Reno or No Reno
August 1, 2011 7:02 AM   Subscribe

Home buying 101: First time homebuyers looking for a primary residence. We found a home we are interested in. It is a ROE/Foreclosure. The home itself is already approved for a Homepath Renovation loan. On the flyer for the home it says you must be pre-approved before calling on the home. We live in the neighborhood so have already played lookie-loo through the windows. It needs a lot of work: New appliances, new HVAC, new windows (paint-but we can do that ourselves)- those were obvious from the outside. We really want to see the inside before we go any further. The house is listed at 95,000. We would offer 85K but roll in an additional 30k for renovations. However, we don't know what we don't know.

Our logic is that if we are going to buy a home we want our mortgage payments to be significantly less than our rent. Which is why we are looking at not so great homes with renovation loan options. If our mortgage is the same as our rent than we might as well stay where we are and let our landlord fix any problems that may arise. If our mortgage is say 600-750 a month, well then it is worth it. We could afford more, but like I said, if something breaks we don't want to be paying the same as we would in rent and then have repairs on top of it. Give us some insight. Have you had experience with Fannie Mae Homepath Renovation loans or FHA 203K Renovation loans?
posted by MayNicholas to Home & Garden (22 answers total) 2 users marked this as a favorite
If your mortgage is the same as your rent, you still get the tax deduction for mortgage on your federal income tax (at least as long as that deduction is in place). This and equity are some of the monetary wins. You might want to figure that into your annual budget.

With respect to knowing what you're getting into, buy a copy of The Virgin Homeowner. It goes through everything that makes a house function step by step and how to understand what kind of life and maintenance it will need. Next, find a good home inspector who is willing to work with newbs and talk through everything. You might want to categorize things that are found as 'now', '1 year', '5 year', '10 year' in terms of when you can get to it.

Best of luck!
posted by plinth at 7:09 AM on August 1, 2011

Response by poster: Thank you for the book recommendation!

Who knows how long that deduction will be in place, so we are not even counting on that one.
posted by MayNicholas at 7:17 AM on August 1, 2011

Get pre-approved and walk through, you don't know anything before seeing the inside.

If it smells like mold, run away.

I found this rent v. buy calculator helpful.

If you're going the fixer-upper route, plan to spend many of your weekends working on the house. If you get an inspector to look at it, make sure the inspector is thorough, pester them with questions, and ask for ballpark estimates for what it's going to cost to fix all of the things that need fixing.
posted by craven_morhead at 7:18 AM on August 1, 2011

Response by poster: If we do get pre-approved how will that affect our credit? I read that having too many credit inquiries of that size can look bad, especially if we don't continue to look for a while and then start again in a few months and have another large inquiry. Does the pre-approval letter hold good for more than one property? Do you know if we would need pre-approval through just anyone or their specific mortgage brokers?

We used the rent vs own calculator. That is how we came to the decision of how much we would be willing to spend to make it justifiable to own.

This whole business is already so overwhelming to think about and we are just looking and weighing options! I can't even imagine how bad it will get!
posted by MayNicholas at 7:26 AM on August 1, 2011

I don't know how pre-approval will affect your credit. It will, however, be good for more than one property, since it's basically an assessment of how big of a loan the bank will give you. You want to be pre-approved through whoever would be writing your loan.
posted by craven_morhead at 7:35 AM on August 1, 2011

An inspection is never an "if." Get a good, independent inspector--preferably one recommended by someone you know and trust. Do not use anyone recommended by your real estate agent--that's a major conflict of interest. If it's a foreclosure, it's likely "as is," so you want to know going into it exactly how much you're going to have to spend.

Also, get a real estate lawyer--preferably one with experience with foreclosures. They can be your advocate through the whole process, and can also answer a lot of the questions you have. Buying a foreclosure is often a lot more complicated than a regular home purchase, which is itself a pretty complex process.

And yes, both the inspection and the lawyer will cost $, but it's an issue of pay a relatively small amount now and have piece of mind, or potentially pay a huge amount later fixing all the problems you didn't know you had.

On preview, regarding pre-approval--generally you want to get pre-approved before you even start looking at houses, so that you know for sure what you can afford and that you can get the loan you'll need. Some real estate agents will even require the pre-approval letter before they start showing you homes. Not sure how this will impact your credit, but getting pre-approved before starting the search is standard practise.
posted by catwoman429 at 7:35 AM on August 1, 2011

Response by poster: Oh yes- an inspection is a MUST. We have a family friend who is a home inspector, so when we are ready he will take care of that. We know he will be working for us.

When we get pre-approved do we specify the amount or do they tell us how much we are approved for?
posted by MayNicholas at 7:44 AM on August 1, 2011

Re: mortgage payments to be significantly less than our rent

I don't know where you live, but in Minnesota, the utility bills can be 30% and up of what your mortgage is. We rent out a house we own and the mortgage is $900/month. The electric bill on Budget Helper (which bills you the average throughout the year which is really helpful when winters get so cold) is $375/month. That tends to be the huge sleeper cost for people who want to live there and think it'll be cheaper than renting an apartment. So please keep that in mind when you are budgeting.
posted by jillithd at 7:51 AM on August 1, 2011

The mortgage broker/bank will tell you how much you are pre-approved for. You will provide all your relevant personal and financial information, and then they will tell you the most that they are willing to loan you. You combine that amount with whatever down payment you have saved, and that is the maximum amount you can afford for a house. So, if you're preapproved for a $200K loan and you have $20K as a down payment, you want to look at houses that are $220K or less.

