How did you decide you were ready to buy?

Xstatic3333 · October 2013

H and I are at least two years out from looking for a home of our own, but we are starting to talk about what we want in our future home and take steps to be financially ready. We are of slightly different mindsets about it. It's definitely not something we fight about, but more of an open, ongoing conversation. I'd be really curious to hear about how you and your SO's decided when to take the plunge. As you'll probably be able to tell from our viewpoints, I'm more a saver by nature and he's more of a spender, although we are on the same page in general with our financial plan.

His view (he's 34): In two years, we can have a good 10% down payment saved up (plus closing costs and our e-fund), buy a home, and then pay a mortgage only slightly higher than our current rent (which is less than we can afford even now). We're in a HCOL area, and most of our friends only put 10% down, so it's totally fine. Our cars will be paid off by then, so we'll have plenty left over to save. We'll be in our new home before we start TTC (probably in around three years), and finally be able to really get settled with a garden, a dog, etc. Maybe we can get an FHA loan if our down payment seems too low for regular lenders.

My view: Even if 10% down is common in our area, I'd really feel more comfortable with 20%. Plus, this is the first time our relationship that we've both had good jobs. I'd rather put away for our down payment slowly while also budgeting for a couple of great trips before we TTC in a few years. If we wait four years to buy and TTC in a rental, I'm okay with that. Speaking of TTC, that's expensive too. Yes we'll have a good e-fund in two years, but our e-fund needs to be a lot bigger once we're homeowners in my opinion. Plus, buying a home is scary. I saw so many people who had to short-sell after the last crash, and it was absolutely awful for them. I definitely don't want to rush it. As for FHA loans, they have some drawbacks, and many of the "old New England farmhouse" style homes we both love don't qualify for them anyway.

The wrinkle in all of this is that our landlord is planning to sell our awesome, perfect-for-right-now, month to month rental in about two years, so delaying our homebuying by a couple of extra years may mean another move in between. I loathe moving, but I know that's not a good reason to make this decision. Since we're month-to-month, one option we're thinking about is looking at short sales once we have 20% of a short sale we like saved up. Houses we both like run around 200-250K retail, but seem to go for about 150K as short sales.

Anyway, I'd welcome an insights about our situation or your own!

hoffse · October 2013

H and I sound like you and your husband.

I am an over-planner, over-thinker, somewhat-paranoid-about-running-out-of-money type person. He is the exact opposite. I'm actually the spender because I want things - H doesn't want things that often so he rarely spends. Being both the spender and the paranoid one is an enormous conflict of interest, I can tell you! Anyway, here are some of my thoughts on this:

1) You have to take the plunge eventually. I really really hate change, and that's been a major hang-up for us. I am somewhat terrified by the entire process, and I'm trying to figure out how much of that is legitimate fear and how much of it is me resisting change to the status quo that I know works.

2) 20% down is ideal, but many people don't do that and do just fine. I'll be 100% honest - we are not going to buy with 20% down because we want to catch the bottom-ish of the housing market and interest rates. We can get a sweetheart deal through one of the banks who is a client of my firm, so we will put less than 20% down with no PMI. But even if I had to pay PMI I might go ahead and do it to get the interest rates locked in. As long as you have around 5% down, you can typically get a standard mortgage with PMI, and then the PMI drops off once you have 20% equity in your house. With 10% down you can do a 10/10/80 loan, which includes a second mortgage but eliminates PMI from the beginning. If the market were still crashing H and I would wait until we had the standard 20%. But rates are slowly but surely going back up, and we want to catch as much of the bottom as we can. That's not a choice for everybody, but it's the one we are probably going to make - we are also going to buy about 1/3 of the house the bank will tell us we can afford (I already have a sense of what this is), so the higher mortgage due to a smaller downpayment isn't going to be a major issue for us.

