Buying a house with almost no downpayment

December 21, 2007 2:40 PM

My wife and I want to buy a house in the Boston area, but have almost no down payment...maybe $10K. We both have good credit (725 and above) and make about $110K, together. What are my options to buy a house?

If need be we could probably get my parents to co-sign (they have incredible credit).

In the past when we had considered houses people had mentioned interest only loans, second mortgages and the like, but now in this new world of mortgage meltdown, what options do we have? Any thoughts?

If it matters we pay about $2K a month in rent right now and a lot of the houses we are looking at are $400-$500K in the metro Boston area. So no way are we coming up with $50 or $100K down payment!

posted by anonymous to work & money (26 comments total)

You should probably clarify if you are willing/able to pay more than the $2K/month you currently pay for housing. The interest on $450K at a reasonable mortgage rate of 6% is more than $2K/month already and owning a house will also cost you property taxes, maintenance, repairs, and utilities (if they are included in your current rent).
posted by ssg at 2:50 PM on December 21, 2007

and insurance, too.
posted by ssg at 2:51 PM on December 21, 2007

6% for a jumbo loan to a guy with a FICO of 725? Try 8.5%.

Some lenders are still trying to originate loans, and with your proof of income and good credit you could probably qualify for a no-down loan, but the points and rate will probably be onerous. Start by plugging numbers into bankrate.com, not because this is where you're going to buy your loan for sure now, but just to get a ballpark idea of what is currently out there.
posted by ikkyu2 at 2:59 PM on December 21, 2007

I just bought a house with my SO in March with no downpayment (in Philly.) You'll need to reserve that 10k for closing costs (plus inspection, etc.) Second mortgage (80/20 split) is likely still a perfectly reasonable option since you have very good credit. Can't speak to parents co-signing (not an option that I ever, ever would've considered in my situation, also, all the folks are retired.)

However, while I'm sure you qualify for a $400K mortgage, I'll bet that your monthly payments would be considerably over $2000. And of course, when the furnace dies or the roof leaks, it's out of your pocket. (And roofers don't take credit cards.) Consider looking for a less-expensive house.

Get recommendations for and meet with a mortgage broker, who can go over all the scenarios with you and let you know what your monthly payment is going to look like.
posted by desuetude at 3:03 PM on December 21, 2007

Tell you what, I'll run the numbers through bankrate for you.

I was a little off; bankrate suggests that for a guy trying to put $25K down (5%) and borrow 475,000 on a 30-year fixed no-points loan, the monthly payment would be $3444, the initial fee would be $1750, and the rate with the fee taken into account is 7.914%.

What you really want to do is find a house you can buy without borrowing more than $417,000, which is the largest loan you can get that is not "jumbo." Non-jumbo, or "conforming" loans to prime lenders with good credit like you, get much better rates because they can be originated by Fannie Mae and Freddie Mac. Conforming loans (which for your purposes means prime credit and non-jumbo) are really not even in crisis right now, the market in them is still pretty O.K.

If you put $22000 down and borrow $417,000, for a total home cost of $439K, on a 30-year fixed 0-point loan you are looking at an APR of around 6.2% and a monthly payment of about $2500. That sounds like the most reasonable thing you're going to find. Don't forget to add in property tax, title fees, escrow fees, inspections, appraisals, etc. to the up front costs - maybe $5-8K, and the recurring costs include taxes, maintenance, landscaping, homeowner's association fees, and various sorts of insurance, probably jacking the monthly cost up closer to $3K.

