Should I hurry up and get a mortgage while I still have a 'good' job?
June 2, 2010 6:15 PM   Subscribe

Should I try to get a mortgage and buy a house before I leave my corporate-type job for a low and unreliably-paying creative one? Or is it possible I'll be able to do those things afterwards?

Hi all. I'd love some advice for my specific situation. The backstory: I'm employed in the media and make $53k a year, in New York City. I have just inked a deal to write my first book. I'm super excited--it's a lifelong dream come true. The advance isn't huge: since it's paid out in two parts (half on signing and half on delivery of a finished book, one year later), it will amount to more or less a graduate student stipend a year, for two years.

I'm unhappy in my current job, and I want to put everything I can into this book; I am itching to give my two weeks' notice. I'm looking at this as an opportunity to leave New York and move to a not-too-far-away city that I've always liked and long thought about moving to, where I can live much more cheaply: the advance and the additional money I can make freelancing will be enough to support me there. Ideally, in a place like that with a reasonable cost of living, I could make writing into a sustainable job for me over the long term.

Now: one reason why I've fantasized about leaving NYC for such a long time is my desire to own property, something that never felt possible for me here at my income level. I'm trying to figure out whether I can buy property in the place where I'm moving to--and whether I need to do it before I quit my respectable, regular-paycheck-having job.

I spoke to a mortgage lender a few weeks ago and was pre-approved for a loan of up to $240k (I have good credit). I was also told that if I buy a building with several units in it, I can count 75% of the rent on units with leases in place as my income, which might raise the figure they'd be willing to lend. Obviously, this loan amount is based on my current salary.

I've crunched some numbers and realized that there are a few buildings in places I'd actually want to live that have three units, where the rent coming in from two of the units is enough to pay all or close to all of the mortgage--leaving me with very cheap rent if I live in the third unit, even after figuring in taxes and insurance.

Assuming I can find a building I like where the rent coming in and the mortgage going out feel sustainable to me (even on my soon-to-be measly budget), do I need to delay giving notice and stay in this job for long enough to get a loan, make an offer, and close on a place? How long is that likely to take? Is there any way I'd be able to be approved for a loan after I quit this job? If my parents were willing to co-sign or otherwise help me out obtaining a mortgage, is that an option? Trying to buy a house right this second feels a little rash, but I've long been thinking, 'If my career takes the path that I want it to, I might never be an attractive loan prospect again. Given that I've always wanted to own property, maybe I need to make it happen NOW.'

Other possibly pertinent information: Between savings and other assets, I can come up with about $90-100k in cash. Enough for a good down payment and a bit of a cushion, but not enough to outright buy a place where I'm looking. Also, I am fortunate not to have any debt.

Thoughts? Advice? Warnings? Out-of-the-box ideas?
posted by anonymous to Home & Garden (15 answers total) 1 user marked this as a favorite
Your pre-approval was based on your income. If you quit your job, you will no longer qualify for that mortgage. Even if you don't quit your job, you may have to justify to your lender how you will be working in NYC and having a primary residence X miles away.

That said, I am in the process of buying a house right now even though the company I work for is almost guaranteed to go belly-up soon. I did not apply for the max amount I was pre-approved for, rather I sought the smallest loan possible. If I get the house, my mortgage payments will be significantly less than the rent I am currently paying. That way losing the day-job won't hurt quite so much, and I already have a good bit of equity in the house.

The only other thing I would say is that it sucks to be tied to a home in a place you realize you hate living in. Don't just buy "a" property because you want to own something. Buy "the" property when you know where you want to be and what kind of place you want to own.
posted by headnsouth at 6:26 PM on June 2, 2010 [1 favorite]

When I read your story, some red flag warnings that I notice:
--what happens if you buy a place based on your current salary, quit, then don't get enough freelance gigs to make your house payment? Without a sure track record, you are gambling quite a bit.
--I would never ask anyone to co sign a loan for me. If something unforseen happens (car wreck, etc) where you can't work, you could bankrupt your parents.
--owning rental property is way more complicated then hoping the other tenant's rent will cover your mortgage. When we owned rentals, we had to spring for a new furnace, new roof, pest infestation...and a number of other things that kept happening. As a homeowner you can let stuff slide until you can afford to fix it, with tenants, you have a responsibility for minimal living standards. Plus tenants (and tenant law) is a huge hassle...

