Should I buy a home in the next month to take advantage of the first time homeowner's tax credit?
April 1, 2010 4:30 PM   Subscribe

Should I buy a home in the next month to take advantage of the first time homeowner's tax credit?

I'm a single, childless late-20s guy trying to decide whether I should buy a home in the next four weeks. For about a year, various family members have been encouraging me to buy a home for financial reasons- to take advantage of the depressed market and the first time homeowner's tax credit. Unfortunately, I've done very little legwork up until now. In the past week I've started searching online, and visited my first two places yesterday, with three more visits planned in the next three days. I'd originally planned to not use an agent, but given that I've never done this before and am in a rush, have decided to work with an agent from Redfin, a discount brokerage.

The places I'm looking have (two bedroom condos to three bedroom townhouses) have list prices of between 2x-2.4x my annual income (roughly $125,000), and between retirement accounts I think I can borrow from for this purpose, cash savings, and an offer from my parents to loan me up to $30,000 for the down payment, think I can come up with a 20% down payment for any of the places I'm considering. My credit is ok, but I don't have much of a credit history... I've foolishly always used debit cards, not credit cards. The financial logic is also a little different for me because I'd like to get a place with extra bedrooms and rent one of them out to make some extra money.

Also possibly relevant: if I did this, I'd lose about $3,000 by breaking my current apartment lease.

I'm considering this mainly because I don't want to rent forever (I feel like I'm throwing money down the drain), and while nothing is certain, I doubt that there will be any better time to buy in the next few years. Ownership itself also appeals to me- I'm looking forward to furnishing it, repainting bathrooms, and generally letting my home express my personality.

So: is attempting to basically find and place an offer on a place within about two weeks unrealistic? And if I do get one, should I try to get the smallest place I could see myself being happy in for the next 3-4 years, which is about as long as I'd prefer to stay in whatever place I move next, or a larger one that I could see myself staying in for the next 10 if necessary? And last, as long as the house is in good condition, is there much chance that I'm wrong about this being the right decision financially?
posted by stubblemaker to Work & Money (19 answers total)
Use this handy rent vs. buy calculator to determine whether you should rent or buy!
posted by mr_roboto at 4:44 PM on April 1, 2010 [1 favorite]

Where are you located? That'll affect how competitive the bidding is and whether you'll be able to get an offer accepted during that window.

My guess is that most places, especially during this last minute rush, the prices will be inflated by more than whatever benefit the tax credit will have for you.

Often, people who rent "throw away" less money than homeowners throw away on home insurance and property taxes.
posted by salvia at 4:48 PM on April 1, 2010 [2 favorites]

After paying out all the money you'd have to pay to get out of your apartment and into the house (lease penalty, downpayment, closing costs, insurance, moving, etc.), how much liquid savings will you have left? It's important to remember that if, the week after you move in, your furnace dies, you won't have heat until you can afford to pay out of pocket to fix it. If you discover termites, they eat the house until you can afford to exterminate. If a pipe bursts and sprays water all over the place, you have to pay for both a new pipe and replacements for whatever was destroyed. Yes, you have insurance for the really big stuff, but you can rack up thousands of dollars in bills that your insurance won't cover. And that's in addition to buying blinds and a table for next to the front door and a towel rack and a new trash can and all the little knick knacks, that, no matter what you say now, you always end up needing to buy to fit the new space any time you move. If you're not secure in the amount of cash you have on hand, definitely don't do it.
posted by decathecting at 4:49 PM on April 1, 2010 [2 favorites]

Your chances of closing on a place in 4 weeks are between slim and none imho.
posted by fshgrl at 4:56 PM on April 1, 2010 [2 favorites]

I don't know about the finances, but it seems like it would be a good idea to stick with a townhouse or condo because first time homeowners sometimes don't have much idea about upkeep etc.

Could you find a place? I think so. But I wouldn't do it unless you find some place you really like - because you might end up living there a while and also, if you really like it, chances are someone else would too and will want to buy it from you when you get ready to sell.

