Sanity check: loans and renting vs buying
January 7, 2013 11:01 AM Subscribe
So I'm looking to move from SF to Seattle (in part to save money) - can I get a loan and buy a place? Would that make sense?
So I'm thinking of moving to Seattle from San Francisco - a big reason is to save money and pay down debt (my salary will remain the same). I'll be able to accomplish that just from lower rent and income taxes... and then I realized that mortgages on decent enough condos would actually cost less than rent at a lot of places I'm looking.
But I have a lot of debt and know nothing about getting a home loan. Before I get to the point of actually applying for loans, I just want a sanity check. I'm looking at FHA loans and it appears I should be eligible, but I have a lot of debt (in absolute terms, but I still come in under their ratios)
Income: $93k (81k base, 12k in annual bonus), will have been at the company for about 2 years
Debt: About $75k in student loans, $25k in credit cards - about $800/mo in payments (my goal for the next 15 months is to pay off the CC portion entirely)
Credit score: 690s or so - zero late payments, missed payments, or any other negative marks (except, as you can see, overall debt load and high usage on the CCs)
I'm seeing places I'd like for $120-150k, or about $800/mo for a 30 year FHA loan with a 3.5% downpayment with taxes and insurance included.
That gives me a mortgage to gross monthly income ratio of about 12% and 24% for total debt (that's ignoring my bonus, just the $6750 in gross income).
So it kinda seems like I should be able to get a loan without too much hassle, but I really have no idea if the total debt load and high utilization of my revolving debt will throw a wrench into it. Any guidance, experience, or resources would be helpful!
Now, assuming it IS possible... are there any major downsides I'm not thinking of? Obviously there would be maintenance and any condo fees, but with tax savings I'm pretty sure I'll at least save a couple hundred a month over renting.
So I'm thinking of moving to Seattle from San Francisco - a big reason is to save money and pay down debt (my salary will remain the same). I'll be able to accomplish that just from lower rent and income taxes... and then I realized that mortgages on decent enough condos would actually cost less than rent at a lot of places I'm looking.
But I have a lot of debt and know nothing about getting a home loan. Before I get to the point of actually applying for loans, I just want a sanity check. I'm looking at FHA loans and it appears I should be eligible, but I have a lot of debt (in absolute terms, but I still come in under their ratios)
Income: $93k (81k base, 12k in annual bonus), will have been at the company for about 2 years
Debt: About $75k in student loans, $25k in credit cards - about $800/mo in payments (my goal for the next 15 months is to pay off the CC portion entirely)
Credit score: 690s or so - zero late payments, missed payments, or any other negative marks (except, as you can see, overall debt load and high usage on the CCs)
I'm seeing places I'd like for $120-150k, or about $800/mo for a 30 year FHA loan with a 3.5% downpayment with taxes and insurance included.
That gives me a mortgage to gross monthly income ratio of about 12% and 24% for total debt (that's ignoring my bonus, just the $6750 in gross income).
So it kinda seems like I should be able to get a loan without too much hassle, but I really have no idea if the total debt load and high utilization of my revolving debt will throw a wrench into it. Any guidance, experience, or resources would be helpful!
Now, assuming it IS possible... are there any major downsides I'm not thinking of? Obviously there would be maintenance and any condo fees, but with tax savings I'm pretty sure I'll at least save a couple hundred a month over renting.
I'd say - in this environment try to get the most loan you can (i.e. 30 year fixed).
Interest rates are super low and you want to lock them in as long as possible. 5.1 is going to look more attractive in the short term, but your resets in 5 years are going to be painful.
posted by Riton at 11:05 AM on January 7, 2013
Interest rates are super low and you want to lock them in as long as possible. 5.1 is going to look more attractive in the short term, but your resets in 5 years are going to be painful.
posted by Riton at 11:05 AM on January 7, 2013
Best answer: The New York Times has a nifty Rent vs. Buy calculator. I think the biggest thing to consider is how long you want to live in that home. You don't mention that, but longer is better.
