Will we ever be homeowners?
February 26, 2007 10:20 AM   Subscribe

Help me find resources to help me figure out when I might be able to buy a house.

My fiance and I are trying to figure out when we might be ready to buy a house. We know without a doubt that we want to do this long before we could possibly save the 20% we'd need for a regular loan. That's about all we know. I have tried and tried and tried to find books or websites that might help me understand low- and no-down payment loans, PMI, closing costs, etc, but they all seem to go over my head. I need something geared toward first-time home buyers with pretty much no knowledge of real estate and no large amounts of money who don't feel ready to contact a realtor just yet. [I don't want to contact a realtor because I don't feel I understand any of this well enough to even know when we might be able to make the jump from renting to buying, when we will be able to afford it.]

Basically, this is what I am trying to figure out:

Based on a down payment of $X, an assumed interest rate, and an assumed finance period, how much house could we afford if we want our TOTAL monthly house-related costs [mortgage, PMI, taxes, homeowner's insurance, EVERYTHING] to be $X or less? Until I know the answer to this question, a realtor is far beyond my league, as I won't know if I can afford anything at all.

If any of you can explain this me, with as much dumbing-down as possible, great. If you can't, I would really prefer a book I can ILL or a website that would explain this to me.
posted by starbaby to Home & Garden (28 answers total) 19 users marked this as a favorite
The government has a website that is a good place to start. Also, despite your insistence that you are not ready for a realtor, they are a wealth of information, but you have to find one you can trust. There are a variety of programs for people who don't have the 20% to put down, but be sure you understand the type of loan you are getting before you commit. There are a lot of peopl right now in danger of losing their houses because they got interest-only or balloon-payment loans or ARMs and are now in more house than they can afford. If you don't understand the types of loans I am referring to, then look at the website I linked to and some of its links for an explanation.
posted by TedW at 10:33 AM on February 26, 2007

I would recommend calling a mortgage broker.

They can come up with a good basis of what to expect - we had no idea what we could or couldn't afford until we talked to her and got more an idea of what kind of loans we had the options of taking out, what kind of insurance costs, fees, etc.
posted by mckenney at 10:34 AM on February 26, 2007

Response by poster: Thank you for the website, TedW.

mckenney, this may sound like a stupid question, but I really don't know: do mortgage brokers charge you to speak with them?
posted by starbaby at 10:40 AM on February 26, 2007

You can always talk to a realtor-it's free and they can explain mortgage possibilities...it's in their best interest for people to get financing.
posted by konolia at 10:43 AM on February 26, 2007

I am a Realtor and talk to people all the time who aren't ready. Nothing wrong with having a friend/co-worker recommend someone and just meet at their office to talk about a game plan to someday buy!

I often have clients who don't want to "waste me time, they aren't ready to buy" but I like to get started. I have had people buy 2 years later finally. Not a big deal. In fact, I like to have stuff "in the pipeline".
posted by thilmony at 10:43 AM on February 26, 2007

Check your county's website to see what kind of housing programs they offer. The HOC in my county offers free homebuyer's education classes, as well as a glossery, faq, and links to credit resources.
posted by amarynth at 10:46 AM on February 26, 2007

I received some excellent advice when I asked about buying a home for the first time.
posted by Otis at 10:47 AM on February 26, 2007

Seconding the mortgage broker - get a recommendation from a friend if you can. That has been our most useful help so far (we're finishing up pre-qual right now), especially figuring out what is already going to be in the mortgage payment and what we need to plan for separately.

I would suggest starting with maybe a Dummies book, not because you're dumb but because those books are often very good glossaries. Knowing the language will help you get started. I borrowed a Kiplinger book from a friend but I didn't really like the way it was organized. Ask around - if you have friends and coworkers who have recently purchased, they've probably got some books you can borrow.

We originally talked to a mortgage broker about a year ago, ish, and he got us up to speed and convinced us to hold off until some various stars aligned credit-wise, which they did and then we started in again. You can do that, get advice and sit on it, without making any enemies. Don't badger her daily or anything, but even a not very long phone call with a good broker can start you in the right direction.

Search this site, too - I learned a great deal about getting a buyer's agent (which I think is what you mean by Realtor) and the process in general by reading this site.
posted by Lyn Never at 10:57 AM on February 26, 2007

If you're in the US, see if there is a credit union in your town. They are similar to banks, but more customer-friendly, less likely to screw you. They often do mortgages, and part of their mission is often to do educational work. Look up "credit union" in your phone book, and call around to see if any of them have mortgage brokers or counselors who could meet with you.
posted by LobsterMitten at 11:09 AM on February 26, 2007

I have no idea if they're found in libraries, but there are literally ...for dummies books about buying houses out there. I have the Canadian edition, and it's just about my speed.