Do you really want to do this? Because it's a lot of work even if you're excited about it.
posted by nnk at 5:00 PM on April 1, 2010

For about a year, various family members have been encouraging me to buy a home for financial reasons- to take advantage of the depressed market and the first time homeowner's tax credit

Is buying a house for yourself something YOU want, or is it something your FAMILY wants? If you're not sure, here's a few questions to ask yourself - do you have a very stable source of income? Are you ready to settle down? Do you see any possibility of changing jobs or moving within the next 5-10 years?

Sorry if I'm scaring you at all, I'm just saying buying a house is not a decision to take lightly. You can always convert it to an investment property if home ownership doesn't turn out to be to your liking, but making money off investment properties can be a gamble. This is just me speaking from experience, hopefully you've already thought all these questions out...
posted by photo guy at 5:09 PM on April 1, 2010

fshgrl, I think the person just has to be under contract.
posted by salvia at 5:13 PM on April 1, 2010 [1 favorite]

Have you even bothered to get pre-approved for a mortgage? You only mention what you'll do to pay for a down payment. How are you going to pay for the rest? If you don't have the ability to pay 100% of your final agreed upon price, then you'll need a mortgage. If you haven't started on securing that, you'll want to get it lined up before you get too much further into this.

As for your plans to borrow from your parents and from two retirement accounts, you may need someone else to advise you on that as well. Generally speaking, it is best to save up for the down payment instead of borrowing from other sources.
posted by onhazier at 5:20 PM on April 1, 2010

For what it's worth, I don't think it's a good idea.

- I don't think the first time home buyer credit is a good enough reason to buy a place. With the tax credit and breaking your lease, you're talking $5,000. What percentage off of the price is that? If your place is $200,000, the tax credit is 2.5% of the purchase. If I had a coupon for clothes that was 2.5% off, I would throw it away.
- A house will likely be the biggest expenditure you make in your life. You admit that you haven't done much legwork yet. Do you want to go into the biggest expenditure you will make in your life without having done as much legwork as you could have? I don't think making the biggest expenditure you will ever make is a good enough reason to express yourself via paint and furniture.
- You're childless and single. Do you want to stay that way? Suppose you get married and your wife gets an awesome job somewhere else. Now what? What if you get an awesome job somewhere else? How are the school districts in your area?
- You're in a rush so I'm not sure you'll get the best terms on the mortgage. The terms of the mortgage are arguably more important than the purchase price. The difference of a percentage point over the life of your loan will make the tax credit of little consequence, especially when your credit isn't spotless.
- I don't think you should consider buying a place if you need to rent out extra rooms to make money. What if you can't find a renter?

I'm sure I sound like Debbie Downer but I've thought about this myself and based on what you've said, this does not sound smart. You need to think through every unpleasant possibility (what if you lose your job? what if you get sick? what if your parents get sick and need your help? etc.) and it doesn't sound like you've done that.

Finding a place in the next two weeks seems extremely unrealistic.

I think you should get a place where you wouldn't need to rent rooms but you shouldn't buy a place if there's any chance you will need to sell it within less than five years.

There is a reasonable chance that this would be the wrong financial decision.

I could easily be wrong and I wish you the best but timing and pressure from family is not a good enough reason to get a place IMO.
posted by kat518 at 5:23 PM on April 1, 2010 [3 favorites]

I don't think it's a great idea.

Check out this website:

Everyone has been rushing to get in on the tax credit and real estate agents are deliberately pumping up the sense of urgency. That's probably pushing prices up a lot more than $8000 in some markets.

After the credit expires prices will drop again.

Renting isn't necessarily "throwing away money." It depends on the circumstances. Often you are actually saving money when you factor in the real estate commission, interest, insurance, maintenance, taxes, etc. Your landlord may very well be the one who's "throwing away money."
posted by eeby at 5:35 PM on April 1, 2010 [1 favorite]

1. Salvia is correct, you only need to be under contract by April 30th, and close by June 1st.

2. It is completely possible to get pre-approved and close in that time, but the time to start is NOW. Things can get complicated and there are often hangups.

3. Borrowing from a retirement account is, generally, a bad idea. I wouldn't.

4. I don't know how universal this is, but to get the best rate on a condo I think they want to see 25% down, not 20%.

5. If you are getting a loan from your parents and you tell the mortgage broker this, they will factor that in when determining your rate and whether they will approve you. If you claim it is a gift, they will need paperwork to prove the money is in your hands at some point (in your hands = in a bank account you hold).

