First home purchase a bit earlier than we planned for...
February 8, 2014 7:38 AM   Subscribe

My husband and I agreed a few months ago that in about three years we would purchase a house. We're being pushed out of our apartment, and we're considering doing it a bit earlier than planned. Problem: down payment savings. We don't have much of one. I kind of feel like we're special snowflakes, so it's ok. Are we?

The circumstances: After my last question, I was able to work out a better plan of action with my current job. Also, I found out that I might just be better at my job than I thought, and there's a lot of interest in me from other companies in the area that I've networked with. My husband is also very happy with his job, and geographically close to his family (which is pretty important to him). We live in an awesome city that has most of what we want, and that's growing pretty well. In short, we're really happy here. We had planned to spend about three years in our current apartment saving up, and then purchase a house here. Except our apartment was just bought, and the new owners want us out at the end of the lease so they can knock down our building. We love the neighborhood we live in, and would like to stay here, but it doesn't have a ton of rentals. My husband thinks we should just buy now, and I'm starting to agree with him.

The problem: We planned to save for our down payment over 3 years. At the point we're looking to buy we'll only have a year's worth set aside (for the down payment - we have other savings for other issues that we won't dip into for this). This translates to maybe 5%-10% down, plus closing costs and a few thousand more for emergency move in repairs. I know normal answers would be "don't consider it without at least 20%," but I think we may be an exception.

Why I think we're an exception: With a 15 year mortgage + taxes we'd still be halving our rent payment. The extra ~$600-$900/month would allow us to store up some money for emergency repairs and perhaps even pay extra on the house. After talking to our credit union, they've confirmed that we'd (probably) qualify for an FHA loan, and that they would also (probably) have other decent options that we'd qualify for as well, even with the smaller down payment.

My parents and in-laws are both encouraging us to buy, and it honestly feels like a pretty safe and logical move for us. I just know that everyone isn't as special of a snowflake as they think they are, and that might just be the case in this situation. So - is the at least 20% down a definite rule, or more of a suggestion meant to be seriously considered, but ignored in circumstances like mine?
posted by lup badik to Home & Garden (16 answers total) 7 users marked this as a favorite
What does the difference in interest payments look like over that 15 year time period summated?
posted by oceanjesse at 7:52 AM on February 8, 2014

The 20% rule is because that's where you start to qualify for better mortgage rates and lower PMI. Even if you can afford the rates you'd qualify for now you'd pay a lot less in the long run if you saved up a bit more first.

It's a math problem. Do the math. Find out what you'd actually qualify for now -- not what you'd "probably" qualify for -- compare it to what you'd be paying if you started at 20% down, and see if the difference outweighs a couple of years rent.
posted by ook at 7:54 AM on February 8, 2014 [7 favorites]

I'm not an expert on anything. To my mind, if you can afford a 15 year mortgage and still have $600-900 extra per month, you can afford the pmi that comes with putting less than 20% down.

I assume you've looked at houses you like and have a general idea of what you can afford and have talked to a lender who agrees and as willing to give you a 15 year mortgage for the price of houses you like, even without putting 20% down?

(If it were a definite rule, lenders wouldn't allow anyone to buy a house for less than 20% down.)
posted by vitabellosi at 7:56 AM on February 8, 2014 [4 favorites]

Would you be able to rent something that's waaay cheaper than you're paying now (since it sounds like rent is expensive, compared to a mortgage), that would allow saving up the remaining downpayment (and emergency nest egg) much faster than you were previously planning?
posted by ambilevous at 8:00 AM on February 8, 2014

I know normal answers would be "don't consider it without at least 20%,"

I don't think this is a "normal answer" at all. I bought my first place a few years ago with 10% down and pre-paid some of the PMI to lower my payment, which I calculated to be worthwhile if I stayed at least 2 years.

Do you need to buy a place to live for the near future? Can you afford the payments without straining yourself? It sounds like the answer to both those questions is "yes." Buy a place.

You can always use the extra money you have to pay down the principal more quickly to get rid of your PMI.
posted by deanc at 8:02 AM on February 8, 2014

If you have found the perfect house in the perfect location, and you've been looking for a while, go for it.

Otherwise, don't do it. Go find a new apartment, move in, commit to another year lease. Lease in the area you think you want to live. Don't fully unpack or settle in for that first year, but really try out and enjoy the neighborhood. After the first year, ask to go month to month and start house hunting (unless the neighborhood turns out to be a busy, in which case move elsewhere and try again.)
posted by davejay at 8:19 AM on February 8, 2014 [2 favorites]

The 20% down is an ideal, but it's by no means the norm any more, and that's probably OK for most people. With a smaller down payment, you'll most likely have MI, so your loan will be more expensive, but that's just the cost of doing business (and the MI may be tax deductible). The bigger concern, to my mind, what happens if something comes up and you have to sell soon after buying. The less you put down, the more likely you are to be underwater. If you're confident (as much as can be) that you're going to stay put, and you've got a cushion of cash, that minimizes the risk.

As far as financing options, I would strongly recommend that you talk to a mortgage broker who specializes in first time buyers. I love credit unions for most things, but they do not always have a full range of mortgage options available. Depending on where you live, your income level, and what your credit is like, you may have significantly better options than FHA that would still allow you to put 3-5% down. FHA's mortgage insurance premium has become extremely expensive and now lasts for the life of the loan, so I wouldn't look at it as a first choice.

If you're in the US, most states have a first time homebuyer program that is hard to beat, with tax credit certificates and down payment assistance available (again, depending on income level & where you're buying). Google "Housing Finance Authority" for your state to see what they have.
posted by tinymojo at 9:39 AM on February 8, 2014

Go talk to a (local, if you can) bank loan officer. You might be surprised.

