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To Buy or to Rent
Hi, ladies! I'm popping over from TB, where I frequent TTGP and Attachment Parenting to bring you a question about buying a house.
In our area renting is expensive. We're in a 2br apartment paying $1700 per month, and that is a cheap apartment for this area. We desperately need more space, but without moving to an unsafe neighborhood, that can't happen for less than we pay now.
Buying would be great, because oddly enough a mortgage on a 3br+ house could equal or be less than what we pay now. Here's the thing, though. Because of a tight budget and terrible student loans, we don't have money for a down payment and would have to get a loan that's 100 percent financing. That limits our home buying options.
So in our position would you try to buy or find a place to rent? My mom says go for it and buy a home, and his dad says to find a cheaper rental...even if we have to go smaller. We are stressed and confused!
Re: To Buy or to Rent
Personally, I wouldn't go into it if I didn't have a down payment. Optimally you probably want to get a conventional loan. I believe you have to have 20% for that, but I could be wrong... It could be that you need to have 20% in order to avoid mortgage insurance.
Due to your outgoing debt, your debt to income ratio is probably going to be out of whack in the bank's opinion. You might not qualify for a loan right now anyway.
However it doesn't hurt to sit down with your bank's mortgage person or a mortgage broker. Bring in your statements of all your finances... Bank statements, debts and etc. This might be a good time to get a game plan so you can start the process of buying your own place. They may even give you some tips on what debts to pay down first and how to save at a better pace.
The market is being really flakey lately, so don't feel too bad if you don't buy right now. I know in just a day it went up by half a point.
my read shelf:
Find yourself a copy of Home Buying for Dummies - it will help you understand a lot about the process.
The rent versus buy question is a common one people face. It's best answered by a detailed and honest review of your finances.
The new "guidelines" (to help you not be house poor whether you rent or buy) for housing costs are as follows:
If you live in a low to mid cost of living area, your housing costs should be no more that 25-28% of your take home pay. If you live in a high cost of living area (sounds like you) your housing costs should be no more than 30% of your take home pay.
Take home pay is what you bring home after taxes, health insurance and retirement contributions are taken out.
Housing costs are rent or mortgage payment (principle and interest), renter's or home owner's insurance costs, property insurance, and major utilities (gas, water, sewer, trash, electric) all combined.
For example, if your take home pay is $70k annually your monthly housing cost in a high cost of living area, should be no more than 30%, which in this case, is $1,750. If you're making $70k after taxes, health insurance, and retirement, and your housing costs exceed $1,750, you are spending too much on housing.
Based on your current take home pay, in your high cost of living area, is a $1,700 rental payment PLUS major utilities and renter's insurance, less than, equal to, or more than 30%?
If it's more than 30% you need to find a cheaper rental or buy a home.
BUT, you need to remember with buying a home that the monthly housing cost (mortgage interest, principle, home owner's insurance, property taxes, and major utilities) still needs to be at or less than 30% of your take home pay. If you cannot find a home that meets this criteria, then you need to A. find a cheaper rental or B. move to a less costly area.
The other piece of this renting versus buying puzzle is the down payment issue. 100% financing loans are still available. However, they will require that you pay PMI, which is a mandatory insurance lenders require for borrowers without adequate down payments. PMI will be expensive and as of June 2013, it's required long-term on mortgages without decent down payments. This will be extremely costly over time. So, it's in your best interest due to PMI and other reasons, to have a down payment before buying.
If I had to choose one family member to follow it would be whomever said to find a cheaper rental even if that means moving to a different part of town or making a commute to work a little longer.
Based on the limited information you shared with your SLs, no down payment saved, and possibly even now over-spending on your rental, it doesn't sound like you are in a secure financial place to buy a home.
Yet.
If you would like help with your budget or some tips, you can post it over on Money Matters. Those ladies can help you prioritize your finances to help pay down debts, build down payment savings and build emergency fund savings.
Hello there!
Have you looked into an FHA loan? FHA loans only require 3.5% as down payment, but of course like a PP said then you have to pay mortgage insurance for the life of the loan.
Do either one of you have a 401k that you can withdrawal for the down payment? That is what we are going to do, even though we only need to put down 3.5% we are going to do much more than that with a 401 hardship withdrawal.
Withdrawing money from retirement IRA or 401(k) is not a wise financial decision...to buy a home, which is not a hardship scenario. It's a preference scenario in which you want something so badly that you aren't willing to wait to save the money you need for a down payment and will take a heavily penalized short-cut to get it.
Here's why it's an inadvisable decision...
The penalty and taxes you would need to pay on the withdrawal amount will significantly lower the amount you actually will get to utilize.
Also, by withdrawing funds from retirement, you are harming your long-term financial future...having a house NOW is not as important as being able to sustain yourself in your golden years so you don't have to go into debt, rely on family, or be on government assistance.
Retirement accounts grow due to the compounding of interest. By reducing the amount in your retirement, you are lessening that growth potential for future earnings. It might not seem like a big deal, but lessening the retirement amount now, can literally mean tens of thousands of dollars that you won't have in your retirement years when you need them.
Taking money from retirement to buy a home, is poor, poor advice. It only digs people further into debt in the long-run since then they don't have the money for their retirement years.