Also, another thing to consider is the maintenance fees and all that dfriedman mentions. I have friends who bought houses thinking it would be a smart money-saving thing to do, but they ended up in a lot of trouble because of expensive housing repairs within the first few years of living there. They were already house-poor and landed themselves in even more debt after buying paying for it all. So be careful.
posted by two lights above the sea at 11:14 AM on January 7, 2013
Also, another thing to consider is the maintenance fees and all that dfriedman mentions. I have friends who bought houses thinking it would be a smart money-saving thing to do, but they ended up in a lot of trouble because of expensive housing repairs within the first few years of living there. They were already house-poor and landed themselves in even more debt after buying paying for it all. So be careful.
posted by two lights above the sea at 11:14 AM on January 7, 2013
Best answer: Are you sure you will live in Seattle for a long time? If you purchase a condo, make sure you can rent it out if you can't sell it immediately when pursuing opportunities elsewhere. Many condo associations have a prohibition against renting the condo out in their by-laws.
posted by readery at 11:15 AM on January 7, 2013 [1 favorite]
posted by readery at 11:15 AM on January 7, 2013 [1 favorite]
As an aside, have you found a way to pay low interest on the credit card debt? Important to do, obviously.
posted by Dansaman at 11:19 AM on January 7, 2013
posted by Dansaman at 11:19 AM on January 7, 2013
Best answer: You'll probably qualify.
Condos have HOA fees, a lot of them in the $300-$450 range. I don't know if the "insurance" you included is homeowner insurance or private mortgage insurance, but at 3.5% down, you'll need both. Also, make sure you have enough cash for both the 3.5% down payment AND the closing costs.
For your price range, I think you'll be looking at places in the price range of $1200/month. If you don't stay there long enough, you'll be sinking money into the transaction fee (3% closing costs when you buy, 6% agent fees when you sell).
posted by ethidda at 11:29 AM on January 7, 2013 [1 favorite]
Condos have HOA fees, a lot of them in the $300-$450 range. I don't know if the "insurance" you included is homeowner insurance or private mortgage insurance, but at 3.5% down, you'll need both. Also, make sure you have enough cash for both the 3.5% down payment AND the closing costs.
For your price range, I think you'll be looking at places in the price range of $1200/month. If you don't stay there long enough, you'll be sinking money into the transaction fee (3% closing costs when you buy, 6% agent fees when you sell).
posted by ethidda at 11:29 AM on January 7, 2013 [1 favorite]
Best answer: Oh! Do I have opinions!
First of all, if you want to know if you can qualify and/or how much you qualify for, you can step into your local financial institution and they'll be happy to run the numbers for you. Some even have seminars for first-time buyers. HUD has some basic information. If you are daunted by reading it, you're not ready to be a home-owner.
You will need to have a lot of cash money on hand to buy a condo. The down payment (about 5% minimum, 20% is optimal) and Closing Costs, which are usually about 5% of the purchase price. The Closing Costs are for things like title search, doc stamps, ad volorum taxes, escrow, etc. So for a $150,000 condo, plan on having $15,000 cash on hand to purchase.
I've owned both homes and condos, and it can be a great thing or a serio-comedy, depending on your worldview at the time.
Here is what you need to know about condos:
1. The mortgage is just one part, the other part is Association Fees and/or Assessments. Fees you pay monthly for the building maintenance, any services provided (cable, satellite, etc.) or for escrowing against future issues. Assessments are budget busters, if the roof caves in, or the balconies all need to be replaced or any expensive repairs need to be done, each unit will be assessed a portion of the repair. You may be asked to write a check for $4,000 at a moment's notice. Neither Association Fees, nor Assessments are tax deductible.
2. Your P&I (Principal and Interest) on your loan is just part of what you pay in a mortgage, you will also pay for property taxes, Private Mortgage Insurance, Insurance, etc. My P&I is $1,400 per month, the remainder is $400 per month. $400 that is not tax deductible.
3. You are responsible for everything inside the condo, appliances, hot water heater, HVAC, walls, paint etc. If your hot water heater goes, not only are you taking a cold shower, you're shelling out $1100 for a new one.
4. If your neighbors are jerks in a condo, guess what, you can't just up and leave. You are stuck in mortal combat with insane people.
5. Your condo association is filled with the biggest nutbars and sociopaths you've ever met. I say this as the former President of my condo association, I had to sell my unit to get the fuck off the board.