I suggest you ask around to family and friends and get a recommendation for a mortgage broker. The broker will be able to answer your questions a little more indepth. I'm relying more on personal experience and experiences I've heard from friends, so what I'm giving is very basic and not guaranteed to be 100% correct.
posted by catwoman429 at 8:04 AM on August 1, 2011 [1 favorite]

Pre-approval is a general statement that you have been approved for a mortgage of thus and so size. It doesn't specify a particular property, it's a statement that a particular lender has agreed to make a mortgage loan of a particular size to you.

We did this through a mortgage broker (I love my mortgage broker). If things drag on for many months then you might need to update the paperwork, but it's not going to require a credit check every week.

Regardless, it's not really negotiable. Sellers won't take you seriously if you aren't pre-approved.
posted by It's Never Lurgi at 8:22 AM on August 1, 2011

Response by poster: Thank you for the responses! I have contacted a real estate agent who I have known for years and she is going to help us. We are going to look at the above mentioned property today and we can ask her what she thinks. She will be working for us and make sure we don't get in over our heads on a money pit. Right now we pay $915 per month with heating oil included in that price, that is why we need significantly lower mortgage payments to account for that type of thing.
posted by MayNicholas at 8:29 AM on August 1, 2011

When we bought our first house, we got one that didn't really need any major work, because we didn't want to spend all our time working on the house.

We still spent most of our time working on the house.

I can't even imagine, as a first-time homebuyer, knowingly buying a home that needs major work, as your primary residence. If you want to roll $30K into your loan to fix up the place, have you thought about just looking for houses in the $115K price range that don't need much or any work?

Make sure when you run the numbers that you take into accout taxes and insurance as well (the mortgage payment is comprised of four parts: principal, interest, taxes, insurance, abbreviated as PITI). Also know that even though you'll be getting a fixed rate mortgage (right?) your payment could still fluctuate from year to year to keep your escrow with enough money to pay your taxes and insurance.

In my experience, banks will pre-approve you for more than you can actually afford to pay, so as long as it's enough to buy what you want to buy in the price range you have already decided on, ignore the actual number that they give you. (The last house we bought, they pre-approved us for $360K and there was NO WAY we could afford to spend more than $250K and even that was pushing it.)

Don't worry about the credit inquiries. They fall off after a couple years, but adding a mortgage to your credit file more than makes up for it in the long run.
posted by rabbitrabbit at 9:21 AM on August 1, 2011

Response by poster: Yes, we have considered looking at homes in the 110-120k range that don't need as much work, but we can't find any. This is why I went ahead and got a realtor. She is fully aware of what we want to spend, so maybe she will find us something. And of COURSE fixed-rate- we don't want to end up getting screwed later.
posted by MayNicholas at 9:50 AM on August 1, 2011

The process of buying a house means multiple credit pulls, it just does. It's a blip. Going down one point on your score for 90 days is never, ever, ever a reason to NOT get preapprovals and do the other investigative work before you walk into what will be a money pit and relationship-destroyer if you get blindsided by something you skimped on.

Pretty much in any city, there's a relationship between rental rates and property value. If you want a mortgage around $700 AFTER your reno loans and PMI and all that jazz, you're looking at the house equivalent of a $350-400 apartment. Paying your landlord to fix things doesn't build equity. (Also, is that $700 an apples::apples comparison on square footage? At least base it on a dollar per square foot rate.) But, on the other hand, it's good to not buy more house than you're willing to, so it's good to have a bottom-line monthly limit in mind. (On the third hand...30K? You can renovate a kitchen with 30K, or a bath and maybe a half if there's no structural damage in either one.)

Anyway, you need to get preapproved on the reno loan to see the house. So your first step, if you're interested in the house, is pretty clear.
posted by Lyn Never at 9:53 AM on August 1, 2011

Response by poster: Is 30k too little to expect to pay for renovations? We really have no clue as you can tell.
Here is a list of what we can tell from outside looking in:
-No central air (does have forced air oil heat) no HVAC unit we can see
-Needs energy efficient windows (on all the windows)
- There are 0 appliances in the kitchen
-It is carpeted, but we have no idea what is under them.

We will know more about what it needs after we have a look today. If we are still interested and the realtor thinks we should proceed, we will go for pre-approval & call in an inspector.
posted by MayNicholas at 9:59 AM on August 1, 2011

Forced air oil heat is part of HVAC.