We moved to our current city with a house in the old location that had been on the market for 9 months (this was in 2009). We had issues with the rental we were in and decided to look for a house. The local bank was willing to give us a substantial mortgage despite not having much of a down payment and still having this other house in Pennsylvania! (She siad, well, we'll probably not pay tie mortgage on the house we're not living in first)
posted by leahwrenn at 9:39 AM on February 8, 2014

There are many factors that play into this, but I think you are in a special snowflake situation. The fact that a 15 year mortgage + taxes is half your rent payment should be economic incentive enough to buy.

20% down might get lower rates and less PMI, but you could do so much with that extra savings (with deanc's idea the best, I think).

If you can get pre-approved for this 15-year, 5-10% down scenario, it's time to buy.

And I assume US (FHA), so don't forget the mortgage interest deduction on federal taxes. I don't care what anyone says, that thing is sticking around for a while.
posted by bombastic at 9:43 AM on February 8, 2014

The 20% down is more because, as others have said, the point where rates & PMI are better, if you can afford the higher rates etc there really is nothing stopping you if you can find a lender that will lend you the money.

If you can really save as much as you think can I would look at funneling some or most of that extra off of the capital ASAP and then in a few years when you own 20% or more of your house (or have that much equity in it) look at refinancing the mortgage to more favourable terms. This would cause depend on loan application fees etc making it a viable option which would depend a lot on just how big the loan is.

I have found credit unions super helpful when looking for housing loans and as leahwrenn said go and talk to your loan officers.
posted by wwax at 9:44 AM on February 8, 2014

My wife and I were in a similar position. Decided to put off buying for two years, then stumbled upon a place we couldn't pass up. We had money we could draw from to put down a large down payment, but didn't want to deplete those cash reserves.

On the recommendation of our mortgage broker, what we ended up doing is taking out two loans. The primary is a 30 year fixed, for 80% of the total mortgage amount. The second is a 20 year 10+1 ARM for 15% of the total mortgage amount. We put down 5%.

Both loans are from the same bank. Because we didn't have a single loan that exceeded 80%, we don't have to pay PMI. The second mortgage is a higher rate than the primary, but not so much higher that it offsets the no-PMI-savings. We can pay off the second mortgage early without penalty, which is what we're planning on doing prior to the 10 year mark. And we never have to deal with the headache of getting the PMI cancelled, which can be a total pain in the ass.
posted by NotMyselfRightNow at 10:48 AM on February 8, 2014 [1 favorite]

FHA loans are great, go for it!
posted by rudd135 at 12:15 PM on February 8, 2014

I have a 30-year FHA loan and we put down 12% of the purchase price. Two years in, when interest rates dropped, we refinanced to another FHA loan with the same lender. For my previous house, I had a conventional 30-year loan and put down close to 40% (gifts from relatives making up most of the down payment).

20% down is not a hard-and-fast rule. It just means you'll be able to qualify for most conventional loans without having to pay PMI. Many banks may also allow you to take out a second loan for part or all of the down payment on the first; I don't think that is a good option, but that is just one person's opinion.

FHA loans aren't bad; do some Googling and other research. You're stuck paying PMI for 11 years on a 30-year mortgage; I don't know what the PMI requirements are for a 15-year mortgage. We got in just under the wire before the rules changed and we'll be able to drop PMI after 5 years. FHA loans are also attractive in that they are fully assumable, meaning that if you ever sell the house, your buyer has the option of assuming the remainder of your mortgage with the original interest rate, payment, and terms, and he/she/they only need to borrow the equity to buy off what you've already paid off. If you get a conventional mortgage, your eventual buyer more than likely won't have that option.

With a conventional loan, you can drop PMI as soon as you reach 23% equity and there's no time requirement.

I thought we wouldn't qualify for a conventional loan on our current house due to putting < 20% down, but we did qualify. The payments on the FHA loan ended up being about $550-$600 cheaper per month, so we went with the FHA loan. Talk to your bank again. Make an actual application. As a previous commenter put it, "see what you actually qualify for, not what you probably qualify for."

I always recommend that potential home buyers visit Bankrate to check mortgage rates in their area. Go there, and contact at least three lenders from the list you get. Make applications with more than one lender if you can afford the application fees, that way you can choose the mortgage which has the best terms and payment for your situation. When I bought my first house, I had been approved by three different lenders, and I had them playing off each other to compete for my business. (If you can only afford one application fee, that's OK too, you'll just have to take what your lender gives you, so shop carefully.)
posted by tckma at 12:39 PM on February 8, 2014

I was coming in prepared to say, "You're not ready," but you sound in pretty good shape and make a good case for it. IF everyone truly saved up 20% before buying, very few people would ever buy.

As mentioned upthread, you will have to pay PMI, but Suze Orman insists that you can roll them into the cost of the mortage, so the X amount of estimated years you'd need to pay it are financed throughout the life of the loan.

If even with PMI, insurance and taxes (especially if you're going for 15-year mortgage) you're still substantially below your rent payment, you sound very well positioned to make the leap now.

Go for it!
posted by ravioli at 1:41 PM on February 8, 2014

Just to re-emphasize one of the points made above, the FHA has recently revised its loan terms and their loans are significantly more expensive than they were even two years ago. An FHA loan may still be appropriate for your situation, but make sure you examine all your options and figure out what your options would be for refinancing out of it down the road.

Also, you may want to check if your state has any programs for first time buyers. The more high priced blue states tend to.
posted by Diablevert at 5:03 PM on February 8, 2014

We got a conventional 30 year mortgage for 80%, and a HELOC for 10%. We put 10% down and didn't have to pay PMI. This made sense because we were in a position to pay off the HELOC pretty quickly. Our broker made a useful spreadsheet showing the different options.
posted by oneirodynia at 7:54 PM on February 9, 2014

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