I want to buy next year, and I'm incredibly intimidated at the thought, and I kept saying 'What I really need is a dummies guide that tells me what I need to do...' Then someone pointed out that there is, in fact, a dummies guide, so I bought it and it's been very helpful in a Hitch-Hiker's Guide to the Galaxy sort of way. I haven't actually used much of the information yet, but whenever I look at it, I feel the panic start to subside a little.
posted by jacquilynne at 11:19 AM on February 26, 2007

First off, don't be intimidated about buying a house. It can be overwhelming when you first start to think about it, but once you get into to it (and learn some of the vocabulary used by realtors and finance people) it can be really fun.

I recommend talking to a financing person - they are either mortgage brokers or banks who supply mortgages. Also, buy that "for dummies" book or other beginner type book.

The reason people put the 20% down is to avoid PMI, private mortgage insurance. As a first time home buyer, I was able to qualify for a particular loan where I could put 0% to X% down and avoid the PMI (which is usually at least $100 a month).

Good luck and have fun with it!!
posted by premortem at 11:35 AM on February 26, 2007

i believe that anybody, with creative dealmaking, can find a house to buy at any time, even with no money down and bad credit, heck, even if they're a prison inmate as long as they can get the classified ads and reach a phone.
in determining what kind of deal you can afford, one essential tool is a little booklet of loan amortization tables. you can look up the principal amount, term and interest rate and see what the monthly payments are right away, there are probably websites that do this too
have you considered a lease-option? you can gradually build up a down payment by paying slightly more money per month than straight rent, and exercise the option to buy at the end of the term. if real estate has appreciated during the term, you will have instant equity.
i recommend talking to a buyer's broker - a real estate broker who specializes in representing buyers. they'll tell you how you can afford to do this today.
posted by bruce at 11:54 AM on February 26, 2007

Nthing "Home Buying for Dummies." But don't drive yourself crazy. Also nthing that it's okay to talk to a realtor even if you're not "ready" and that when you are ready, the realtor will help move things along and facilitate the whole process.

Don't be afraid to ask for as much information and explanation as you need. Your mortgage broker (get recs) should be an invaluable source of information. If the mortgage guy isn't willing to explain everything, get a new guy. (Erm, make that gender-neutral. You know what I mean.)

The first mortgage broker we spoke to was dismissive of our assertion that we were only willing to pay a total of X per month, because X is far below the 1/3 of our pay that is typically quoted as a guideline. He had clearly made up his mind as to what we should be comfortable affording, and clearly got bored with our questions. I didn't realize what a jerk he was until I found our current mortgage broker, who has been patient, proactive, and has explained every aspect of the process multiple times.

There are a lot of different programs, particularly for first-time home buyers. If you have very good credit, you will qualify for programs that do not require a down payment.
posted by desuetude at 12:02 PM on February 26, 2007

Response by poster: Thanks for the answers! These are all great, and you guys are kind of talking me into going to talk to a professional. I have two questions before I do:

If my boy is going to be on the mortgage with me, will he have to come with to talk to people? To have them run his credit, etc? Or can I do this by myself and just have his financial information on hand?

Also, what constitutes a "good" or "great" credit score? We think we are doing okay, but we don't really have a basis for comparison. We do both know our credit scores [over 700], and have decent credit history. Is this good enough for some of the programs you guys are talking about? I just bought a car, does that screw me?
posted by starbaby at 12:24 PM on February 26, 2007

Do you need "your boy" to get the loan? If so, yes. If not, he wouldn't have to come with yet.
posted by thilmony at 12:30 PM on February 26, 2007

Response by poster: I don't know if I "need" him to qualify and things, but I want his name on it with me, as does he.
posted by starbaby at 12:48 PM on February 26, 2007

Last question first: you may need your boy when you actually buy the house (depending on your income, credit scores, etc etc etc), but you don't need him there when you go to have informational chats with mortgage people or agents. If he's busy, or not interested in the process, or you just want to do it yourself, you can always involve him at a later point when you need to.

And that's what I'd suggest you do first. Make a few appointments to talk with people. Get recommendations if you can, or just start with the mortgage officer at whatever bank you have your checking account at. Just tell them the truth --- you are interested in buying eventually, but not today, and you want to know more about the process, what programs are available, etc etc etc. They will see it as an investment in future business, and you aren't committed to dealing with them (don't sign anything now!).

It's a really intimidating process when you are looking at it the first time, and it seems really easy to get it wrong. Really, it isn't so hard (assuming you have enough income to not be stretched too far), and there are lots of people there to handhold you through the process.