6. If you are considering renting a room, consider there will (possibly) be turn over. To be on the safe side, build 4 months vacancy a year into your budget. That might be overly conservative, but why chance it?

7. $3000 to break a lease? That sounds absurd.. That is a tough situation to be in.

8. Taxes and interest can be written off on your taxes, which is nice, but it's really only a benefit above and beyond the $5700 standard deduction. If your taxes and interest amount to $7000, you're only reducing your taxed income by $7000 - $5700 = $1300.. so if you're in the 15% tax bracket you'd only save $195 a year.

Finally, it is good that you are looking at a number of places but I don't think I'd feel comfortable not having a good grasp on the market - something like 6months to a year of research on your particular market.. It's good you're going with a broker.

Nevertheless, I don't think you have time to get a feel for what is out there. Bottom line, I'd second kat518.. probably a bad idea.
posted by mbatch at 5:41 PM on April 1, 2010

Right house
Right time in
Right time out

I was 24 when I bought my first house in 2001 I broke a lease to buy it. Fortunately I was able to find a renter to replace me and didn't end up loosing any money. Likely you wont loose all $3,000 if you break your lease. Our purchase price in 01 was $72,000 we sold the house in 06 for $115,000. we got lucky it was the right house in the right place at the right time. We only put around $5,000 into the house during the time we lived in it (which included a new furnace). Selling the house took about a year and I went through two Realtors and a a lot of sleepless nights wondering if the house would sell. We were in the middle of building a new house and each month the construction loan payment on that house was more expensive and we still had the mortgage on the existing house. In the end it ended up being a good investment. Can you do the same thing? Maybe.... It really depends on where you live and how flexible you can be. In the end the profit we made from the house ended up paying for all the overages on the construction of the new house and paid off the credit cards we lived on while paying two house payments.

posted by jmsta at 6:24 PM on April 1, 2010

Yeah, congrats to jmsta n' all --- but 2010 is not 2001. I'm not an economist nor realtor, but I do talk to many of them in the course of my job, and well...

1) a great deal depends on what part of the country you're in; local conditions often vary considerably from state a national trends, but

2) generally speaking, there is a large over-supply of housing on the market. Sizeable percentages of people out there are not yet in foreclosure but are delinquent on their mortgages. It's hard to tell exactly how many homes out there are eventually going to get taken by the bank or have to be sold for cheap in order to prevent it getting taken by the bank. Some people put the amount of this "shadow inventory" as high as 7 million homes. To put that in perspective, last year about 5 million homes were sold in the US according to the NAR. These troubled sales are going to be a drag on the market for at least the next several years, in most places.

3) so, if you're planning to stay in this house you're gonna buy at some point in the next couple weeks for five years or less, it is quite likely that you will not make much money back when it comes time to sell. You might come out a loser, all things considered, especially if you end up having to sell quickly under some constraint. If you're planning to stay for like a decade (in this house you're going to buy sometime in the next two weeks) then you might perhaps hope for some gain, although a lot of things can happen in a decade.

4) of course, perhaps you are planning just that, or perhaps you're in an area where prices have held fairly steady like parts of the midwest or Texas. And possibly the economy will recover quickly and prices will begin to increase again.

5) Then again, Obama's team of economic advisers announced recently that we could be looking at 8 % unemployment through 2012 and current homeprice ratios, though they have taken a big hit, are still not in line with historic trends, leading some observers to think they have farther to fall.

6) Just personally....I dunno, would you buy a car feeling like you feel? Knowing you were going to have to live with making the payments for the next four years or so? And drive it every day? Without knowing jack, really, about you and your seem uncertain. This is not the way I would want to feel when making a commitment of this magnitude, especially if I had to make it in the next two weeks. Which, realistically, you definitely do --- you have to have an offer accepted by the end of the month and the whole thing closed by June.
posted by Diablevert at 7:21 PM on April 1, 2010

FWIW, I asked a similar question a week ago: How bad an idea would it be to try to buy a condo before the new homeowner credit deadline (April 30th)?

