Buying my first house: am I screwed now?

March 18, 2008 6:38 AM

When should I buy a house? I'm freaked out about buying my first house to start with, and now this?

I've come into an offer that's hard to refuse: a parental gift of 20% down for a house + the basic startup costs associated with buying a house (inspector and whatnot). Lucky, aren't I?

But here's the rub. I don't have much/any money in savings ($1000?), I don't make a lot of money (non-profit job), and buying a house scares the bejeezus out of me. I have a vague idea of how to do it (get an independent inspector!), but the details and amount of information out there is overwhelming.

And now all I hear is that despite a potential glut of available and affordable housing, people can't secure funding for mortgages.

My question(s): How would/will this scary real-estate market affect me in general, as a first time home-buyer? If you'd anticipate my having problems securing funding, what can I do? Does my lower-income status and first-time buyer status hurt or help me? Are there programs I can take advantage of, being kind of on the lower-income side but certainly not destitute.

Should I wait?

Bonus if anyone can point me to a trustworthy (i.e. not offered by a realtor or bank) primer on how to buy a house for the first-time buyer.

Additional info:
Salary ~$36K (not that I love disclosing that here, but whatever)
Market: Durham or Raleigh, NC, USA. Urban or rural, as long as there's a good sized and appropriate space for a garden. (Which one of these would be another question altogether...I work in the downtown area of Raleigh, but currently live in and love Durham)
Banks: I have access to USAA, but no credit union.
Marital Status: single, no kids.

posted by Stewriffic to work & money (33 answers total)

First of all, don't worry about losing money in the real estate market. You are getting 20% free, so even if prices drop 20% in the short term you'll still be breaking even. From a financial perspective, a 20% discount on an investment is huge.

The much more important issue is whether you can get a mortgage and handle the payments. You didn't mention your credit situation, do you know your credit score? Banks are tightening up right now, so if you're in the infamous sub-prime category you can pretty much assume you won't be able to get a mortgage any time soon.

Even if you can get the money, I would be very worried about having to make payments with only a $1000 buffer in the bank. You should have at least 6 months expenses saved up at all times, no exceptions. Personally I would save up for a while and wait until I had that amount covered, but that's a personal decision you'll have to make.

And as far as a good subjective resource for home buying, I like Zillow's Wiki.
posted by burnmp3s at 7:02 AM on March 18, 2008

My credit is fine. It's in the 700s, anyway. But I'd better get on that and get my most recent score in hand, hm? USAA has my CC (recently zero-balanced: In Jan and Feb I paid off $5,000 from a time when I was unemployed) as well as my car loan ($227/month until Sept 2009 $4,115.97 total left ~6.19%), so they know I'm responsible and pay.

Other debt: student loan $~20K, $128/month already consolidated ~3.6%
posted by Stewriffic at 7:21 AM on March 18, 2008

You need a lot more in savings. I would wait until you have 3 months worth of expenses in the bank to even start looking. Especially being single, you only have one income to rely on, so you have to make sure you can pay your mortgage and keep the lights on if you were to lose your job. Also, when you own a house, stuff happens, and you're financially responsible for fixing it - and that stuff can be expensive.

What you can do now is to take a hard look at your budget and make cuts where you can. If you don't have a budget, it's time to make one.
posted by boomchicka at 7:26 AM on March 18, 2008

I would not think of buying a house right now. If you can put off that generous offer of the downpayment for even 6 more months, it would be worth it. Say that you want to save up some money, as burnmp3s suggests. With the market in a complete free-fall, prices will be falling by thousands every month for the next year at least.
posted by eas98 at 7:39 AM on March 18, 2008

Actually, that was boomchicka who suggested the savings. Same advice applies.
posted by eas98 at 7:41 AM on March 18, 2008

2nding burnmp3s and boomchicka; having a cushion is key. As for the time to buy as my realtor dad likes to say, "All real estate is local," and the Raleigh/Durham market is fairly strong. Don't let the bad market news in places like California affect your decision too much.

