A place of one's own
July 9, 2012 11:31 AM   Subscribe

I kind of want to buy a house. I know absolutely nothing about buying/financing a house. I also have sort of crappy credit.

I have been thinking that I would like to maybe buy a house in the next couple of years. I've never owned a house, and I know next to nothing about financing one. And I have absolutely no idea what the current economy/housing market means in regards to housing prices, financing with less than stellar credit, etc.

My SO and I have a good income, but our credit is not great. We have some medical bills in collection and probably some late car payments on our credit report as well. I am hoping to pay off the collection agency over the next few months and get the car payments on auto-deduct so they won't be late any more.

We've been paying monthly rent of 1200 for the past 12 years for the same apartment. How does this compare to a mortgage payment?

What kind of a down payment will we need? We can probably save up 10 thousand over the next two years, maybe more.

Is it harder or easier to get financed these days with poor credit?

The kind of house I have in mind would be a modest 2-bedroom, 2-bath in the west or northwest suburbs of Chicago (for example, Glen Ellyn-Wheaton-Downers Grove or Palatine-Rolling Meadows) with a yard big enough to put in a small fire pit & have get-togethers with a few friends in the summer.

So what can you tell me about buying a house in my situation? I don't even know where to begin looking for info, things I've read about house-buying in the past always assume you have good credit and a big down payment.
posted by sock puppy to Home & Garden (22 answers total) 26 users marked this as a favorite
When I was buying my first house, I found Michael Bluejays guide to be indispensable. It talks about a lot of different aspects of home buying, including a lot of the financials that I didn't even think to consider.

The very first step, before you even start looking at houses, is to talk to a lender and find out how much house you can afford and what the monthly payments will be. IMO, the second step is to look at how much taxes and insurance will be for a house of that theoretical value.

Then it's time to look at houses in your neighborhood or talk to a realtor.
posted by muddgirl at 11:37 AM on July 9, 2012 [1 favorite]

Sorry, here's Michael Bluejay's home buying guide.
posted by muddgirl at 11:37 AM on July 9, 2012

I agree with muddgirl, you shouldn't do this alone. That said, some general observations:
  • How much you can borrow will depend on your income and your outstanding debt, not on your credit rating.
  • The interest rate you pay will depend on your credit rating
  • Most lenders like 10% - 20% down payment
So it's definitely doable. The specifics will depend on your income, debt and the house you want.
posted by ubiquity at 11:40 AM on July 9, 2012

You are in the perfect place to talk with a nonprofit consumer credit agency or your local credit union if they have a robust financial education program (mine does). Start now with the goals of managing your monthly bills better, paying down your debt, and improving your FICO score. A year or two from now you'll be in great shape to buy a home.
posted by headnsouth at 11:42 AM on July 9, 2012 [4 favorites]

Zillow is a great resource for window-shopping real estate. It will give you a good ballpark idea of what kind of house you can afford in your desired area, and it will estimate the monthly mortgage costs. Don't forget to factor in the cost of property taxes, too --- hundreds of dollars per month.

A larger down payment will get you better loan terms. Typically, a down payment of less then twenty percent will force you to accept some really bad terms.
posted by qxntpqbbbqxl at 11:44 AM on July 9, 2012

It is MUCH HARDER to get a loan today - however, home prices are also MUCH LOWER today.

The first real step is get your finances in order. Talk to a bank. See if you can get private money. Start saving a down-payment.

But, the main thing I want to say is: start doing your homework about your local market NOW. The more you know about the local real estate market, the better you will do.

It is unfair to really engage a realtor if you are not ready to buy - don't mis-led a realtor. That is not fair to them as a professional. But, you can start going to one "open house" per week. You can see is there is a local REIA (real estate investment assoc) in your area, and go to a few meetings. Start looking for houses that you like, and check them on zillow. Start really looking through real estate sales magazines. Start learning the market NOW.

And get your finances in order.
posted by Flood at 11:46 AM on July 9, 2012

BTW, $1200 month would easily cover the mortgage on a $200,000 home, after a down payment of $40,000. That doesn't include insurance and taxes, but it doesn't include the amount you will save on your federal income tax either. So again, it's doable.
posted by ubiquity at 11:46 AM on July 9, 2012

Depending on your property taxes for your location, $1200/month roughly equates to a $200k house mortgage.
posted by LeanGreen at 11:47 AM on July 9, 2012

Hi, I've bought and sold many houses. I am currently upsidedown in our current house in Atlanta.