6. If you don't like people telling you what to do in your domicile, re-think condo living. I had a friend who had to put her dog in a stroller and take him down in the elevator in it because it was a condo rule that no pets would walk the halls. Some condos will tell you what kind of decorations you can have on your door. Some will tell you what kind of flooring you can have. (Carpeting, it's quieter.)
7. You may not be able to rent your condo. The board may have to approve any tenant, or your building may restrict rentals to 25% of the total residents. A real PITA if you need to move.
Here are my recommendations that will make you a HAPPY homeowner, instead of a rueful, bitter old nag. (Like me!)
1. Pay off all debt before you buy.
2. Rent in the area you think you want to live in for a year. This way you can see if it's really and truly what you want, day-to-day.
3. Have an emergency fund of 6-8 months worth of expenses. In case you lose your job, become disabled, or any other financial catastrophe befalls you.
4. Have a fund built up for "Shit Gonna Break" I'd say about 2% of your purchase price. Because shit gonna break.
Waiting won't hurt you, ESPECIALLY if you're new in town. Rent a nice place in a hip and happening area and start studying the local real estate market.
posted by Ruthless Bunny at 11:39 AM on January 7, 2013 [5 favorites]
First of all, if you want to know if you can qualify and/or how much you qualify for, you can step into your local financial institution and they'll be happy to run the numbers for you. Some even have seminars for first-time buyers. HUD has some basic information. If you are daunted by reading it, you're not ready to be a home-owner.
You will need to have a lot of cash money on hand to buy a condo. The down payment (about 5% minimum, 20% is optimal) and Closing Costs, which are usually about 5% of the purchase price. The Closing Costs are for things like title search, doc stamps, ad volorum taxes, escrow, etc. So for a $150,000 condo, plan on having $15,000 cash on hand to purchase.
I've owned both homes and condos, and it can be a great thing or a serio-comedy, depending on your worldview at the time.
Here is what you need to know about condos:
1. The mortgage is just one part, the other part is Association Fees and/or Assessments. Fees you pay monthly for the building maintenance, any services provided (cable, satellite, etc.) or for escrowing against future issues. Assessments are budget busters, if the roof caves in, or the balconies all need to be replaced or any expensive repairs need to be done, each unit will be assessed a portion of the repair. You may be asked to write a check for $4,000 at a moment's notice. Neither Association Fees, nor Assessments are tax deductible.
2. Your P&I (Principal and Interest) on your loan is just part of what you pay in a mortgage, you will also pay for property taxes, Private Mortgage Insurance, Insurance, etc. My P&I is $1,400 per month, the remainder is $400 per month. $400 that is not tax deductible.
3. You are responsible for everything inside the condo, appliances, hot water heater, HVAC, walls, paint etc. If your hot water heater goes, not only are you taking a cold shower, you're shelling out $1100 for a new one.
4. If your neighbors are jerks in a condo, guess what, you can't just up and leave. You are stuck in mortal combat with insane people.
5. Your condo association is filled with the biggest nutbars and sociopaths you've ever met. I say this as the former President of my condo association, I had to sell my unit to get the fuck off the board.
6. If you don't like people telling you what to do in your domicile, re-think condo living. I had a friend who had to put her dog in a stroller and take him down in the elevator in it because it was a condo rule that no pets would walk the halls. Some condos will tell you what kind of decorations you can have on your door. Some will tell you what kind of flooring you can have. (Carpeting, it's quieter.)
7. You may not be able to rent your condo. The board may have to approve any tenant, or your building may restrict rentals to 25% of the total residents. A real PITA if you need to move.
Here are my recommendations that will make you a HAPPY homeowner, instead of a rueful, bitter old nag. (Like me!)
1. Pay off all debt before you buy.
2. Rent in the area you think you want to live in for a year. This way you can see if it's really and truly what you want, day-to-day.
3. Have an emergency fund of 6-8 months worth of expenses. In case you lose your job, become disabled, or any other financial catastrophe befalls you.