So basically you need to be looking at a little less house, a little more down payment, and even more money set aside for upfront costs, if you want to get the best deal available, which is a pretty good deal. Here's a tip; the houses you're looking at for $450K could be negotiated down to $439K if your broker can make the seller's broker understand that this is what it's going to take to get the deal done and the mortgage approved.
posted by ikkyu2 at 3:13 PM on December 21, 2007 [3 favorites has favorites]

Oh, and since you did ask: neg-am, interest-only, and ARMs are not for people who need to ask the Internet whether or not to consider them. That means they are not for you. Forget about them.
posted by ikkyu2 at 3:16 PM on December 21, 2007

Is there some reason you need to do this now? I think that it might be better to wait, as the housing bubble hasn't finished popping and we don't really know what is going to happen to interest rates. Banks are jittery right now.

Some economists, like Paul Krugman (see here and here) argue that housing prices could drop a lot more before things stabilize again, and if you look at the buy-to-rent ratio, it may make more financial sense to rent, as strange as that sounds. In any case if you take another year or two to save you'll have that much more to put down on the house and you'll be borrowing less money, so you'll be paying less interest.
posted by lackutrol at 3:21 PM on December 21, 2007

Consider buying a two family and then use the rental income to help you with the morgage payments. Think of it as your starter home. Our tenants pay $1400 a month and that's more than half our morgage and property tax payment - we live in Belmont which has a great school system. I find the trade-offs in living in a two family are well worth it given the economic benefit. We use good judgement concerning selecting tenants - usually a couple often with one or more kids and have had only good tenant experiences in the past decade that we've owned the house. I guess this may be slightly off-topic re: getting a loan in your circumstances, but I would imagine the tenant income would figure into the equation favorably with the bank.
posted by mayann at 3:25 PM on December 21, 2007

The place I go when I wonder "hmmm, do they even give mortgages for this situation?" is creditboards.com. There is a section in their discussion boards for mortgage brokers only (open to others to read) where you can read them asking one another "where can I find a mortgage for ...?" and see if you find a situation that parallels yours. There's also a general section on mortgages where you can ask people about your own situation, and sometimes people will help with questions like this. But I'd guess that the only way to get any better information than what ikkyu2 gave you above is to talk to a mortgage broker in your area (any realtor can hook you up with one, or ask coworkers that own houses) and try to get prequalified for a loan of a certain amount. That's a good step to take before you even start looking at houses because people take it to mean that you're really serious. Good luck!
posted by salvia at 3:47 PM on December 21, 2007

You can do 5% down. You'll have to pay PMI (private mortgage insurance) which will up your payments a bit. Also, you're not going to get pre-approved for much more than 400K at 110k/year. So you need to look further out (where housing's cheaper) or look for a condo. You can do a reasonable single family for less than 400k in the Framingham area, but that's a long way out to me.

Your first step is to get pre-approved for the mortgage. Talk to a mortgage professional about it-- you're not obligated to get the loan. Send me an email and I can point to a good guy at a major bank that you can talk to.
posted by Mayor Curley at 4:00 PM on December 21, 2007

NB that that monthly cost of $3k that ikkyu mentions does not include the tax deductions you'll get. At your income bracket, you're probably looking at about $1000/month in federal income tax savings--more in 2009 or 2010 when the Democrats repeal the Bush tax cuts. That would make renting and buying a break-even decision.

That said, unless you think housing prices are going to increase substantially, you're likely better off renting and squirrelling away enough for a down payment so that you don't have to pay mortgage insurance. In this tight credit market and uncertain real estate market, it's unlikely someone is going to give you a 6.2% no-money-down mortgage, and anything above that makes renting cheaper. In terms of money management, you're also better off having some emergency funds in the bank in case something happens to one of your incomes. If you have to sell the house in a hurry, you would very likely lose $30,000 in commissions alone.
posted by commander_cool at 4:20 PM on December 21, 2007 [1 favorite has favorites]

Oh, worth mentioning that talking to a mortgage broker does NOT obligate you to actually use that mortgage broker for your loan.
posted by desuetude at 4:46 PM on December 21, 2007

Commander_cool makes an excellent point, I agree completely.
posted by ikkyu2 at 5:26 PM on December 21, 2007

Another thing that occurs to me is that if each of you have a qualified IRA, you can take out $10K apiece for the down payment on your first home. (assuming this *is* your first home). With the $10K you already have you'd be just about where you need to be for that 5% down, $439K hypothetical house I mentioned.