If I were you, I would either keep the job and save enough to buy a place pretty much out right or move and live in an apartment until you can make sure that your income as a freelancer will really be enough to support the house you want to buy. Lenders will usually approve a mortgage for a person who is self employed if they have a three year solid earning track record...
posted by MsKim at 6:27 PM on June 2, 2010 [3 favorites]

You want to:

1. Buy your first home
2. Move to a new city
3. Become a landlord for the first time
4. Write a book
5. Start a career in freelancing

I think you will find home ownership more demanding than you realize, being a landlord more demanding than you realize, and finding freelance work more demanding than you realize.

It sounds like you're in a good financial position as it is. Why not write the book, try to get the freelancing thing together and see where you are in a year? If the book is almost done and you have a steady stream of clients, go for it.

N.B. having roommates pay the mortgage thing never works. They offset it but thinking you're living virtually rent free seriously underestimates the cost of property ownership.
posted by geoff. at 6:46 PM on June 2, 2010

So, you're wondering if you should buy a (currently) depreciating asset with a fixed monthly payment based on your current income, knowing that your current income is about to end and your income will be substantially lower for the foreseeable future?

Anecdote: I used to live in a 5-unit building subject to rent control. An up-and-coming guy with a great job and promising future bought the building, having calculated the amount of rent he could collect on the tenants monthly and assuming that he could use his own unit as a work-live home office thinggy for some sort of tax advantage or something. He understood that, in order to raise the rent beyond what was permitted by rent control, he would have to evict two tenants so that he could live in the building and knock down a wall between his and the neighboring unit to reduce the total units to 3.

Then, in the process of knocking down the wall to make two of the units a single unit, he discovered major structural problems and roof problems that had to be fixed. And code violations that had to be corrected. And some plumbing issues. And when he tore out the carpets to "improve" the building and justify higher rent, he discovered that the hardwood floors that looked ok on the edges were actually incomplete in the middle, and had gaping holes and huge problem spots that couldn't be left as they were.

We (the tenants) were told that he was stuck spending north of $100k on mandatory repairs that he simply couldn't get out of. So he had to raise the rent to cover his expenses and keep him out of the red. That meant that the rent basically doubled. So the remaining three tenants gave a month's notice and moved out. I worked nearby, and would often drive past the building after having moved out. If I remember correctly, only one of the units found a new renter within a year of everyone moving out. I have no idea what happened to the owner's finances. But the last time I talked to him, which was right before moving out, he was a nervous wreck.

I'm not saying that any of that will happen to you. But be careful when you're doing the math to figure out just exactly what you can afford and how it will all work out.
posted by The World Famous at 7:05 PM on June 2, 2010 [2 favorites]

I had the exact same thoughts as MsKim, plus this:

It is a huge comfort to live in affordable housing -- where you never worry about making the mortgage payment, where you don't worry about losing the house if your work doesn't turn out the way you hoped. Do you have friends who took out the largest possible mortgage they could get approved? Ask them if it is a worry. Talk with a few people who are "under water". Living without that stress is wonderful.
posted by Houstonian at 7:42 PM on June 2, 2010

Why do you want to own property? Because it doesn't sound like you want to buy because you want to put down roots and stay in one place for a really long time. And in this market, that's the only reason to buy (unless you really have the financial wherewithal to invest in property*), particularly if your income is uncertain/shifting and you are intending to rely on rental income to cover the mortgage payments.

*When I say "invest" I mean it in the same sense you'd invest in stocks or bonds. I.e., you want to put cash down and later realize some profit.
posted by devinemissk at 8:06 PM on June 2, 2010

Unless your book deal is for the rip-roaring cautionary tale of someone who quit NYC to become a newbie amateur landlord in an unfamiliar city... do what MsKim said.
posted by holgate at 9:01 PM on June 2, 2010

I qualified for my current home while employed at a previous job. I was living and working 150 miles away. My mortgage co never asked me how I was planning to live in the house AND work the job once I closed, so I stayed silent. I closed, quit the job then moved.

I also chose to purchase a (slightly) cheaper home than what I was qualified for, just in case the job market in my new town was not as rewarding as I hoped.

I would not have qualified for my home loan once I moved because I would be starting a new job in a new town...a much higher risk to them.

So I suggest buying a single-family home now, in the new town, and waiting a few years to proceed on the rental property idea. If you find you're income isn't enough to cover your mortgage later you could always rent the home or sell.
posted by PixieS at 9:40 PM on June 2, 2010

I was a landlord once, for a couple of years, renting out my house after I moved in with my partner. Based on my experience, whenever I hear someone talking about becoming a landlord, I want to invite them over to watch Pacific Heights with me.