Bottom line, though, if you're not comfortable with the decision, my advice would be not to do it. Homeownership is a stressful situation at times (says the owner who's had to have her well serviced twice in the last 18 months), and I can only imagine it would be infinitely LESS fun if you're having regrets.
posted by tigerjade at 7:43 AM on March 18, 2008

Also, the mortgage problem is mainly for people who don't have a 20% down payment or bad credit. You have neither of those problems so you should be fine in that respect.
posted by boomchicka at 7:43 AM on March 18, 2008

Hello Stewriffic! I live in the same area as you, and I'm probably going to be looking for something similar soon. We currently live in a condo with no "official" garden space and it's really starting to get to me. You'll find that real estate is less expensive in rural areas, and you'll have less trouble if you want to do something "unusual" (Watch Out for neighborhood association rules in newer neighborhoods), but I hesitate to move out there because I don' t like the idea of having to drive forever just to go shopping or out to lunch.

About credit unions:

You actually can join a credit union around here. I myself was a member of the Latino Community Credit Union (I'm not latin in the least) -- you just have to join the Latino Community Development Center first. They were in the same building when I joined, and it was kind of cool. I'm not a member any more since the branches were not conveniently located for me and I'm a member of a credit union in GA which had better remote banking services. It looks like they're currently offering 5.75% / 4.937% on mortgage loans.

There's also (I just found through Google) Generations Community Credit Union, which says "Anyone can be a member of Generations." I think this is a new credit union. It looks like they only offer mortgages of up to 15 years, though.

We also bank with RTP Federal Credit Union. They may have more complete offerings (our mortgage isn't through them, but I'm not sure why at this point). Now, you do have to be a member of a member organization, but I actually called and asked them about this at one time, and it's very easy for an organization to join. Here's a link. You're a doer, you could probably get your company/organization/whatever to join. I think it's not a long involved process, either, but you could always check.
posted by amtho at 7:44 AM on March 18, 2008

Y'all rock. Keep it coming. I'm feeling more and more in control with each answer.

Hi amtho! Wanna get a coffee sometime?

I actually underestimated the amount of savings I have. I've only got ~1000 extra in checking, but in savings I have almost 2K, and thanks to my depression-surviving grandmother, I also have secret pockets of actual cash in the house totaling probably $500.
posted by Stewriffic at 7:59 AM on March 18, 2008

I would go talk to a bank or mortgage broker to find out how much you would qualify for. It will probably scare you how much they are willing to lend to you. Your caution is a good thing. Stay well within your means and you will stay out of trouble. Building up a little more savings cushion is definitely something you should do whether you buy a house or not. (on preview it looks like you are well on your way as regards the savings)
posted by caddis at 8:01 AM on March 18, 2008

Buy the smallest, cheapest house you'll be comfortable in. Once you've gotten used to having and running your own house, in a couple of years you can upgrade.
posted by blue_beetle at 8:06 AM on March 18, 2008

I'm in the same position as you, Stew. I'm looking to buy in Oklahoma City, which is a market that will probably avoid any major drop of prices. However, I've got months and months to look, and I've noticed that, over the past five weeks, no home I've looked at has sold, and I've seen quite a few. Every week brings more homes on the market. I've decided to relax and see if any good deals come walking my way; you can do the same and build up savings in the meantime.
posted by suckerpunch at 8:13 AM on March 18, 2008

You might qualify for first-time homebuyer assistance programs, like this one from the state. Since you live in Durham, I would make contact with the folks at Self-Help. They're a community development financial institution - they specialize in lending to low-income people in a way that is sustainable and will help people build assets. (They helped start the Latino Community Credit Union that amtho referred to, and created the Center for Responsible Lending, which has been very active in the policy conversation about the foreclosure crisis.) You probably don't actually want one of their loans, but they should be able to point you to programs you might qualify for and to pre-homeownership counseling.

In terms of larger strategy, I agree with others that you should wait a bit and build some more savings. This is not a time to be anxious about missing out on the market. Yes, RE markets are local but the credit crunch and swing towards more conservative mortgage underwriting will have some effect on most markets.
posted by yarrow at 8:27 AM on March 18, 2008 [1 favorite]

"Home Buying For Dummies" is actually quite good, and will soothe some of your nerves. You should be able to pick up a used copy very easily. Your local continuing ed courses or community college is sure to have a "first-time home buyers" seminar. This sort of course will help you put together checklists and a "battle plan" and acquaint you with all of the terminology.

Your first-time buyer status helps you. Your income is not that low, comparatively. You have savings and 20% to put down. You're gonna be fine.