4. Have a fund built up for "Shit Gonna Break" I'd say about 2% of your purchase price. Because shit gonna break.
Waiting won't hurt you, ESPECIALLY if you're new in town. Rent a nice place in a hip and happening area and start studying the local real estate market.
posted by Ruthless Bunny at 11:39 AM on January 7, 2013 [5 favorites]
Best answer: Other monthly costs to consider along with debt and mortgage because they add up:
- Condo fee if you are looking at condos (as in to the association)
- Homeowner's Insurance (see if you can get a bundle deal with your auto insurance)
- Electric
- Sewer/water
- Gas
- PMI
- Escrow account
- Taxes
- Phone bill
- Internet bill
- Cable bill
- Car loan/monthly car expenses
Other one-off costs to consider:
- House Inspection
- House Appraisal
- Moving expenses
- Immediate expenses for upgrades
- Closing costs
Standing contributions to consider:
- Medical/dental insurance
- 401(k)/retirement saving
- Savings-savings
- Emergency savings
I tend to follow a more conservative approach when it comes to expenses.
Also - the old notion is so true - something big and expensive will break within the first year of homeownership (and for me, did the same thing during years 2 and 3). Be prepared. I've had to redo plumbing, have washer/dryer serviced and am getting increasingly anxious about my boiler. And this is in a literally move-in-ready, redone condo. It's just part of it.
posted by floweredfish at 11:42 AM on January 7, 2013
- Condo fee if you are looking at condos (as in to the association)
- Homeowner's Insurance (see if you can get a bundle deal with your auto insurance)
- Electric
- Sewer/water
- Gas
- PMI
- Escrow account
- Taxes
- Phone bill
- Internet bill
- Cable bill
- Car loan/monthly car expenses
Other one-off costs to consider:
- House Inspection
- House Appraisal
- Moving expenses
- Immediate expenses for upgrades
- Closing costs
Standing contributions to consider:
- Medical/dental insurance
- 401(k)/retirement saving
- Savings-savings
- Emergency savings
I tend to follow a more conservative approach when it comes to expenses.
Also - the old notion is so true - something big and expensive will break within the first year of homeownership (and for me, did the same thing during years 2 and 3). Be prepared. I've had to redo plumbing, have washer/dryer serviced and am getting increasingly anxious about my boiler. And this is in a literally move-in-ready, redone condo. It's just part of it.
posted by floweredfish at 11:42 AM on January 7, 2013
Also - the old notion is so true - something big and expensive will break within the first year of homeownership (and for me, did the same thing during years 2 and 3).
Yeah, and you'll either have to fix it, or you'll get a "special assessment" from your condo association.
I've owned my house for 15 months. I've had to fix the plumbing, replace kitchen appliances, replace the kitchen faucet, and replace the roof. (Not to mention upgrades I did that were not necessary.) I think you buy a home for very long term investment or because you want everything done your way.
posted by ethidda at 12:18 PM on January 7, 2013 [1 favorite]
Yeah, and you'll either have to fix it, or you'll get a "special assessment" from your condo association.
I've owned my house for 15 months. I've had to fix the plumbing, replace kitchen appliances, replace the kitchen faucet, and replace the roof. (Not to mention upgrades I did that were not necessary.) I think you buy a home for very long term investment or because you want everything done your way.
posted by ethidda at 12:18 PM on January 7, 2013 [1 favorite]
Separate from the financial piece, which many people have covered above, I think it's worth considering moving into a rental for 6-12 months in Seattle before buying. It is so, so, so worth it to actually live in a city for a bit and get a sense of what types of amenities you really want to be close to (easy freeway access vs. walking distance of coffee shops and bars? outdoor pursuits vs. nightlife? etc) before committing in a fairly permanent way to one place.
We recently moved several thousand miles from an expensive east coast city to a less-expensive city in the mountain west, and while it was a big pain to pack up all our shit twice in 12 months, I'm so glad we moved into a rental house before starting to look at buying a place. Even though the town we moved to is not very big--only about 100,000 people--the neighborhoods we thought we wanted to live in ended up to be pretty different after we had actually lived in the area for a while.