Being a landlord carries all the risks of homeownership, including unexpected but urgent expenses in the $5-10,000 range, and the possibility of being unable to sell out and move when you choose to. It also carries additional risks. For instance, I had to evict my last tenants, which took several months under the laws of my state, during which they lived rent-free while trashing my house. (They had clearly done this before and knew how to stretch out this period as long as possible.) My tenants before them were nice but clueless; I remember having to go over to the house one night to flip a circuit breaker when the power went out in part of the house, even after I asked them, "Did you check the circuit breaker?" and they said yes. And once I had to drive across town to push the refrigerator's drip tray back underneath the fridge with my toe b/c they couldn't figure out how to stop the fridge from leaking all over the kitchen floor.

I know there are people who make money as landlords. More power to them. But I wouldn't do it again unless I had a good cushion of savings to tide me over times when the house is empty or the rent isn't coming in on time (if you're depending on each month's rent to pay that month's mortgage, you're very vulnerable), and to meet unexpected repair and maintenance expenses. In addition, I'd advise anyone thinking about it to study up on their local tenant/landlord laws (in my eviction case, I caused a delay by delivering a letter to my tenants through improper means, so I had to do it again through proper means), and to consider whether they're really tough enough to ruthlessly evaluate incoming tenants, do checks deep enough that you can't get gamed (I'm pretty sure the "employer" who gave me a reference for one of my tenants was a fake), and to start eviction proceedings promptly even when faced with a plausible sob story and a promise of payment "soon."

In your situation, I myself would want the lowest-cost, safest, least-stressful housing option possible. I'd be renting a little studio in a pleasant location, keeping that nice chunk of savings someplace safe, and concentrating on getting my book done (congrats on the contract, by the way).

I am the voice of bitter experience and should perhaps be taken with a grain of salt for that reason.
posted by not that girl at 10:53 PM on June 2, 2010 [3 favorites]

Bank your advance and use it as a down payment when the book is done.

Being a landlord is hard. It's really hard. You have to get tenants. You have to convince them that they really do have to pay you on time and do minimal upkeep on the property. You have to be friendly but not be their friends. You have to fix a million little things. Sometimes in the middle of the night. When they leave, you have to find new ones. Unless you are very handy, it's usually a money losing proposition because of repairs. Don't try to afford a mortgage with renters. It will stress you out to such an unbelievable level that your book will always be on the back burner.

Seriously, that's the major reason not to do this. If you're serious about getting this book written, disrupt your life as little as possible. Don't add new and exciting stress to your life. The house will come with things that need to be done urgently and the book will always have to come second. If you want to be able to concentrate on writing a book stay a renter. That way you have someone to call when things go wrong, and you don't have to cannibalize your writing time to deal with the million details that come with owning property. Let someone else have all that stress.
posted by stoneweaver at 11:18 PM on June 2, 2010

Seriously, find an inexpensive place that you can afford without tenants. Find out roughly what you'll be paying per $1K on a mortgage and go from there. Divvy up your monthly "income" and allow yourself no more than 35% of it for your mortgage and PMI (if you put down less than 20%). Buy small. Pare down your "stuff" and live frugally. Your mortgage interest will probably make your tax obligation very small.
posted by bendy at 11:25 PM on June 2, 2010

Also, secure the mortgage now while you have the documented income, but be careful not to buy more than you can afford on your future income. Once you have the mortgage, the bank doesn't care about your paystubs as long as you send in your payment every month.
posted by bendy at 11:28 PM on June 2, 2010

Your question begins with "Should I hurry up ..."

I've found that — when money's involved — I always make my worst decisions when I feel some sort of time pressure. FWIW.
posted by Alt F4 at 4:39 AM on June 3, 2010 [3 favorites]

When I've been in situations like yours, I sometimes have to stop and simply ask myself "what do I really want?" Once I know that, it's easier to take the next steps. This is not to diminish the importance of knowing what you can buy, what you qualify for, interest rates, or being a landlord. It just means sometimes we can all get overwhelmed by the unlimited possibilities and lose site of knowing what we want and what we're willing or unwilling to do to get it.
posted by ChicagoTherapyConnection at 7:15 AM on June 3, 2010

If you decide to own rental property, I would highly recommend you hire a qualified manager. I use a realtor that manages property. I’m a writer and if I had to deal with the disruptions of showing the home, handling repairs and following up on late rent, I would never get anything done. Plus, professional managers have better access to qualified renters. I also wouldn’t let anyone in the building know that you own it. Unless you have incredible self control, you’re going to need to cut any potential distractions.
posted by iscavenger at 7:17 AM on June 3, 2010

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