Get a recommendation for a mortgage broker. Wow, are the good ones worth it. Anyone who doesn't have time for your questions isn't worth your time. Get another recommendation. Get recommendations for a real estate agent, too. This person is going to be your advocate, so make sure you're on the same wavelength.

The worst thing for me was enduring endless well-meaning advice, analyses of the general US real estate market (much of which has little to do with my specific area), scary stories, etc. Don't get me wrong -- I got some great advice from friends and family. But I did spend an Xmas trying to politely indicate that I'd like to discuss something other than mortgage options and what ifs and worst-case scenarios.

Good luck! I kind of felt like buying our house was a whole second job for awhile there, but in retrospect, it wasn't difficult, just intimidating.
posted by desuetude at 8:33 AM on March 18, 2008

Hi! My partner and I just bought a house in Durham, so:

1. If you want a realtor recommendation, drop me email. Our realtor was a wealth of information and went out of her way to be available and do things for us like schedule the inspection and so on and so forth. I mean, yeah, a realtor is a realtor and they want to make money, but some are definitely better than others, and ours made homebuying feel much easier than it could have been.

2. One thing our realtor mentioned to us about the real estate market in that area is that there wasn't really a housing bubble, and that the value of real estate there has been increasing pretty steadily at 3% a year for seven or so years. So I wouldn't worry too much about the market. Plus, you're going to be paying rent or mortgage anyway. You always need housing.

3. I say that if your parents want to give you 20% down for a house and will pay for start-up costs, go for it! Make sure that you'll be able to cover things like appliances, though, if they won't. That'll be where your money'll go.
posted by hought20 at 8:39 AM on March 18, 2008

Bonus if anyone can point me to a trustworthy (i.e. not offered by a realtor or bank) primer on how to buy a house for the first-time buyer.

I had some very useful answers to my 1st time buyer question here.

posted by Otis at 8:42 AM on March 18, 2008

Oh, and also! If you want to get a sense of what you'll qualify for, it doesn't hurt to go to, say, lendingtree.com and go through a quick approval process. You might get a little bit of spam as a result of that (so use a throwaway email, maybe), but it eased our minds to do that before we spoke with a lender in person.
posted by hought20 at 8:45 AM on March 18, 2008

Before you start shopping, realize that a vast array of closing costs and prepays are going to seriously eat into that 20%. Bet on actually putting 10% down, unless your parents mean that they'll give you 20% + closing + prepays.

We used USAA to buy a house last July. They're easy to deal with; almost all of it was online, filling in this and that, and then I faxed them evidence that I hadn't been bullshitting them -- bank statements, retirement account statement, job offer letter, etc. The only weird thing we found is that because it's all by mail and fax and so on, we didn't physically sign our mortgage application until our closing.

USAA has a service where they hook you up with a realtor, and you get a kickback. Kickbacks are nice.
posted by ROU_Xenophobe at 9:13 AM on March 18, 2008

I want to second the "for Dummies" book - it really helped us feel less overwhelmed by breaking down the many complex considerations.

The first thing to figure out is if you really want to own a house. Owning is a lot more work than renting. To me the real compensations are not having strangers living in the same structure as you, being in control of your own living space, and having things that are hard to get with an apartment - garage, work spaces, garden. I feel like it will work out financially in the long run, but if I were forced to sell now, I'd almost certainly come out the loser. Like any other investment it involves risk. Above all don't buy because anyone is telling you you just have to right now because of this, that or the other.

If you feel like a house would be great, do the rule of thumb type equations - estimating utility and maintenance expenses, tax savings, etc. (the book will help) to figure out what kind of mortgage you could afford. Then get a realtor (get a personal recommendation from someone you trust if possible) and start looking at property in your price range. Don't be swayed by how much a bank will approve your for (even these days, with a good down payment and good credit they'll probably approve you for considerably more than it would be smart to spend) and don't let a realtor pressure you. They're operating in YOUR market these days.

Right now it's a pretty damn good bet that you can afford to take it nice and S-L-O-W. Chances are both interest rates and prices are going to go lower. Take your time getting yourself educated, take your time getting your papers together. Build your savings, really think about your budget and what sort of housing cost would make sense. Get to know your market. Don't feel bad if you look for a few months and decide you want to take a long break from it. My wife and I did that, and it was a good idea: we knew a lot more about what was involved and wanted time to process it all and re-evaluate what we wanted. I think realtors are used to helping people get their feet wet in the market - they're building relationships, they know it works out for them in the end.