The prices are tough to estimate without knowing square footage, but I'd budget $5-10k for windows, the same for carpet if you're replacing it, and $3-5k for appliances, depending on what appliances you want. Another $5k if you're doing major work on the HVAC. But those are just the big ticket items you can see from the street. I'd be surprised if the roof doesn't need replacing now or in the near future if you can't find move-in ready housing for nearly the same price point at all. The little stuff adds up too; I dropped $1k at Home Depot after closing on a move-in ready house, and that was the first weekend.
posted by craven_morhead at 10:11 AM on August 1, 2011

Response by poster: The place is 1300 square feet. It is listed as a 2 bedroom, but the attic is finished. I don't think they can call it a bedroom because the windows are not large enough to be considered an escape route. We would eventually want dormer windows added up there since it will be the master bedroom. It is just too hard to tell. I wish we could find something more move-in friendly. Like I said, we could afford more, but don't want to be house poor when I become a stay at home mom.
posted by MayNicholas at 10:22 AM on August 1, 2011

You need more experienced eyes than your own on this. Your realtor will be your first port of call. I would try very hard to get a contractor in for an estimate before you get to offers and inspectors so you have some idea of the costs of the renos you need to make.

For what its worth, we were conservative home buyers on a budget. We bought a tiny 2-bed house that had a new roof, had an inspection, and allotted a reno budget of 25K. We got major structural work including steel, a new kitchen, new concrete subflooring, new hardwoods, new windows, put in a boiler and new rads, and paint. What this did not cover was more second-fix type expenses that take a house from renovated to finished. Our doors still have no handles. Some are unpainted. The contractor put in exactly the kind of baseboards I hate. We have no crown moulding. The kitchen has no splashback tiles.

We planned to get to all of this over time. Unfortunately, time instead demanded a new shower, some insulation fixes, and oh joy the new roof leaks in two places. All of those are a higher priority than door handles, which by the way are about 30 bucks each. That's fine until you need 12 of them.

I have no idea what your income is. Ours is low so hurdles that would not be an issue for other people continue to be a problem to overcome for us. My point is, be really realistic about the first stage, second stage and final fix budget as well as your ability to DIY and to live for now with less expensive fixtures and fittings.

We compromised on things its relatively easy to rip out or replace later, like kitchen units. We did not compromised on things it would be impossible or cost inefficient to do after reno, like the boiler, swanky radiators, and installing one of like 5 garbage disposals in Ireland.
posted by DarlingBri at 11:05 AM on August 1, 2011

$30k seems rather cheap based on the list you've given, especially as those are only the most obvious things, rather than all the problems lurking beneath the surface. You can do stuff cheaply if you're a super-duper DIY type, but if you're not going to be doing your own windows and such, that all adds up super fast. What starts as "the kitchen has no appliances" can quickly become "rip the kitchen out to studs and fit new cabinetry, plumbing, and utilities" once you realize that the existing cabinets don't fit the appliances you want (or don't fit any modern appliances at all), the electrical supply to the kitchen is inadequate/not up to code, there's water damage in the exterior wall fronting the kitchen, if you're redoing the windows anyway you might as well make them bigger, if you're ever going to want a dishwasher someday in the future you have to clear this space for it, and oh crap they just delivered the wrong refrigerator and now I have to fight with the store because they say this is my fault and expect me to pay for it.

People spend $30k and six-nine months on kitchens alone. I know you'll be frugal and do your best to keep things in budget, but this stuff has the ability to get out of control very fast. Add the roof, which as craven_morhead says is probably due or soon to be, random hidden problems found in the inspection or after you start renovations, the usual move-in costs (oh we need a trash can over here, got to find a cheap table by the front door for keys, what do you mean there's no toilet paper holder in the bathroom? And so on, and so on, and so on...), and that money that just seems to disappear in construction, and it all adds up to a lot.

And don't discount your time in all this. Even with contractors doing the work, you'll be coordinating everything and dealing with all the loose ends. Less so if your contractor is awesome, more so if your contractor is typical.
posted by zachlipton at 11:17 AM on August 1, 2011

(Sorry, my point - now that I think about it - was this: We can afford our small, conservative mortgage which is indeed both a blessing and less than we were paying in rent. What we can't afford is to make up for the +/- 10K shortfall we allotted to renovations. In retrospect I would have expanded the loan to acomodate that.)
posted by DarlingBri at 11:22 AM on August 1, 2011

A two bedroom house can be very difficult to re-sell. We're a family of three searching for a house and we wouldn't even look at a 2 bedroom. Just because you can afford this house doesn't necessarily mean you should buy it. Have you looked at a lot of houses? In and a little above your price range? I think you need to see many houses and get a sense of what's out there, what the market will bear, when something is overpriced and when something is a good deal, before you can settle on one to buy.

If you're not in a huge hurry to get out of your present housing, consider spending some time looking. Go to open houses, cruise the online listings and really know what you're getting into. This particular house doesn't sound great. Maybe it is but you won't really know until you've seen what else is out there.
posted by Kangaroo at 4:27 PM on August 1, 2011

Response by poster: Well we had our look at the house and it was a DUMP! No way would we even consider it. Our realtor showed us another home that was already finished and not a foreclosure. We liked it, but now that we have her we will see more homes first. She understands what we are looking for so we will take our time and find the right home. She also put us in touch with a mortgage broker that she has worked with for years so we can get a true idea of what we have to work with.
posted by MayNicholas at 5:23 PM on August 1, 2011

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