Whether doing this is a good idea or not is hard to say. I tend to side with the folks above who think that housing prices have further to fall in the next year or maybe even 2, but I don't know that for sure. No one does. If I were in your situation, which I more or less am apart from a few details, I would be (am) planning on waiting about 2 years.
posted by ikkyu2 at 5:32 PM on December 21, 2007

Also, one other thing to consider is how long the house you're looking at has been on the market (your broker should be able to tell you that) and estimating how motivated your seller might be. Anecdotal evidence (as such things are hard to track) has it that while in some places housing prices may not have moved as much, behind the scenes, the sellers are taking on more costs than they might per local custom.

What that means is that while the house may not have dropped in price, if the sellers are underwater and want to get out ASAP, they may not lower the price, but they might cover your closing costs, fees, etc. That leaves more for your downpayment. Maybe only a couple of thousand, but hey, it helps.

Also, seconding what ikkyu2's comment about trying to avoid non-jumbo loans.
posted by mjbraun at 5:35 PM on December 21, 2007

You may also want to define what you mean by metro-boston, 400-500k will get you more than it did a year ago if you go a bit further outside of Boston. Are you specifically trying to avoid commuting/suburbia?

Is it just you two? Home vs condo?
Areas like Framingham offer 4 bedroom houses for $440 or lower. Areas like Brighton put you closer to the city but have more condos on the market.

Out here I have seen houses on the market for months. But still, honestly, looking at your numbers above I would say you should be looking for something between 350 and 450k.
posted by jeremias at 6:37 PM on December 21, 2007

About the PMI, you might check into so-called first time homebuyers programs (it doesn't really have to be your first time, but there are some restrictions). In Oakland, a friend went through a first time homebuyers class held by Acorn Housing (a nonprofit) which qualified her to put close to nothing down without paying PMI. Acorn's role, as I understand it, is to guarantee the second loan (the one for the downpayment). The program still exists; it hasn't vanished with the subprime chaos.
posted by salvia at 9:20 PM on December 21, 2007

I tend to side with the folks above who think that housing prices have further to fall in the next year or maybe even 2, but I don't know that for sure

I do, for the simple reason that the Crazy-Eddie lending practices that juiced prices up 2003-2006 are now GONE, as is the speculative premium people were willing to pay 2001-2005.

Without that wind beneath our wings, I fully expect prices to conform to the patterns we saw in the early 90s, and that's even not considering the next two years of ARM/Alt-A neg-am resets and recasts that are going to be going off like so many bombs across this country.

On the contrarian side, there is the distinct possibility that the $417K limit will be raised, either in 2009 or earlier as part of some emergency "affordability" intervention, perhaps to $1M . . . this might provide some counterweight to the declining side of the equation.

The poster is grossing over $9K per mo but only has $10K in ready savings. From what I've gathered, eg. from eloan.com, 5% downpayments on conforming is the sweet spot.

My recommendation is to balls-out save for a year -- live as though you had that $4000/mo mortgage -- to put together at least $30K for the purchase transaction and $20K for a safety cushion. $50K at 4%
posted by panamax at 10:19 PM on December 21, 2007

... is $2K per year -- a free month's rent -- to sit on the sidelines.