The economy is the economy, there's nothing you can do about it. You can get laid off in good times and get a great job or promotion in bad times. If you think it through and make sensible decisions you'll be fine.
posted by nanojath at 9:25 AM on March 18, 2008 [1 favorite]

Be aware, and this may vary from state to state, but if you do not disclose to the bank or mortgage company that the 20% down payment is coming from an external source, you could be committing bank fraud. That's not to say you can't use the 20% down, it will just affect the amount of money they may be willing to loan to you. You are a much more attractive loan candidate when you have 20% saved away yourself than receiving it from a third party.

As a Realtor, here are my recommendations:

1. Take a very, very hard look at what you can afford realistically. Buy under that, no questions asked.

2. You are unfortunately in a risky position for buying a new home. While you have a steady income, you don't have the savings to hold you up if you were to become unemployed / unable to work. Definitely work on building up that reserve of cash before you approach a home.

3. The good news is that with the 20% down, you aren't at a great risk of actually owing more than the value of the house. Prices are falling, and there's no guarantee that things won't go downhill severely in the near future.

People get into trouble when they lose their jobs, or there are unexpected costs with owning a house. I don't know what your rent is currently, but think of the extra monthly costs you'll have, including insurance, property taxes, your utilities may increase, etc. Even without those, you only have $1000 in savings. I also don't know your current debt situation, but it's far to easy to start putting home related items on credit cards that add up quickly.

I think owning a home is a good thing; that being said, it may not be the right time for you to dive into this, both financially and personally.
posted by shinynewnick at 9:26 AM on March 18, 2008

I'm looking to buy in Oklahoma City, which is a market that will probably avoid any major drop of prices.

This is simply unknowable. If you ask 100 people in 100 regions you'll find most of them will tell you some reasons they think their area is different. Almost everyone is wrong. You are a delicate and unique snowflake that is completely unique - just like everyone else.

I echo the people above who say your lack of a savings is a problem. Let's give you a magic bonus and say you have $3,000 in savings. A $200,000 purchase with 20% down AND your parents cover all the closing costs leaves you with a $180,000 mortgage. At 5.75% over 20 years that's a $1,050.43 monthly payment.

If you lose your job you will be able to eat and pay your bills for 30 days on that $3,000. And you don't have $3,000.

If you lose your job and it takes you 2 weeks to get a new one - which is likely wildly optimistic - you will have lost 2 weeks of income, $1,500.00. An amount that exceeds your actual savings account.

You have no business buying a house in that situation, even if we weren't facing an almost historically unprecedented situation in our economy.
posted by phearlez at 9:28 AM on March 18, 2008

Wow, a math screwup and a typo. At 5.75% over 30 years, not 20, a $160,000 loan - $200,000 minus 20% - is $933.72 a month.
posted by phearlez at 9:32 AM on March 18, 2008

I'm looking to buy in Oklahoma City, which is a market that will probably avoid any major drop of prices.

This is simply unknowable.

Oh, agreed. I'm very aware that I'm basically placing a bet on how the market will move. It's a bet I'm willing to make, and if it fails, so be it.

For what it's worth : $56k salary, $45k savings, single, stable job, can live very, very cheap. Credit rating's in the high 700s. Been out of debt since 2003, own car outright. Looking for a 1000-1200 sqft house, with a top end of $75k on the price. The only reason why I may not move is that I'm currently quite happy in a one-bed apartment with a rent of $425.
posted by suckerpunch at 10:19 AM on March 18, 2008

Be aware, and this may vary from state to state, but if you do not disclose to the bank or mortgage company that the 20% down payment is coming from an external source, you could be committing bank fraud.

Wow. That would have never even occurred to me. Thanks.

So yeah, I'll definitely do the save-up-a-cushion thing and hold off for now. I'm looking to buy the cheapest house I can find that's structurally sound and not located in a scary drug-lord area.
posted by Stewriffic at 11:35 AM on March 18, 2008

So yeah, I'll definitely do the save-up-a-cushion thing and hold off for now.