Housing markets vary from place to place. Chicago is pretty stable, so you probably won't be getting any HUGE bargains (not like in my neighborhood, or in Phoenix or Florida.)

Also at this point, it seems that the market has hit bottom. That doesn't mean it's going to shoot up again, just that everyone who is going to default has probably done it, so what's out there now, is out there.

Now, for the process.

For the next couple of years you are going to want to become debt-free. Pay everything off that you can, then start saving like a mo-fo.

People will tell you to go into a "no money down" or "interest only loan" or something like that. We have a no-interest, FHA loan, 30-years, fixed rate at 5%. I wish someone had told me what I'm going to tell you. I'd be blissfully renting right now instead of paying on a house that I'll still owe money on if I needed to sell it.

Put down 20%. This means that you won't have to pay Private Mortgage Insurance. PMI can cost about $100 per month. It's not deductable.

Save up for closings costs, but get the seller to pay them if you can. They are about 3-5% of the total mortgage. This will include things like Doc Stamps, Title, and all sorts of other hoo-ha that they get you for at your closing.


If the house you want is $200,000, you will need to save $40,000 for a down payment, and about $6,000-$10,000 for closing costs. You should have $50,000 in ready cash to buy a $200,000 house.

Not only that, but houses have a nasty way of costing money for completely unsexy things. Is that a fuse box I see? You'll need $2,000 to upgrade it to a breaker panel. Toilet backing up into the basement? You'll need $7,000 to replace the sewer pipe. (and neither your insurance, nor your water authority is responsible for it. Ask me how I know).

You should have a fund merely for stuff that can go wrong with the house. You can't be caught without funds when the hot water heater gives out. You just can't.

In addition to that house fund, you'll want a robust savings account with about 6 months of living expenses filed away.

Remember to include your escrows into your total monthly housing payment. If you go onto real estate sites, you'll see things like, "Own this house for only $1200 per month." That's principle and interest, the house note and interest, NOT escrow. Escrow would be for state and municiple taxes, Private Mortgage Insurance, Homeowners Insurance and Flood Insurance. Factor in at least 25% of your total P&I for escrow accounts.

Houses cost more to heat and cool than apartments. More space, more money.

Houses don't always appreciate. Some neighborhoods are on the decline. Be aware of this.

Buy a house only if you want to stay there for at least a decade (it used to be 5 years, but it's gone up now that we're not in a boom anymore.)

Stop watching HGTV. That shit will warp you faster than you can say Jack Robinson.
posted by Ruthless Bunny at 11:51 AM on July 9, 2012 [16 favorites]

Yeah, we just refied and our monthly is down around the 1,200$ level for a house appraised around 220k.
posted by robocop is bleeding at 11:52 AM on July 9, 2012

Whoops, I missed that this was a year or two down the road. Bluejay's guide is still really valuable at this stage, and I agree on priorities:

(1) Get your finances in order. This means improving credit score, decreasing debt, thinking about your budget, if you can squeeze out any more savings, if you can get gifts from your parents/grandparents/etc to go to the down payment.

(2) Figure out, in general terms, how much house you can afford and on the other end, the lowest price house you would be able to stomach. That's sort of your purchasing range. This might shift your neighborhood search a little bit (I used both Zillow and Trulia during this stage. You could also search and see if any website provides access to your local MLS listings.)
posted by muddgirl at 11:53 AM on July 9, 2012

Your monthly payment is MUCH higher than just the mortgage payment. You need to figure in the cost of the mortgage (principle, interest); insurance (mortgage insurance & homeowner's insurance); property taxes; and a repair fund (1-3% of home's value per year).

Agreed that you should not buy unless you plan to stay in your house for many years. Buying and selling a home is incredibly expensive -- closing costs can be 3-5%. If you have to sell in fewer than 5 years, closing costs may (will) eat up any of the appreciation (if there is any appreciation ...)
posted by yarly at 12:01 PM on July 9, 2012

Paying off collection amounts will not improve your credit. They will simply take the money and pass off your account to another collection agency. You need to contact the original creditor and see if you can write it off. Take it in writing. With that you can challenge the collection agencies and report them to BBR and to the Attorney General AFTER you have got in writing from original creditors. By law they cannot report fraudalent amount.
posted by pakora1 at 12:12 PM on July 9, 2012

1. Find out your credit score. Honestly, with the situation you describe ("crappy credit", "bills in collection", "late car payments"), I suspect that right now it would be difficult to get approved at all. But its fixable.