Plus, having a rental gave us the time to really look at places for 3-4 months before putting in an offer. When you look at 30 or 40 properties, all of a sudden you get much better at figuring out which places are overpriced versus a killer deal. I literally can't understand how people spend only a week (or weekend!) touring available houses or condos to buy before moving to a new city; that seems like a situation where you're much more likely to end up in a place for YEARS that isn't as great for you as you could have snagged if you had more time to really be discerning.
posted by iminurmefi at 12:39 PM on January 7, 2013 [2 favorites]
We recently moved several thousand miles from an expensive east coast city to a less-expensive city in the mountain west, and while it was a big pain to pack up all our shit twice in 12 months, I'm so glad we moved into a rental house before starting to look at buying a place. Even though the town we moved to is not very big--only about 100,000 people--the neighborhoods we thought we wanted to live in ended up to be pretty different after we had actually lived in the area for a while.
Plus, having a rental gave us the time to really look at places for 3-4 months before putting in an offer. When you look at 30 or 40 properties, all of a sudden you get much better at figuring out which places are overpriced versus a killer deal. I literally can't understand how people spend only a week (or weekend!) touring available houses or condos to buy before moving to a new city; that seems like a situation where you're much more likely to end up in a place for YEARS that isn't as great for you as you could have snagged if you had more time to really be discerning.
posted by iminurmefi at 12:39 PM on January 7, 2013 [2 favorites]
mortgages on decent enough condos would actually cost less than rent at a lot of places I'm looking.
That is as may be. But unlike renting, your mortgage payment is not all you'll spend on housing.
Muck about with this. I disagree with some of the details--the idea that you can plan on any kind of consistent return on either investments or real property appreciation is a crock of shit--but it's an excellent way of coming up with the kind of costs you're going to be paying in buying v. renting.
posted by valkyryn at 12:40 PM on January 7, 2013 [1 favorite]
That is as may be. But unlike renting, your mortgage payment is not all you'll spend on housing.
Muck about with this. I disagree with some of the details--the idea that you can plan on any kind of consistent return on either investments or real property appreciation is a crock of shit--but it's an excellent way of coming up with the kind of costs you're going to be paying in buying v. renting.
posted by valkyryn at 12:40 PM on January 7, 2013 [1 favorite]
Response by poster: So many great points and pieces of advice, thank you everyone!
Recap:
1. Could I get a loan with my debt? Answer: probably
2. Pitfalls - I was including estimated taxes and insurance (both homeowners and PMI/FHA), but y'all have put the fear of god in me regarding maintenance :)
Other things I had given some thought to, but are bigger issues than I'd realized:
*Making sure I would be allowed to rent it out per condo rules
*Condo associations are assholes (Something I, amazingly, didn't give a ton of thought to. Growing up I saw my parents deal with awful HOAs... definitely something I'd like to avoid)
Questions/good points that came up:
Is my CC debt low-interest... most of it is around 10%, so not crazy (again, never missed a payment or anything, so they've never had a reason to jack up my rates). I don't think I'll be doing anything fancy to lower the rates, though. As mentioned, my #1 goal for the next 12-18 months is to pay that off in full. Which is totally doable
How long would I stay in the place/make sure I like Seattle/like the 'hood. I'm pretty nomadic, which definitely is a problem, but I also don't see it changing soon. I never want kids, so while an SO or a job could take me places, I'm not totally worried about it. But there are definitely costs to moving so I'd want to keep those in mind. In terms of making sure I like the area, I was definitely planning on crashing on a friends couch for a month to find a place to rent... I could do that longer if I decided to buy. I'm from Portland, so I'm comfortable with the weather and culture of Seattle, I know I'll like it.
Once again, thank you everyone for some great advice! At this point I'm leaning towards sticking to my original plan of renting and focusing on debt this year. While buying looks doable and might lower my normal monthly costs, the increased lack of flexibility and (more importantly) the danger of unexpected costs are convincing me to wait. In 12-18 months I'll have paid off my CC debt so I'll be much more flexible financially.