3) You're not buying a house at the height of the bubble. So while you have seen so many people struggle with an upside down house, you're not as likely to face that problem as they were. Being upside down comes from having a mortgage on your house that is higher than it's actual value. So buying a short sale or foreclosure almost always prevents this. Another way to prevent it is to look at other houses in the same neighborhood and make sure your house is not the most expensive one. That will help stabilize your home value from an appraisal standpoint - because really, it's anybody's guess what the value of the nicest house in the neighborhood should be. Frankly I'm not that concerned about this aspect of home ownership, because that bubble has long since burst, and we aren't anywhere close to the height of another one - at least not in real estate (I think student loans will be the next bubble, but that's a different topic).

4) I think it's important to really sit down with your calculator and hammer out some numbers. There are 10,000 mortgage calculators online that help tell you what a mortgage costs - and remember there are taxes, insurance, increased utility expenses, home maintenance costs, etc. that also add up. But before you let it scare you, really figure out what that means from a numbers perspective. I typically take the advertised interest rate for the 20% down, excellent credit buyers and add 1.5% to overestimate a bit to get my mortgage interest rate. Then I double my current utilities because a house is bigger than my apartment and will cost more to heat and cool. I look on the tax assessor's map and figure out how much property taxes are for that zip code, and then I do a rough estimate of homeowners insurance. What I have found is that even after all that, with our other expenses included, we will still have plenty leftover for savings, retirement, home repairs, and new stuff we will have to buy like a lawn mower. And that makes me feel confident we can handle it.

So conclusion: I'm just being paranoid. My fears are probably irrational and have more to do with my resisting change than anything else.

Something I always try to remember when I feel like things are tight is that more than 90% of people polled say that if they had just 10% more per month in income, their lives would be manageable. What that means is that it's in our nature to spend up to the limit of what we have available to us. In other words, it doesn't really matter how much house we buy - I will always wish we had more money and that we could save more of what we do bring home.

hoffse · October 2013

I should add - your fears might be very rational. The only way to know is by number crunching. Turns out, mine are not.

And yes, TTC is expensive. H and I plan to save about $15,000 for a first baby - and then hope that we have a lot leftover (whatever is leftover will go toward a college fund). I was worrying about this as well because we've talked about TTC soon after a house, and I was concerned we would not be able to afford both.

So one day I sat down with one of those massive baby registry lists from buy buy baby and got on Amazon.com to just add up what stuff costs without doing comparison shopping. I threw in some extra for maternity clothes, a birthing class, some extra decor (rug, lamp, paint, storage), etc. Then I read the "what does a baby cost" thread to get some ideas about delivery expenses. I did include more expensive versions of a stroller, pump, carseat, etc. in my estimates because I recognize that I might not be able to resist those when the time comes.

Ultimately, $15,000 really ought to be more than enough... and I know that when it's time to really buckle down with our research, we will always look for the best intersection between quality and price, and I will bargain-hunt like mad. So I would bet I overestimated the price of a lot of things.

After your start up expenses, your monthly costs kick in with things like health insurance premiums, diapers, formula (maybe), clothes, life insurance, daycare, college savings. I did include these in my "how much house can we afford" calculations so that we wouldn't bankrupt ourselves with a baby right after we moved in.

Ducktale · October 2013

I think everything that has happened recently with the housing market has caused a lot of fear of buying a house. I think some is healthy, because it's quite obvious that people were buying more house than they could afford. But if you're good with money and plan ahead, don't let paranoia overtake you.

We put down 10% on our house. We decided it was a good time to buy because the home prices and interest rates were crazy low at the time, so we wanted to get in on that, knowing we would buy sometime in the next few years anyway. We saved aggressively for that 10% and then purchased it. We knew we were ready because we did our homework and knew what we needed to save, what our monthly payments would be, etc. and what we had been paying in rent was only a little less than the mortgage/insurance/taxes/PMI. So we did it. (side note: our mortgage lender and realtor were very impressed we had a 10% downpayment. Must not be that common where we are?)

I know we were nervous, just paranoid because we purchased the home in 2011 in the midst of the foreclosure rates skyrocketing, and kept thinking--what if that happens to us?