There are a lot of good online mortgage calculators. It is worth spending some time with them, plugging in different numbers, to see what the implications of higher downpayments, or lower interest rates, or buying a more expensive house, are over the long term. You can also, before going into talk with the professionals, calculate figures like your debt-to-income ratio, that will affect how much you can borrow and and what rates. Again, there are online calculators for all of this.

This is also the time to think about your comfort with risk and uncertainty --- are you willing to extend yourself further with an adjustable rate mortgage? Or do you want the predictability of an old-fashioned fixed rate mortgage? Do you want a fixer-upper or a brand new house? And so on.
posted by Forktine at 12:58 PM on February 26, 2007

Generally, if you can get the loan on your own, you can use a partner's income as other income and not put him on the loan.

Your Credit Scores explains credit scores. You're fine, as long as your income is high enough that your car payment isn't really high compared to income. We are in the mid 600s with two new cars and are not making a down payment.

Most of your preliminary talks will happen by phone and/or email, unless you just really insist on a face-to-face. It's not a "take him with" situation so much as grabbing a copy of his last paycheck and a couple of other pieces of information so you know when you're asked. Even if you guys are going in together on the loan, it doesn't really take two to do the legwork, it just takes two to sign. (If you're not married, though, you really ought to set aside some cash and time together for a lawyer to get you guys set up in case something happens to one of you.)

I think your first step is to read the Dummies book so you can speak the language (and search online for things you want to know more about), after that take your numbers-specific questions to a mortgage broker, and then stop all real house-money activities for a bit and pretend house-shop. Spend some time online and then on the streets looking at properties, deciding what is and isn't for you, get a feel for how your local market acts, and then re-start the process for real.

Your number one landmine in home-buying these days is overextending - you will very likely be offered more mortgage than you can actually afford (out here in the real world where people have other expenses and like to eat food and stuff), and if you let that get all sparkly in your eyes you will get in over your head.

Decide first what you can afford to spend. I know that in some markets that magic 1/3 income (it's probably 1/3 gross, as well) will barely get you in, but based on your location in your profile you don't need to spend that much. We've agreed that 1/4 of our take-home monthly income is our maximum payment, and luckily that's enough to buy plenty of house in this market, and I can sleep at night because it means we'll have cash to spare.
posted by Lyn Never at 1:02 PM on February 26, 2007

You can just have his info handy at this point. I handled all the financial stuff for my SO and myself and I am the primary contact for the realtor, mortgage broker, homeowners insurance, etc.

Over 700 is very good. (If it's over 750, your score will likely be considered "excellent.")

Buying a car doesn't necessarily screw you. It is something that would be factored into your approval application, but I wouldn't worry about it too much. They'll generally pre-approve you for one heck of a lot more money than you'd ever be willing to take on.
posted by desuetude at 1:08 PM on February 26, 2007

Response by poster: I've tried the calculators, and of course, with just the mortgage we can afford huge amounts of house, but the problem I have with the calculators I have found is that that they will not factor in anything else but the actual mortgage. No PMI, no closing costs, taxes, etc. This makes it frustrating. I have read that closing costs are expected when you finish up with the buying part, and that they generally run 3-4% of the house. But I know nothing about PMI and how much it costs, how much home owners insurance costs, and what other costs need to be added when making the jump from renting to buying. Most of the books I have read just tell me to remember to factor in these things, but don't give me any tools to help me actually do this. That's what I need--a formula. But from what I am hearing, I can't figure that out on my own, I need to have a professional do it for me.

It is all very intimidating, and it's so very hard to be patient. I will try the ...for Dummies book when I can track it down.

Thank you, everyone!
posted by starbaby at 1:20 PM on February 26, 2007 [1 favorite]

Estimate your monthly PMI. That's fairly easy as it's based on mortgage assumptions. Insurance is so localized, you might call your car insurance agent and ask if there's a formula they use for estimating it. She might even be able to give you a table of ballpark numbers.
posted by Lyn Never at 1:27 PM on February 26, 2007

Oh, and just because I have this list of links on hand: The Tax Benefits of Home Ownership, Mortgage Loan Deduction Calculator, IRS: Tax Information for First-Time Homeowners (2005). It's not all spending; you're making some back too.

Also, we were told that property taxes would be rolled into our mortgage (mileage may vary - I don't know if that's a state thing). The yearly tax is in most MLS listings, but you'll have to find a search that actually shows it - some don't.
posted by Lyn Never at 1:38 PM on February 26, 2007

Response by poster: What all do you pay for monthly in relation to your house?