(I looked for a few days and then said screw it. I felt like I would be settling on a non-ideal property just to save some money, which is dumb.)
posted by smackfu at 7:53 PM on April 1, 2010

You say you expect to move in 3 to 4 years. It would be location specific, but generally, in this market, I don't think that's long enough for you to recoup your investment. If you can convince yourself to stay the 10 that you mention, then maybe. Don't forget that most of your initial mortgage payments will be almost entirely interest. Interest that is probably about as low as it's ever likely to be. But still, you'll be throwing your money away one way or the other. You'll also be throwing money away on stuff like home owners association dues. An association that may tell you what you can and can't do in your place that you bought and own.

That said, one of the best decisions I ever made was buying a place. I was surprised at how happy and settled it made me feel. If you really want to buy a place, now is a good time to do it, but $5K from the government doesn't seem like much in the way of incentive to me. Don't do it just for that.
posted by willnot at 8:19 PM on April 1, 2010

I feel like I'm throwing money down the drain

Then stop paying your rent.

I'm guessing this will land you under a bridge. Then see if you think rent is throwing money down the drain.

Your rent gets you a dry place to sleep. It gets you a home. It gets you a refrigerator and a stove. It gets you a heated place during blizzards. It gets you a nice place to have sex. It gets you a place that keeps your television dry from the rain.

If rent were throwing money down the drain, you wouldn't be paying it.

Lots of calculations, rational and irrational, go into the rent vs. buy decision. Do not let the "money down the drain" thing factor in. That is absolute utter nonsense that is pumped by people selling real estate and by people who mistakenly bought real estate and now want to convince themselves that it was actually a good idea.
posted by massysett at 4:48 AM on April 2, 2010

1) The tax credit isn't $8000, it's 10% of a home purchase price. Figure that in to your calculations (a big mistake is everyone thinks they are getting $8k), it looks like you'd lose more in breaking your lease than the tax credit would get you.

2) Do you have an emergency fund set up (6-8 months of expenses)? Probably not, if you're going to borrow the down payment. You will need savings if you buy a house. A/C goes out (or furnace, or water heater), then you're in trouble.

3) It's technically illegal to borrow a down payment. The money has to be sitting in your account for at least a month prior to closing. They will ask for bank statements to prove this. I think if a lump sum gets dumped into your account they will ask you where it came from. Your parents may have to sign a waiver stating any money they gave you was not a loan, but a gift.
posted by getawaysticks at 6:24 AM on April 2, 2010

Consider an FHA loan, you only need 3.5% down, most banks handle them. And do get yourself pre-approved, like today. Otherwise you don't really know how much you can spend.
posted by mareli at 7:16 AM on April 2, 2010

I don't think you'll pull this off in time for the tax credit, but if you want to buy, home prices will be low for a while (maybe even lower) and interest rates are low, so now is a good time to buy.

Maybe I'm just super wierd, but i don't understand the people who champion renting. I hate having my only sanctuary be under the mercy of a landlord and their rules (can I have a pet? Can I grill out front? Can I have a yard sale? Can I store my bike somewhere? Can I grow a garden?). I'd much rather have my own little piece of America and deal with the fucking furnace that breaks. In my area, mortgages are often lower than rents at this point (but the lump sum down payment needed is still restrictive to most people). Also, I hate change. I hate moving. My intentions if I bought a house would be to never move again. I know you cant predict the future, but unless I really really really had to, I would not move. Not even if my (hypothetical) spouse got a job across the country. I like "having roots". My family has lived in the same 2 bordering counties for 3 generations. We just don't like change. If you keep pray tending to the advice that you won't get a return on the investment if you move before 10 years go by, you will be a serf forever. A place to live is most people's primary expense. If thats the case I would much rather have that place to live be my little kingdom under my rule, not some shoebox in a pile that someone is kind enough to let me stay in in exchange for my hard earned money.

If you are like me and you can afford it, buy a house. Just make sure you can afford it. Draw up a budget of food expenses, money for savings, car payments / hospital bills / other monthly expenses, utilities, and a little fun money (don't make yourself house poor) and see how much you have left over to cover for a mortgage, taxes , and homeowners insurance. You should be able to have a house emergency fund (a couple thousand dollars) for things like a hot water heater or sun pump that can go and will need replacing. If you are financially stable enough to handle all this and can limit yourself to buy in your proper price range, then buy.
posted by WeekendJen at 10:22 AM on April 2, 2010

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