Two biggest pieces of advice:

One is the obvious, DO NOT buy more house than you can afford. We were approved for a mortgage that was twice as much as the house we bought. Many people around you may have big fancy brand new homes, but take a look at the numbers, think long term, and be honest with yourself.

And two, make sure you get a reliable inspection and if they find things that are too risky or could cause long term issues or are signs that the house is not in good conditions...walk away (example: shoddy electrical work, cracks in the foundation, etc. While these can be fixed in the short term, they may be signs of more extensive problems that may not manifest for years).

Home buying does come with risks. It's true. The repairs you have can be expensive. I'm an over planner/over thinker/paranoid about what COULD happen kind of person. But at some point, you just jump in. Be smart, have a comfortable efund, stable jobs, etc. What I have found is that USUALLY the repairs needed are spaced out, and come with some advanced warning. For example, needing a new roof is a huge expense, but you typically know you'll need a new roof well in advance and can save (and if you need a new roof suddenly, it's usually due to something in which homeowners insurance would cover it anyway). Our most expensive sudden/no warning home expense cost us $1500, which our efund can more than easily cover.

maple2 · October 2013

For us, the deciding factor was circumstances. We made a move for a job that we knew had a lot of security, so we weren't too worried about long-term financial problems. We had enough saved for 10% down. We were looking during the bottom of the market, so we knew waiting until we had more for a down payment would definitely raise our interest rates significantly. We also had young children and did not particularly want to move twice in a short period of time, especially since school attendance might become a factor.

In your situation, I'm not sure what I would do. Like pp mentioned, there would be trade-offs worth considering in terms of higher interest rates but no PMI in the future when you have 20% down versus lower interest rates plus PMI sooner because you don't have 20% down. That would be a difficult calculation since it involves predictions about future interest rates, but it would be a useful thought experiment. At what future interest rate is it economically better to buy now? How likely do you think it is that interest rates would reach that level by the time you would buy? In terms of other financial priorities, assuming you are correct that your mortgage would only be slightly higher than your current lease, wouldn't you be able to buy a house and still afford to do things like save for vacations and TTC?

Another important consideration is the time and effort involved in owning a house. I was pretty old compared to lots of people on this board when we bought our first house, and though it was at times frustrating to spend so much on rent without building any equity, it was also great not to have the responsibility for yard maintenance, building repairs, etc. While I do enjoy having a yard that's good for entertaining, a garden, and the fun of personalizing a space I will live in for years, I also have to spend a lot more time every week on things like mowing, weeding, fixing holes in the walls, hiring an electrician, etc. You should also think about whether or not you want to give up some of your free time for those types of activities or enjoy the lack of home owning responsibility a little longer.

Xstatic3333 · October 2013

Thanks all for your thoughts! This is a rare situation where I am glad to hear that some agree with H instead of me

I think a few of things are clear-10% down may be fine for our situation, I need to sit down and crunch the numbers to see what we'll really be able to afford like @hoffse mentioned, and that I need to do more research about how mortgages work in general. All that I've had drummed into my head by my family and more financially-responsible friends is "30-year fixed, but pay it off early." What I really need to learn about is the different scenarios regarding down payment size and PMI. I'll have to look into the 10/10/80 scenario as well.

I definitely agree that we don't want more house than we can afford! We're looking at homes with three bedrooms and 1.5 or more baths, which should last us through our adulthood, but we don't need anything fancy. We talked about looking at "starter homes" with 2BR/1 bath, but we'll both be in our 30s by the time we buy so decided against it. It is also a good point that we'll still be able to save for travel and TTC once we're in our new home. I think my concern was more that those two items (and travel is the only one that's an immediate concern) would suffer if we save aggressively for a down payment. Travel is pretty important to me; I'm not a big shopper, so that's what I save a lot of my "fun" budget for. We have decided to take a trip this year, but already have money in the bank for it. Maybe we could skip big travel next year and do something fun close to home.