So far I've got mortgage principal and interest, PMI, property taxes, possibly closing costs if you have them figured in, and home-owner's insurance. Is there something else I'm forgetting? Not counting maintenance or condo fees or anything like that.
posted by starbaby at 1:45 PM on February 26, 2007

Do you belong to/have access to a Credit Union? CUs are famous for 100% financing without PMI.

I would recommend calling a mortgage broker.

Yikes. Most mortgage broker's I've ever experienced are sharks and crooks. Even if you find an honest one, they make their money by finding you a mortgage. You can just as easily do the research yourself and save yourself the commission.
posted by tdischino at 2:32 PM on February 26, 2007

Except that if you are anything like me, the process of finding out everything about all mortgages and doing all that legwork wasn't worth the money I would have saved.

You pay a price for a service - cleaning up our credit to get us a better loan and doing all that work so we just essentially had to provide paperwork, and show up at closing with a check was worth whatever it ended up costing us.
posted by mckenney at 3:42 PM on February 26, 2007

One thing to do is to look around for all the resources that might help you with your downpayment and closing costs. Often "low income" or "moderate income" buyers can get help with their downpayment. (And it may not feel low to you, but the government may still think it is.)

One good way to find these resources is to take a first-time homebuyers class. Here are some nonprofit providers of first-time homebuyer classes [PDF] in Pulaski County, Arkansas. These are often required for people getting financial assistance from the government, which is why so many of those classes have comments like "...Those who complete the program may qualify for up to $5,000 in grants from the Federal Home Loan Bank and from HUD when they buy a home."

You can also look around on your own for what might be available to you. Google "downpayment assistance [your city / county / state]" or "first time homebuyer [your city / county / state]." (Not sure you'll get much by state, but definitely search both city and county.) These programs are often government-funded but run by local community groups. As you're evaluating any program, you'll want to find out what they offer, and also whether your income is low enough to qualify. (This might influence whether you want to buy the place together or separately.) Income limits are often stated as percentages of the Area Median Income (AMI), which you can look up for anywhere in the country here (hint: MSA=city).

So for you, let's see. It seems like a lot of programs are set up by the Arkansas Development Finance Authority (skim down to "homeownership" for the list). There are two main types of programs: grants and loans. For people below 80% of AMI (in Pulaski County 80% is $43,400), there is the American Dream Downpayment Initiative, which provides small grants to help with closing costs. There is at least one more small grant program on that ADFA page. Even if you don't qualify for that one, you might still qualify for the HomeToOwn program, which loans people with incomes below $55,100 (for a 1-2 person household) money toward your downpayment. You do accrue interest on the loan (7.25%), but it would save you the money you'd otherwise have to spend on mortgage insurance.

While you're checking out the nonprofits that offer classes, you might see if there are any nonprofit affordable housing builders that are building affordable homes they plan to sell. There's a list of nonprofits that build affordable housing here [PDF]. There may not be many affordable houses being built and there might be a waiting list, so I'd personally probably go the other way unless I happened to like the project they were building. (The plus side is that it would be newly built, and it might come equipped with appliances.)

These programs & options seem really similar to what is available in my city, so they may hold true for other potential homebuyers around the US, but I do think every state is set up slightly differently. Good luck!
posted by salvia at 5:09 PM on February 26, 2007

When calculating how much money you have available for down payment/closing costs, keep in mind that the lender will want you not to spend down all of your savings to do this. They expect you to have a good chunk of money in reserve for emergencies, because if you're living paycheck to paycheck, you're a lot more likely to default the first time a financial crisis comes up. A good general rule is to have at least three months worth of living expenses in the bank that you never touch. Probably the lender won't require quite that much, but that should be your goal.

Also, I went to two lenders to get a quote and pre-approved. The first just took my info and told me that I could get a loan for $X. The other wrote up sample loan paperwork for me for $X that showed every line item of an actual loan - closing costs, fees, average local property tax, insurance, etc. and showed what my closing costs and monthly payment would be with everything included. It was really helpful.

You should go ahead and talk to a realtor now even if you don't know if you're ready or not. They will help you figure out what you can afford and if you're ready for homeownership. Any decent realtor is going to be helpful even if you're not ready to buy, because they'll want you to come back to them later on when you are ready.
posted by clarissajoy at 6:27 PM on February 26, 2007

tdischino's suggestion to go to a credit union is great. I have now refinanced my house twice through my credit union and got a good deal both times; in fact, one of the reasons I opened up my savings account at my credit union was to be able to take advantage of their generally good loans.
posted by TedW at 6:10 AM on February 27, 2007

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