, but I did it with a partner (so we had two incomes), one of us is handy (so many repairs can be relatively cheap) and I knew that my monthly expenses afterwards would be so low that it would only take a few months to save a good sized emergency fund.
posted by emilyw at 2:55 PM on March 1, 2011
You will be responsible for the maintenance of the house. If you think "Well, it can't cost much, the landlord never seems to do anything" then that means a whole lot of repairs are overdue. I've heard people suggest 1% of the price of the house annually for the average cost of upkeep. Of course, these expenses don't come up evenly. It's entirely possible that a month after closing, the boiler breaks and the roof starts leaking and the builder says "holy heck, this roof is all wrong, your chimney stack is not resting on anything, and you need THIS and THIS and THIS" and before you know it you have spent $20,000.
For that matter, you might just have some random personal expenses - medical bills? car repair?
If you're buying on your own, and especially at such an enormous income multiple and with almost no equity, you're also very vulnerable to losing your house if you lose your job. Thus, you really either need insurance against becoming unemployed, or you need a realistic savings cushion that can sustain you through a job search.
I did just buy a house where I had very little cash on hand after closing, but I did it with a partner (so we had two incomes), one of us is handy (so many repairs can be relatively cheap) and I knew that my monthly expenses afterwards would be so low that it would only take a few months to save a good sized emergency fund.
posted by emilyw at 2:55 PM on March 1, 2011
Can I put just 5% down (I think I can, right)?
This depends on your lender. We got a mortgage through a local credit union and they required 10% down as a minimum. (On the upside, there was no variation in rates. If you hit 10%, you got whatever their rate was.)
posted by Tu13es at 5:23 AM on March 2, 2011
This depends on your lender. We got a mortgage through a local credit union and they required 10% down as a minimum. (On the upside, there was no variation in rates. If you hit 10%, you got whatever their rate was.)
posted by Tu13es at 5:23 AM on March 2, 2011
Aside from all that stuff: if you've decided on this house and only this house you're basically letting the seller choose his price, which means you're probably not going to get a good one. You'll be doing yourself a great disservice if you don't at least look around for houses which might suit you just as well or better for less.
posted by mendel at 7:15 PM on March 2, 2011
posted by mendel at 7:15 PM on March 2, 2011
This depends on your lender. We got a mortgage through a local credit union and they required 10% down as a minimum. (On the upside, there was no variation in rates. If you hit 10%, you got whatever their rate was.)
Well, that's a dubious upside, because most of the places that do this have higher-than-normal interest rates anyhow. If you got a loan with 10% down, you probably got a decent deal compared to other places; if you had 20% down, you probably would have done better to go elsewhere. I've encountered this several times.
posted by Dee Xtrovert at 1:06 AM on March 3, 2011
Well, that's a dubious upside, because most of the places that do this have higher-than-normal interest rates anyhow. If you got a loan with 10% down, you probably got a decent deal compared to other places; if you had 20% down, you probably would have done better to go elsewhere. I've encountered this several times.
posted by Dee Xtrovert at 1:06 AM on March 3, 2011
I agree with the general conclusion that you might be rushing it. I'm in a pretty similar situtation and looking at houses in a similar price range, but I'm waiting until I have 20% down, in part because you're basically throwing money away on PMI. Also you're in the 'nonconforming' range right now, which means worse rates -- a larger down payment would help.
If you have enough money for that big of a mortgage, you have enough money to sock away a few grand a month while renting for another year or two. I get the sense of urgency too, but a little self-control has been helpful.
One last thing: I would point out that the "rule of thumb" of "X times your income" has always struck me as nonsense. That rule is supposed to apply when interest rates are 3%? 5%? 12%? Use a rule of thumb more like the one the banks use: if your mortgage is more than 40% of your take-home income, it's too much. Then a bigger down payment starts to look sensible.
posted by zvs at 11:22 PM on March 5, 2011
If you have enough money for that big of a mortgage, you have enough money to sock away a few grand a month while renting for another year or two. I get the sense of urgency too, but a little self-control has been helpful.
One last thing: I would point out that the "rule of thumb" of "X times your income" has always struck me as nonsense. That rule is supposed to apply when interest rates are 3%? 5%? 12%? Use a rule of thumb more like the one the banks use: if your mortgage is more than 40% of your take-home income, it's too much. Then a bigger down payment starts to look sensible.
posted by zvs at 11:22 PM on March 5, 2011
This thread is closed to new comments.
posted by L'Estrange Fruit at 9:38 AM on March 1, 2011 [1 favorite]