Time to buy a house!
January 13, 2014 6:57 PM   Subscribe

I have a newly good income, a very tiny (yes, I mean very tiny) beginning of a savings account, shitty credit, a little (in the hundreds) debt and I want to buy a house. What should I do?

I also have a partner who is in a similar place of an OK but growing income, some but not a ton of debt, and poor credit.

We haven't gone into the specifics of how we'd do this together yet. This is really the very beginning of starting to think and plan about this.

I know we need to "save money" and "rebuild our credit". But what does that mean? Should I work with a nonprofit like NACA? How much money do I need to save? How good does my credit need to be? When should I start talking to banks or realtors?

I know zero, so tell me anything, including what questions to ask and who to ask them of.

Also, unfortunately, I live in and think I want to stay in the SF Bay Area (East Bay side).
posted by latkes to Home & Garden (10 answers total) 10 users marked this as a favorite
To avoid paying for PMI (private mortgage insurance), put 20% down.
posted by Houstonian at 7:04 PM on January 13, 2014 [2 favorites]

How "good" your credit needs to be will depend in part on the lender and in part on the kind of loan you want. If you want one of those low down payment, low interest FHA or state type loan, then you want a credit score as high as possible.

If you're a little more flexible, think you'll have the standard 20% down payment and don't mind a traditional bank loan, then you can shop around lenders for the best interest rate for preapproval.

1. Make sure all the information on your credit reports is accurate. If there is a credit card that you didn't open or an address you didn't live at listed, get it cleared up by writing to that reporting agency.

2. From here on out, pay your debts on time. Every month. Don't miss a single payment for anything. Your credit score takes the biggest hit immediately after missing a payment and gradually that will go up over time, so don't tank it by missing a payment.

3. Figure out how much revolving debt you have (credit cards) to what your availability of that debt is (your credit card limits). Try to keep each card in about the 30% range or less. Use each card you have at least once/month to keep the card active.

4. Do not open any new cards. Do not take out a car loan. Save what you can.

5. Take a first time home buyer's course. It is really useful. We paid $60 for ours, and it was full of some information we already knew and a lot of information we had no idea about.

There is more, but these are good things to start with.
posted by zizzle at 7:07 PM on January 13, 2014 [4 favorites]

What should I do?

It is essentially impossible for someone in your scenario (bad credit) to buy a house without at least a 10% down payment, and 20% is more likely. You should start working on your credit while accumulating that down payment. To start, get your credit reports - you can do so for free from each of the three major credit bureaus. Then, figure out what accounts have negative information and go through each account and see if you can pay it off and/or negotiate for a lower payment and/or negotiate for removal from your report. The people at CreditBoards are a great resource here.

How much money do I need to save?

Figure out what sort of house you want. Figure out how much that house would cost right now. Start saving money as if you owned that house right now. If you owned a house, you would have to pay maintenance on everything (hint, this is very very expensive). So, put that money towards your down payment instead. If you owned a house, you would have to pay property tax. Similarly, put that money towards your down payment. If you can't do this savings, you can't afford to buy a house because you'd not be spending any more money than you would otherwise. If you can, you'll have a down payment saved up just in time to buy a house.

so tell me anything, including what questions to ask

Here's a question: does it even make sense to buy a house? What are you trying to get out of it? It is distinctly possible that in the Bay Area, buying a house is more expensive than renting. New York Times has a great calculator to estimate these things. If you can't figure out how to fill in all the items in the calculator, you are not prepared to buy a house. There are reasons to want to buy a house - even if just to say you own one - but you should know what those are, and more importantly, you should know how much you want to pay to fulfill those reasons.
posted by saeculorum at 7:42 PM on January 13, 2014 [9 favorites]

First figure out what a reasonable mortgage for your income should be. Generally your monthly mortgage should be no more than about 35% of your gross income, less if you have additional debt burden. For the maximum price on a home you can roughly afford, expect that you'll need to save an additional 20% downpayment on top of the mortgage. Stop here, take a look at the cost of real estate in your area, and see what that buys you. Then reconsider whether it's worth it for you to buy. Not only may your money not go very far, depending on the local market, it may make more sense to rent as already noted.