How our job situations play out will also be a big factor. We're both at least partially federally funded (but not federal employees), so recent events have definitely had me on financial edge. That said, there's no reason beyond our crazy government to expect problems for either of us anytime soon.

brij2006 · October 2013

Ours was situational also. We bought a home after H and I got our jobs right out of college. The reason we chose to purchase was because it was much cheaper than renting. Rent for a 1br apartment was $550/month. Our mortgage is a little over $300 for a 4 br home. But we were only looking at fixer uppers, and we wanted to be able to put some sweat equity into our home. So we mostly looked at foreclosures. We also didn't put any money down, but that's because our mortgage was only 60% of the appraisal. So we did not need a down payment. Instead we used that money to put into the home and fix it up.

We also knew that we weren't going to TTC for at least 5 years, and we could easily afford our mortgage along with doing a lot of traveling and paying down debt. We have never regretted purchasing our home, even though we did not have 6 months in our E-fund and had just started our jobs. It probably wasn't the best time for us to buy, but our house was exactly what we wanted and our mortgage is cheap.

anssett · October 2013

I'm not buying without that 20% downpayment. I want the security and equity that brings. I want to avoid PMI. I want to prove to myself (and H) that we are in financial shape to own. Not everyone is like that and that's OK. But if you feel squicky about buying sooner, rent longer and wait.

EDIT: also, we're in a HCOL and I don't think that's an excuse to short change the downpayment, FOR US.

hoffse · October 2013

OP, also think about things like how long you are going to stay in your house. I'm a lawyer and H is about to be one, so in 7 years one or both of us ought to have partnered. We are also on target to have student loans paid off by then. So at that point our financial situation will change. Dramatically. To give you some perspective, our student loan payments are triple what many people pay on their mortgage or rent... so that's a major chunk of change we will no longer be spending once those are done. We are considering (not convinced yet but considering) a 7/1 ARM for us - you break even after about 10ish years in the worst case scenario for most of them, and I have to imagine that by 10 years in the house we will be ready to move to a non-starter home - because by then our financial situation will allow it.

The 30-year fixed is definitely a good idea if you're going to stay in a house longer than the break-even point on ARMs. But if you're not, ARMs are something to consider as well. At the very least, I think it's important to learn how they work in life.

The problem with financial "rules" is that everybody's situation is different. What is best for your friends may not be best you (and frankly, it might not be best for them either, and they're just unaware....). It takes time to sift through the various options and decide what makes the most sense for you. The best thing you can do is research, research, research, and then slowly but surely eliminate possibilities that don't fit well with your financial situation and long-term goals. But don't rule anything out until you've ran the numbers and determined that a given option won't work for you. With at least 2 years before you buy, you have plenty of time to really get up to speed on the various options.

And please do research PMI and the FHA loans. The rules for FHA loans changed in June, and PMI now attaches for the life of the loan until you sell or re-finance. For FHA loans only, PMI no longer drops off at 20% equity like it used to. Again, not necessarily bad - if you don't plan to be in your house that long you might be paying PMI the entire time with a conventional loan anyway. And FHA interest rates are often lower than conforming rates. But you need to number crunch to find the break-even point.

How do you get an estimate for how long you will be paying PMI on a conforming loan? Multiply the asking price on the house by 0.2 to find out what 20% is. Then subtract your downpayment. This is the balance you have to make up in equity before PMI drops off. Use this calculator without adding in any extra payments (and click on the button that says display loan schedule) to see how your interest is amortized over the length of the loan. Scroll down until you find the number where the PRINCIPAL you have paid equals the balance you need to get to 20% equity:

http://www.decisionaide.com/mpcalculators/extrapaymentscalculator/ExtraPayments1.asp

This isn't perfect because like brij mentioned you may get a hell of a deal on a house. In which case, you walk into equity. But it's a pretty good estimate most times.