My further advice is to begin your househunting NOW. I've been tracking the neighborhood I intend to buy for almost 2 years now. I monitor what has been listed, the price reductions, and final sales price (or, more likely) when the unit is taken off the market). Taking this pulse is very useful in keeping me out of the market . . . since NOTHING is moving at these prices now, NOT buying now is a no-brainer. Prices were jacked up in my area 50% in 2005 alone, but these unsupportable gains are now being worked out of the system.
posted by panamax at 10:25 PM on December 21, 2007

salvia, the poster apparently makes too much to qualify for ACORN assistance. I doubt the PMI waiver is significant, given that it is both tax deductible now and the banks can just roll another point into the rate to self-insure the mortgage anyway.
posted by panamax at 10:38 PM on December 21, 2007

Why would you want to buy a house now? Housing prices are dropping, and are likely to drop much more. It's a near certainty that you would end up badly underwater on your mortgage if you bought now. To top it off, the drop in housing prices is making a US recession quite likely, so unless you both have completely recession-proof jobs, now is a really bad time to be taking on substantial debt.
posted by Coventry at 12:56 AM on December 22, 2007

That depends, Coventry - prices aren't dropping in all areas of the country. I don't know about Boston, but at least here in (central) Austin, prices are still rising. Quite quickly in some areas, even.
posted by kaseijin at 6:48 AM on December 22, 2007

Oh, and to the OP: I would look into an 80/20 and get much less house. With your household income being over 100k/yr, I think you lose the ability to deduct any mortgage insurance from your taxes. 80/20's are hard to come by now, but with your credit scores it may be an option.
posted by kaseijin at 6:50 AM on December 22, 2007

I don't know much about the Boston market, either. Apparently, there are a few small areas in Boston where prices have risen, though it's hard to tell whether those fluctuations are statistically significant, because they reflect small samples (a few dozen transactions at most.) However, it appears that in aggregate, the prices of houses in the area are dropping. Here is a set of graphs showing the Case-Schiller index for Boston, along with anticipated declines as reflected in housing futures contracts. I found both of these links on the Boston Bubble web page.
posted by Coventry at 9:17 AM on December 22, 2007

Even if you can afford it, you need to look at why you have only saved $10k when you're making $110k a year before taxes and are only paying $24k a year in rent. Your best bet is to wait, save as much more money as you can and see what housing prices and the prices on the kinds of places that you want do in the next year.

Maybe you can do it earlier and without saving more money first, but being able to save a larger down payment shows that you are responsible enough to own a house in a price range that may be near the top of what you can afford.

Kaseijin - It's a nightmare to work through all the IRS regulations, but I think that you can deduct normal (i.e. more recent than 1987 and for the purchase, building or improvement of your home) mortgage interest in full until you have income of a good bit higher than $100k combined, and even then you still can for mortgage amounts under $1 million. I think. Maybe someone else can dig and find out - I though it would be easy but spent 15 minutes on irs.gov and gave up. The original poster should be fine, though.
posted by iknowizbirfmark at 9:55 AM on December 22, 2007

My recommendation is to balls-out save for a year -- live as though you had that $4000/mo mortgage -- to put together at least $30K for the purchase transaction and $20K for a safety cushion. $50K at 4%

I agree with this and other advice you're receiving. I am looking for a house and have been (along with other family members who are keeping an eye) looking for a bargain house. I can't predict what the housing market will do in 1-2 years, neither can you. It may mean more affordable houses or government subsidies can buoy housing prices and you won't see any difference. Keep in mind that when you get closer to high-end housing, the fluctuations get kind of funny. You won't find them following what the mainstream logic is on housing prices. High income demographics rarely feel the ebb and flow of the economy as tracked by the nighly news.

So what do I mean by finding values? Especially in speculative markets or places where housing values can be severely inflated (high end housing, large metro areas that experienced the housing bubble), you'll find an executive or some family put a house at say, $1.2m and 3 months later have it drop to $1.1m or more. That's out of your price range (and mine) but the idea is to keep an eye out on housing prices and look to see where a house is really a bargain. You're not looking for the sale at Barney's, you're looking for the move-now bargains in Wal-Mart bins. Does that make sense? I am sorry I can't quantify it, but once you begin tracking the markets you'll soon realize that you cannot predict trends but you can find aberrations that you certainly can take advantage of.
posted by geoff. at 12:28 PM on December 22, 2007