In the meantime, do ask yourself why you want to own a home. Do you really want to be tied down to a mortgage? How reliable is your future income? What's the risk of prolonged or indefinite loss of income to a point where those mortgage payments might not be feasible.

Consider home ownership in the context of long term financial planning. Do you have any retirement savings? Have you given any thought to your retirement and whether perhaps you would be better served socking away for retirement and having a secure retirement plan BEFORE you think about home ownership. That really is the prudent thing to do.

While you contemplate all that, fix your damn credit. Step one is looking at your credit report, figuring out why your credit sucks and researching how to fix the problem. Often if you have genuine dings on your report, the best fix is time as most credit screw ups fall off the report after 7 years. Got to CreditBoards and figure out how to build a good credit history, increase your credit limits, and minimize your credit utilization.
posted by drpynchon at 8:46 PM on January 13, 2014 [3 favorites]

Start saving money. That is the first thing.

Second, get to know your local market. Start reading all the home-buyer magazines. Start playing around on zillow and other real estate websites a lot. Start going to open house sales. (Don't make appointments with realtors until you are serious and ready. It is not fair to play games with someone's career just so you can learn the market.)

Third, start taking steps to repair your credit.

Fourth, pay attention to the national real estate market. There are indications that another real estate bubble is forming. It seems to be growing out of California again. Lots of people got hurt in the last bubble. Don't be one of those people. Try to understand why people got in trouble and what happened.

Buying a home is often the single largest investment people make in their lifetime. Don't do based on emotion. Research careful, think it through, and be a smart buyer.
posted by Flood at 4:18 AM on January 14, 2014 [1 favorite]

I know we need to "save money" and "rebuild our credit". But what does that mean?

How much does a "starter" home in your area cost? Is it more than 3x your combined annual income? If yes, you need to wait to buy until you make more money. If no, then save up about 20-30% of the price of that house. You will want to put as large of a down payment as you can. 20% is a conforming loan (no PMI needed). Some credit unions will give good rates with no PMI to 10% or more. You need roughly another 10% in closing costs, and first months payments. You may possibly need more to break your lease, moving expenses, deposits on utilities, etc.

What are your current credit scores? Are they above 700? Lenders will take the lowest from either of you for joint borrowers. You need to have great credit because this determines your interest rate. You will end up paying tens of thousands of dollars more over the course of the mortgage if you buy while you have bad credit. Get your credit reports, find out what your negative reports are, and fix them. For example, my husband had 2 late payments on a card (from before we got married). The credit report keeps the last 2 years of payments. We made perfect payments on that card for 2 years until the last late payment fell off the record.

Other things to consider. You both need stable jobs and careers. You will become tied to a place and it could cost you tens of thousands of dollars if you needed to sell quickly to move for a job. You can't count on your house gaining in value. You need to also have enough income to save money for home repairs. You need to consider what would happen if one of you died or lost your job, would the other be able to afford the mortgage? Do you each need life insurance for the balance of the mortgage?

Lastly, I'm assuming since you said partner not spouse, that you two aren't married. (Ignore this if I'm incorrect) You do need some special considerations as a non-married couple looking to buy. What would happen should you break up? Should one of you die? Will one be contributing to a downpayment more than the other? What should happen to the returned equity should you sell? In a divorce these issues would be arbitrated by your lawyers and possibly local laws.
posted by fontophilic at 5:55 AM on January 14, 2014 [3 favorites]

There are all sorts of programs out there for first-time, low-income, poor-credit homebuyers. Most large cities and towns have one of these programs. When I was first purchasing a house, I was amazed at the level of assistance that is available. There are seminars on improving your credit, paying down debt, how the home-buying process works, even what kind of maintenance you can expect as a homeowner, and how to save money and be prepared for those home improvements and repairs. There are special mortgage loan programs with super-low down payment requirements, no-interest and low-interest purchase or improvement loans, mortgage tax credits, all sorts of good stuff! The program in my area even had an option where you could work directly with a "housing counselor" on these issues, such as rebuilding credit and saving down-payment money.