2. Improve your credit rating. The better your credit, the lower your interest rate and your monthly payment.

2. Save. You really want to put in 20% down. Less than that and you're paying PMI or (god forbid) getting into balloon mortgages. A $200,000 house means a $40,000 downpayment. Plus you'll need another $5k or so in closing.

3. Save more. As others have said, you mortgage payment is only a small part of what you'll have to pay - taxes, repairs, insurance, etc etc etc.

4. Learn. There are some really good resources on personal finance out there. Here, here, for example. Learn from others (including my own) mistakes.
posted by RandlePatrickMcMurphy at 12:22 PM on July 9, 2012 [1 favorite]

You also need to consider utilities. A lot of people who rent their houses don't have to pay for garbage collection, sewer, gas, water, or even electricity. I pay about $300 total in utilities every month.
posted by elsietheeel at 12:34 PM on July 9, 2012

My county offers a free first-time home buyer seminar to help people in your situation, and if your county does the same, it would probably be a good idea for you to attend one. Also, it would probably be worthwhile to see what kind of first-time home buyer programs your state, county or city offer. You may be eligible for a grant or special rates.
posted by amarynth at 12:37 PM on July 9, 2012

You're getting accurate answers to your specific questions, so, if I may offer a relevant answer to a question you didn't ask but should have, consider starting with a 2-bedroom condo.

You'll get the same tax benefits of owning a single-family home without the maintenance headaches (assuming you don't buy into a small vintage building where things are apt to go wrong, and the condo association has no savings and must special assess only a handful of owners to cover emergency replacements and repairs.)

Which is to say, in my opinion the days when the collective wisdom was "stretch your budget to buy the most home you can afford" are gone. We can no longer expect increasing home values, which in turn means that homeownership is not the wealth builder that it used to be. You don't need to give up on your preference for a yard and the ability to invite friends over for grilling, they just might look a little different than you've got in your mind at the moment.

Debt is a curse, not a lifestyle. Focus on what you can save, not on what you can spend. When you are ready to retire, you will thank your lucky stars that you did.

All that said, take a look at Ilyce Glink's Buy, Close, Move In!: How to Navigate the New World of Real Estate--Safely and Profitably--and End Up with the Home of Your Dreams. I've been following her for decades. She knows her stuff.
posted by Short Attention Sp at 4:28 PM on July 9, 2012

Improve the credit first. Medical collections can often be resolved by going directly to the source and negotiating with them directly. But NEVER do it over the phone. Do everything in writing, with certified mail/return receipt. If you have to deal with the collection agency, also do that in writing, and see if they will do what's called a "pay for delete." You pay the bill in full, they delete the tradeline from your credit reports. This is not uncommon at all, and I have successfully done it before.

Bumping up the good ol' FICO score before you go mortgage shopping will help you out.

Also look into FHA loans and in certain areas, USDA loans too.
posted by drstein at 6:43 PM on July 9, 2012

I joined a credit union earlier this year and they offer amazing financial counseling at no charge. So I totally just made an appointment, screwed up my courage, and went in to say "I feel like a complete teenager financially but I sorta kinda want to buy a house in the next few years maybe? Please don't laugh at me."

And it turned out to be a great experience. My credit is not nearly as bad as I had worried it might be. The only real significant black mark was actually a mistake made by my medical coverage that they were able to to help me identify, resolve and get adjusted from from my credit score. I didn't even know it was there, and just having that alone fixed was worth the visit. He also helped advise me on certain investments and spending strategies for the next few years that will help me qualify for better rates on home loans when the time comes. It was an incredibly positive and empowering experience and I learned a whole lot of stuff that it would have taken me a long time to figure out on my own. Credit Unions are awesome.
posted by troublewithwolves at 9:00 PM on July 9, 2012 [1 favorite]

"Home Buying for Dummies" was a pretty good resource. It had more detail than Ruthless Bunny's otherwise excellent post above.
posted by ArgentCorvid at 7:46 AM on July 10, 2012

Response by poster: Wow, you guys have given me a ton of good info. Thanks so much, I really appreciate it.
posted by sock puppy at 10:03 AM on July 10, 2012

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