Xstatic3333 · October 2013

Wow, thank you all for the advice! Looks like I've got some homework to do! We are looking to be in this house for 20+ years, but I'll still look at how ARMs work to stay informed. How soon before buying did you all first meet with a mortgage broker or bank?

hoffse · October 2013

I would talk to banks a month or two out from your target buy-date. The bank will give you a letter with a pre-approval amount, and they are usually good for 30 days. You can often have them reissue a new one if it takes you longer than that to find a house, as long as nothing has dramatically changed. Eventually, though, they will want to run your credit again to double check. Some banks may let their letters last longer than 30 days so you might want to call around.

One thing that's a pretty safe bet is that the bank is likely to pre-approve you for more than you should actually be spending. Here's a very basic "how much house can you afford" calculator that looks at your debt-to-income ratio to give you a guess of what the bank would approve you for:

http://www.bankrate.com/calculators/mortgages/new-house-calculator.aspx

If it were me, I would cut that number down by at least 1/4 to 1/3 to figure out what I could actually afford. These calculators tend to be on the high side. Keep in mind it will vary a bit based on your credit score too.

How much per month your housing payment should be is something that gets debated a lot. In general, I agree with this article, but as you can see there are lots of opinions on the topic:

http://www.moneyunder30.com/percentage-income-mortgage-payments

For us, we want to make it as low as we can get while still having enough space and amenities to make it a place we want to live for 10 years. I made the mistake of renting a very nice apartment as my one and only real lawyer splurge, so now I'm spoiled. My goal is to find something as nice or nicer than my apartment, while still sticking to the recommendations in the article above. That will be a challenge.

If you're looking at 20+ years then an ARM isn't likely to work for you. You will probably want a 30 year fixed instead. But I would still read up on them because a sneaky banker might try to sell you on the lower intro rate with an ARM. That could still be a good choice if your income is going to change a lot in 5-7 years like ours will, or if you are determined to (and actually do) pre-pay your mortgage during the intro rate period. But otherwise, you will probably spend more in interest with an ARM than a 30-yr fixed. Again, crunch the numbers and also take into account your inclination (or in my case disinclination) to pre-pay on a mortgage. Then find the break even point after the lenders give you the rates you are eligible for with the various options. I love this website - the calculators are a lot more in-depth than most of the basic (ahem: crappy) ones that come up with a google search. I rather like playing around with them to see what various combinations will do. But I'm probably strange like that:

http://www.mtgprofessor.com/calculators.htm

hoffse · October 2013

Also, some good articles from my favorite mortgage education website (the one that has all the calculators):

http://www.mtgprofessor.com/A%20-%20Purchasing%20a%20House/Who_Should_Be_Homeowner.html

http://www.mtgprofessor.com/A%20-%20Purchasing%20a%20House/how_much_house_can_you_afford.htm

http://www.mtgprofessor.com/A%20-%20Purchasing%20a%20House/How_much_house_should_you_buy.htm

hoffse · October 2013

And this might be the best of all. OK, I'll stop now

http://www.mtgprofessor.com/A%20-%20Interest%20Rates/How-Much-Higher-Is-Your-Mortgage-Price.html

vlagrl29 · October 2013

It's been about 7 years since we bought our home but we put 20% down and I would definatly recommend doing that if you can.

Xstatic3333 · October 2013

Great website recommendation! The first "basic" calculator you linked gave me a minor heart attack when I accidentally put in only H's income (math on a Saturday...) but once I got it straight it seems like we're on the right track. It definitely aims high; in our best case scenario they have us "approved" for about 33% more than what I feel comfortable with. There is still a large part of me that's still with @ansett and @vlagrl29 and wants that 20% though. Either way, we have some time to research and thanks to you all some great food for thought.

MrsD06 · October 2013

I agree with you on the down payment. The more you have the better your options will be in choosing the loan that best suites you. But as an FYI, FHA loans now have PMI attached for the life of the loan rather than it dropping off after you've reached $20k in equity. You may still want to go the FHA route, however there could be other loans better suited for you.

Jokerkat12 · October 2013

Hi!

As a Realtor I'm seeing more and more people put 10% down and be just fine!

Keep in mind that the longer you wait, the higher the interest rates and home prices get.