Some programs, once you get involved with them, even help you build your down payment by providing a "match" to what you yourself save.

The reasoning behind many of these programs is that income diversity is important for long-term economic health of cities and towns. Also, homeownership tends to make people more interested and involved citizens - when you own a home, you have a "stake" in the community.

Even with your "newly good income" you may still qualify to participate in these programs, especially in such a high-cost-of-living area like the SF Bay Area.

A google search on terms "first time home buyer east bay ca" yielded these possibilities:
East Bay Economic Development Alliance - first-time homeowner programs
City of Oakland Homebuyer Assistance
Eastbay Neighborhood Housing Program - Homeownership Program
City of Pleasanton First-Time Homebuyers
San Francisco Assistance for First Time Homebuyers

Even if you somehow *Don't* qualify to participate in these programs, definitely ask at your bank or credit union (wherever you plan to get a mortgage) about their own deals for first-time homebuyers. Often they have reduced qualification requirements, or lower down-payment requirements, for first-timers.

Good luck!
posted by Ardea alba at 6:04 AM on January 14, 2014 [3 favorites]

I second fontophilic. You want to have reliable jobs or know you could get another with similar pay quickly. I would also recommend having an emergency fund (6 months) in case of illness or job loss. So my buy a house gameplan would be:

1. Pay all bills on time.
2. Pay down all credit card debt.
3. Start an emergency fund for AT LEAST a couple months.
4. Set up your longer term down payment savings. Maybe automatically save an amount every months. At this point I'd also make sure you are both funding a retirement account in some way. YOU NEED TO RETIRE!!!!!! And maybe even in style.
5. Consider immediate move in costs - painting/repairs/new furniture. Make sure these things won't dip into your emergency fund.
posted by Kalmya at 6:10 AM on January 14, 2014 [2 favorites]

I'm not sure buying a house in the Bay Area is a good idea. The market is volitile, natural disaster can wipe you out and the tax structure is non-sensical. Find out how much insurance is on a home is in your desired area, and factor that into your monthly payments. This may not be a doable thing. Ditto taxes. You may be unpleasantly surprised at how much of your housepayment may be to these 'escrow' items.

If you get into a good apartment with rent control, you may be better off in the long run. I have a friend who has a gorgeous apartment overlooking Alamo Square Park. He's been there for 30 years! His rent is about 1/4 what other in his building pay. He couldn't BUY that place, but he's living large and happy and comfortable.

So there's that.

Kalmya lists the steps you need to be in a financial position to buy a house and doing these things will improve your credit score.

You're a couple of years away from this goal, so take this time to really understand the process. HUD has some great resources, check these out.

Start viewing listings where you want to buy to get a feel for the properties and the market. You may find that what you can afford to buy is not as nice or safe as what you can afford to rent.

It might help to understand WHY you want to buy. If there's a lot of emotion tied up in the decision you may want to think and think again about what you hope to gain by owning.
posted by Ruthless Bunny at 6:36 AM on January 14, 2014 [1 favorite]

I found this book, How to Buy a House in California, really helpful when I started this process many years ago. It won't answer all of your questions, but it will answer a lot of them. And this is an updated edition dated a year ago, so it should be pretty accurate.

I do own a house here in the Bay Area, on a non-profit salary, so it is possible (and the property values wouldn't be going up so much if thousands of people didn't think it was a good idea to own a home here), and if you know it's what you want, do it.
posted by gingerbeer at 2:50 PM on January 14, 2014

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