posted by alaijmw at 6:08 PM on January 7, 2013
Recap:
1. Could I get a loan with my debt? Answer: probably
2. Pitfalls - I was including estimated taxes and insurance (both homeowners and PMI/FHA), but y'all have put the fear of god in me regarding maintenance :)
Other things I had given some thought to, but are bigger issues than I'd realized:
*Making sure I would be allowed to rent it out per condo rules
*Condo associations are assholes (Something I, amazingly, didn't give a ton of thought to. Growing up I saw my parents deal with awful HOAs... definitely something I'd like to avoid)
Questions/good points that came up:
Is my CC debt low-interest... most of it is around 10%, so not crazy (again, never missed a payment or anything, so they've never had a reason to jack up my rates). I don't think I'll be doing anything fancy to lower the rates, though. As mentioned, my #1 goal for the next 12-18 months is to pay that off in full. Which is totally doable
How long would I stay in the place/make sure I like Seattle/like the 'hood. I'm pretty nomadic, which definitely is a problem, but I also don't see it changing soon. I never want kids, so while an SO or a job could take me places, I'm not totally worried about it. But there are definitely costs to moving so I'd want to keep those in mind. In terms of making sure I like the area, I was definitely planning on crashing on a friends couch for a month to find a place to rent... I could do that longer if I decided to buy. I'm from Portland, so I'm comfortable with the weather and culture of Seattle, I know I'll like it.
Once again, thank you everyone for some great advice! At this point I'm leaning towards sticking to my original plan of renting and focusing on debt this year. While buying looks doable and might lower my normal monthly costs, the increased lack of flexibility and (more importantly) the danger of unexpected costs are convincing me to wait. In 12-18 months I'll have paid off my CC debt so I'll be much more flexible financially.
posted by alaijmw at 6:08 PM on January 7, 2013
Best answer: Congratulations on a new situation, and buying versus renting is a big decision to make.
Definitely a long-term lifestyle choice, as being anchored by an illiquid asset can cause a lot of headaches should your situation change. Since you are from the Pacific NW that reduces that likelihood, but another question that comes up is the long-term job prospects for your particular field. It certainly is a factor, whether you can do what you are doing for the long-term should your employer in Seattle change for whatever reason.
When I was young, fabulous and single (okay, perhaps not 'young' but 'younger'), I was not broke and had saved up a decent kitty to put toward real estate. Many years later, many address-changes later, across a few states and countries, I to this day do not regret the sacrifice I made those years ago to buy a place that today throws off a great rental income. Of course being a landlord is not for everyone (certainly!) but as you state the debt-to-income ratios do make sense, and whatever the other considerations that come into play (upthread all the advice is exactly correct) should you decide to look into it further you might find that home ownership would suit you well, and perhaps even becoming a landlord should your situation change.
One macro-economic consideration is the interest rate environment and the housing market combination. It is amazing how low interest rates are now, and as stated before you could lock up 30-year money for far less than just a few years ago; on top of that the overall real estate market seems to have started something of a recovery. (Here's a link to the Seattle Case-Schilling index chart.)
It's not going to change overnight, so you do have a year to work on the debt and improve the overall condition; I'm just saying that if you are comfortable with the idea there isn't anything in your situation that would prohibit you from moving forward.
posted by scooterdog at 10:20 AM on January 8, 2013 [1 favorite]
Definitely a long-term lifestyle choice, as being anchored by an illiquid asset can cause a lot of headaches should your situation change. Since you are from the Pacific NW that reduces that likelihood, but another question that comes up is the long-term job prospects for your particular field. It certainly is a factor, whether you can do what you are doing for the long-term should your employer in Seattle change for whatever reason.
When I was young, fabulous and single (okay, perhaps not 'young' but 'younger'), I was not broke and had saved up a decent kitty to put toward real estate. Many years later, many address-changes later, across a few states and countries, I to this day do not regret the sacrifice I made those years ago to buy a place that today throws off a great rental income. Of course being a landlord is not for everyone (certainly!) but as you state the debt-to-income ratios do make sense, and whatever the other considerations that come into play (upthread all the advice is exactly correct) should you decide to look into it further you might find that home ownership would suit you well, and perhaps even becoming a landlord should your situation change.
One macro-economic consideration is the interest rate environment and the housing market combination. It is amazing how low interest rates are now, and as stated before you could lock up 30-year money for far less than just a few years ago; on top of that the overall real estate market seems to have started something of a recovery. (Here's a link to the Seattle Case-Schilling index chart.)
It's not going to change overnight, so you do have a year to work on the debt and improve the overall condition; I'm just saying that if you are comfortable with the idea there isn't anything in your situation that would prohibit you from moving forward.
posted by scooterdog at 10:20 AM on January 8, 2013 [1 favorite]
This thread is closed to new comments.
posted by dfriedman at 11:04 AM on January 7, 2013