What may be a 20% deposit this year may actually only be a 10% deposit in 4 years if the home prices keep rising the way they have been.

Also, we're at historically low interest rates. 7-13% used to be the norm.

As other people mentioned ARMs can get you a great rate if you plan on moving in a few years and just getting a starter home for some equity.

I would start by talking to a lender about what you can realistically afford on your income and how much the lender would want you to have for a down payment for the best interest rate.

Also, something I often advise my clients who aren't looking to buy immediately- Go look at open houses in your price range and get an idea of the style and neighborhoods you both like.

That way when it comes time to buy you're both on the same page and ready to jump!

Good luck!

short+sassy · November 2013

Quite frankly, I should have bought my first home years earlier than I did. I was just too "nervous" about it. One thing that helped me take the leap was taking a home buyer education course. Although I already knew a lot of the information, it helped to gel everything together and I did learn a lot also. But the main thing it did was to greatly increase my confidence in making the right decisions.

I took the course after I realized I could buy a duplex and the rent for the other side would more than pay for my mortgage.

Xstatic3333 · November 2013

H and I are definitely on the lookout for a homebuyer education course! I know most of them are run by real estate agents looking for our business, but we'll go in with a skeptical eye and not get talked into anything too soon.

We had a talk the other day that really made me realize why we have different ideas about the kind of house we think we can afford. When we first started talking, I arbitrarily threw out the number 250K as our max budget. After more research and number crunching I want to lower that amount to 200ish (depending on property taxes) and consider 2 BR starter homes (if these numbers seem crazy to anyone, we're in MA and they will actually be pretty limiting). However, H seems to get a little judgey when I show him ads of what I consider to be good bargain homes. He phrased it as, "I want to get the best possible house we can for what we can afford to spend." My attitude had been to set a max budget, but then see how far below it we can come in. Basically, I think I'll have to look hard at our finances in a year and then set a conservative max budget to get us on the same page. (I know it sounds like I'm dictating everything here, but we're both cool with me taking the lead on financial planning).

tlc35 · November 2013

I was told that once I reached 20% equity, the PMI would drop off, but once I reached that point I was told that I couldn't get rid of the PMI since I hadn't owned the house for 5 years yet unless I refinanced. I was very annoyed by this. My lender told me initially it would be feasible but then my loan was sold to wells-fargo.

Belthil · November 2013

Our situation was a little different. I was going to grad school 16 hours away from where and then FI and our families lived. He was living in an apartment on the second floor of a business and had a mouse problem (and had a landlord that would reimburse him for mouse traps but wouldn't do anything proactive). This is where I was planning on moving to when I graduated.

A family friend mentioned to my mom one day that their neighbour's house was for sale. My mom looked into it and shared it with my H and I. We were both open to the idea as neither of us liked the apartment and wanted him out ASAP (he was also on a month-to-month rent). The mortgage that he got was a few dollars more a month than what he was paying in rent which was still okay for his budget.

As putting an offer was spur of the moment for us we hadn't started saving for a down payment and our parents were nice enough to loan us the money. We were lucky that we had the support that we did because without them we would still be in the apartment with a few extra furry friends.

With our parents help we were able to put 20% down which is why we think we got the house, there was nothing else available that wouldn't require tearing down the house and building new within our price range so the offers were pretty competitive.

I think if you can manage it 20% is a better down payment because it makes your offer stand out more if there are multiple offers and it requires you to borrow less (yay less interest!)

moonprincessd · November 2013

We saved and ended up doing a 10% down payment, and pay the extra until we make it to 20%. It's not very much in our area.

If we could it again, I think we would have wait a little longer, but only because we weren't expecting the unfortunate issues we had with our home. We currently discovered roots in our plumbing, so now we might have to replace the pipes.

So my advice would be to save up. There is only so much your inspector can or is allowed to check unless you include it in you're contract.

How did you decide you were ready to buy?

Re: How did you decide you were ready to buy?

Choose Another Board

Search Boards