That doesn't seem like a bad idea. But I'd like to point out that there is nothing wrong with talking to a realtor or two (I favor exclusive buyers agents, but do some research on your state) and maybe looking at a few houses.

Even though you aren't looking to buy right away, you'll get a good feel for what you are interested in and what you aren't.

Good luck.
posted by Pogo_Fuzzybutt at 11:45 AM on March 18, 2008

At the end of the day, you need to go to a bank (or a few banks) and ask what you qualify for and what the interest and monthly payments are. YOU'VE got to decide if this is affordable and nobody else. Keep in mind that owning is very different that renting. You're now responsible for property taxes, utilities, repairs, etc. All this can eat away at your cashflow. Also, is there a chance that you may move soon? Being tied to a house can cause that to be a major pain rather than a month to month tenancy.

The parents are offering quite a deal, and I suspect that it may be the "if you don't own a house you're nothing...it's the best investment blah blah blah" attitude their generation seems to push so hard on. Maybe you can ask for the money to wipe out your student loan instead, and promise to save for a down payment with the money that would be going to it instead?

Home ownership is grand and all, but it's not the be-end-all of financial success.
posted by hylaride at 12:11 PM on March 18, 2008

If you don't yet know about co-housing, you might want to research it. There are at least three co-housing communities in this area.
posted by amtho at 1:28 PM on March 18, 2008

Co-housing sounds fantastic, so I checked it out. Holy Moly. There's not much available as far as empty spots, and the one place I was able to find an opening had a house with a sale price of almost $500,000. Yeah. Not happening.

But it's so coooooool! I'm continuing to research.
posted by Stewriffic at 3:26 PM on March 18, 2008

Yeah, for any fans of The Wire, Clive Davis was going to get nailed on "the head shot", which was a secret loan by a family member to purchase a home.
posted by shinynewnick at 5:05 PM on March 18, 2008

yes, it's scary to think of buying in a declining market. So, be prepared to shop carefully, and find an exceptional deal. Because of the market's volatility, buyers are in a good position.

I have a 2 family house, and it made all the difference during some tough times. The rent doesn't cover the whole mortgage, but it covers a lot, and I built equity much faster than in a single family. It's not trouble-free, but owner-occupied means you can protect your investment.
posted by theora55 at 9:50 AM on March 19, 2008

Sorry, coming in way late, but what's your motivation for buying a house? You realize that houses have a lot of upkeep costs and maintenance headaches, right?

I'm not saying it's generally a bad decision, but you should have a strategy in mind for purchasing one. If it's for financial reasons, now is surely not the right time to buy, unless your area has already hit bottom. Even then it's a big risk.

If it's to own some garden space, well there may be better options for you. A few places I had lived in the past had community garden areas that were very reasonably priced.

Also, you should be comfortable with fixing things. Even if your house is relatively new, things may break. Houses are complex objects with many parts. Do you have the skill (or money) to upkeep the house over time? Do you have time time and energy to do regular maintenance? Just some questions...
posted by brandnew at 6:45 PM on March 19, 2008

I don't know if the OP is still checking this, but I thought I'd link to this blog entry on whether to rent or buy.

I agree that you need a cushion for house emergencies before buying, but think that 1) you should have a good sense of what kind of emergencies you'll face and what they'll cost so you know what kind of cushion you'll need rather than just "a whole bunch of money" (my feeling is around $5000, but I'm not super conservative about money, so--an HVAC system will cost you $3500-$4000 to get replaced, and other things you'd have to fix immediately that aren't structural are going to be less than that for the most part) and 2) the mortgage we're going to be paying on our cute, small, in a decent area house in Durham is less than rent for a comparable size in most of the safe places in the city--and it's pretty easy to get an even smaller place for significantly less that will leave you with a pretty wee mortgage payment (ours is around $850 for 1100 square feet) if you're willing to live in, say, 800 square feet.

Also, if you have a good realtor and a good inspector, you have a good chance of knowing exactly what is going to be an issue after you move in--so you'll have an idea of what kind of "emergencies" might crop up (outside of acts of god, of course).

And now I'll stop. I wonder if this house and real estate fever is going to wear off after we get moved in. And how long we'll continue to find HGTV entertaining...
posted by hought20 at 9:42 AM on March 20, 2008

Just popped back in here. Thanks!
posted by Stewriffic at 3:02 PM on March 22, 2008