Having a roof over your head is a basic necessity. Having a roof over your head in the form of a home you cannot afford is not a necessity - it's an ill-advised desire. If you have to cheat your retirement account to buy a home, you cannot afford to buy a home. Period.
So 0% down loans do exist if you are willing to buy in certain areas (e.g. rural using a USDA loan or in questionable urban areas where cities have special programs to incentiveize home ownership as a method of trying to lift up struggling neighborhoods). And you would still need cash on hand to pay for closing costs (3-6% of your purchase price) AND still have an emergency fund equal to 3-6 months of your living expenses left over when all is said and done. And if these don't sound like areas where you want to buy, then you are also going to need a down payment, which means you will need to find a less expensive rental and/or eliminate some luxuries from your budget in order to be able to save. You can cut out cable service, become a 1 car household, etc. in order to save if becoming a home owner is a high priority for you.
Also remember that, just because the principle and interest payment for a mortgage may be less than your rent, you still have to factor in mortgage insurance, home owner's insurance, home owners association fees, property taxes, and home maintenance expenses. Those things can VERY easily make home ownership MORE expensive than renting. Plus you would want to paint, furnish the new house, do landscaping projects, etc., which all further increase your ownership costs.
It sounds like you may not have enough saved yet. I bought my house with very little down. You can look into down payment programs in your area. I am in Atlanta and this was the costs associated with mine -
$115,000 - cost of the house
$5,000 GA 1st time buy downpayment program ( I do have to pay it back but it is interest free until I sell or rent out the home)
$500 Earnest Money
$500 FHA Appraisal
$400 Inspection
$50 brought to closing
Now I had the seller pay 6% closing. I bought at a time that they market was pretty cold. It has gotten a lot busier in the last year so I don't know if they are still willing to pay that much in closing.
Good Luck! Please make sure that even if you get the house for very little out of pocket that you will need saving for a lot of things. The 3-6 months is a good idea before you buy.
Ok, well they don't have to do it the way we are doing it. If they preferred you can also just simply take a LOAN from your 401k that you PAY BACK if you want to just do the min 3.5% down payment.
We were unfortuantly forced to purchase before we were 100% ready due to renting conditions, which I won't even get into here.
But there is also the option of just taking a loan and paying it back with an automatic payroll deduction if you they would rather just do the 3.5%
In the 25-28% - be sure to include taxes.
In addition to your downpayment, you need to be prepared to pay for moving costs, utility deposits and start up costs, any repair/renovations needed, decorating & furniture/appliances, ladders, tools, yard items, lawn mower, snow removal, trash cans and a million small items. You STILL need to have an good emergency fund in place AFTER you have done all of this. (What if the furnace dies, or other unexpected event occurs?)
WHY do you need more space (assuming you have 2 people in this 2 bedroom)? Look at how you can better use the space by limiting items, go vertical with storage, furniture appropriately sized, muti use pieces. There are good books and websits on living in small spaces.
Can you increase your income? Get second PT jobs , sell items you no longer use or need?
Basically you do not sound financially prepared to own a house. So I would stay put or even move to a less costly place
Look at your current spending and cut back on your lifestyle (eating out, new clothes, vacations, entertainment etc.)
SAVE, SAVE, SAVE - then buy a home when you are financially ready. (remember you will need to replace vehicles in the future, utilities will cost more for a house and maintenance is an ongoing budget item.
Home Buying for Dummies and Mortgages for Dummies are must reads.
ETA: NEVER touch your retirement funds.
Thanks again, all! This has been super informative! We are going to rent another year and save as much as we can while trying to reduce our debt, and reassess then.
We need more space because DH needs an office space, we have a toddler and are trying for a second. 3br really would suit our needs much better than 2.
To only spend 30% of your take home income on a mortgage is not a realistic number in area's like where the OP is from. I agree it would be good to stick as close to 30% as possible, but I live in an extremely high cost area where that is almost impossible. My husband and I are spending closer to 45% of our income on our mortgage but we do not have any other outstanding debt. We also saved the 20% down which helped us tremendously.
I thought the same thing when I saw this. From what I've heard, your rent/mortgage should be 1/3 of your income before taxes. When it comes down to it, a family making 80k a year (almost double the national household income) is making about 4k a month after taxes. That means that family cannot afford a rent/mortgage payment higher than $1,200 a month. In New Jersey, it is close to impossible to find a 2 bedroom or better apartment to rent for that price, unless it's in a bad area.
It's fine for you to think this...but the 25%-30% figures come from people like Dave Ramsey, David Bach, and Suze Orman (posters here don't just make these things up). Clearly these folks have a lot figured out and are the respected names here on BAH and over on MM. If you think otherwise, again you're entitled to, but that thinking bucks the generally accepted "rules" for home buying and housing costs.
Regardless of where someone lives, the goal should be to not be mortgage poor so that people can save for retirement and pay off debts.
DIY & Home Decor Blog
I adore Ramsey, Orman...not so much. I think even Ramsey would say there are exceptions to the 30% rule. For example, if you look at a couple like my husband and I who have absolutely NO debt, NO car payments, and over 100k in savings (because we live below our means and are great at saving), we can afford to go over the 30%. It's situational.