I’ll add-do your house hunt with what you might need in 5 years in mind. You may not have kids now but in only a few short years things like how short a walk it is to the park or whether the local public schools are good could really matter. In my experience once people have kids they become cemented to a community and it becomes harder to move to uproot yourselves and move to a new town. It certainly happens, but you’ll have developed friendships that can be hard to leave. I know a lot of people who originally bought a house thinking they’d stay a couple of years then find that 10 or 20 years later they’re still in the same community.
@Finnlet you have received lots of great info and I just wanted to add my 2 cents since I am a Realtor. I’m not sure where you are but in my area (ME/NH) there are certainly some good reasons to have your own representation with an agent. I’m not saying you have to look specifically for someone designated as a “Buyers Agent” - just do not go directly to the listing agent if you fall in love with a home. Yes, you could go to a few local open houses and see how you like the personality of the person hosting and I do meet many buyers that way. ALSO, the options with mortgages nowadays really make it important to meet with someone who can help you choose exactly which mortgage program works for you. Maybe that will require 20% down but maybe it will not. They may have special programs with lender paid PMI or might have other things that work better for you to hold on to some of your cash that make sense to buy now instead of waiting until the interest rates go up. To have a true prequalification or preapproval from a trusted lender is huge before you even start looking at homes. The lender will also have a few names of good Realtors that they can offer you too. You do want someone with experience but you may not need the agent who sells the most in the area – you want someone who will have time for you and and good agent will do that and help you through every single step of the process making it as painless (and hopefully even fun!) as possible. They will have great project management and communication skills. Your idea of calling into an agency probably would not be my first recommendation (although when I was a brand new agent that is definitely how I got started!). good luck and have fun with it!!
There are ways, as already mentioned, to avoid PMI with less than 20% equity down. That said, just because you can doesn’t mean you should.
If I were you, I would create a budget and home cost that’s based on 20% down and stick to it. Way to easy to “creep” beyond the budget when you get the payment vs. cost mentality. “It’s only another $23 per month, let’s so it” . Three problems with that thinking:
Most importantly, it creates terrible lifelong financial habits (that will cost you a ton of real money later in life - like the ability to comfortably retire on less than you think)
With the best intentions in mid, what if you happen to lose your job, become ill, etc and are unable to make payments? Lenders will work with you if you have more equity.
A major reason for the financial meltdown was people were buying RE with very little or nothing down. Yes the industry made it easy. Yes their was tremendous institutional fraud. But there was just as much consumer greed and ignorance. For a time, it was automatically difficult to get a low down payment loan. Looks like we're creeping back to that and borrowers are raking on more debt than they should.
Create a budget and walk away from anything that exceeds the budget. Even if it takes you longer to find the right house. Trust me, the financial discipline you create will serve you so well your whole life. Living that way gives you tremendous freedom down stream.
“A major reason for the financial meltdown was people were buying RE with very little or nothing down. Yes the industry made it easy. Yes their was tremendous institutional fraud. But there was just as much consumer greed and ignorance. For a time, it was automatically difficult to get a low down payment loan. Looks like we’re creeping back to that and borrowers are raking on more debt than they should.”
^^This is just plain wrong. People buying home with little down was NOT the reason the RE meltdown happened. People have been buying with 5-10% down long before the meltdown. Lenders lending to people who were not creditworthy, creative first loan products that covered 125% equity, interest only loans, massive HELOcs, etc. - that’s what undermined the housing market.
^ that’s EXACTLY what I was talking about. Negative amortization interest loans. Non income verification loans. That is essentially people buying with little down. They bought WAY to much RE for their budget, got greedy and instead of ratcheting back, used these crazy loans to get in the market. Living in FL where this was rampant, I know SO many who became overnight RE investment experts by leveraging everything with these ridiculous loans because they couldn’t be 20% down (residential) or 30% (investment) down. Moral of the story is, if you can’t, don’t. Don’t find another way to take on debt you can’t afford to pay back when it hits the fan.
Don’t put it all on the lenders. Two parties in that relationship. Consumer greed and ignorance was just as much a cause. I’m no fan of the lenders, but let’s be real. No one forced anyone to take out a 125% loan. That’s just plain stupid.
My greater point was / is wait until you have 20% down so you don’t waste money on PMI or get over extended (80/10/10 loan). Just because VA and FHA loans allow for less, you would be wise to wait until you have the 20%. Nothing says you have to buy a house prior to that. Even if it takes a yr or two to get the extra down payment, you’re way better off in the longer run.
Thank you very much for calling us stupid. Had we waited to get that 20% down, we would have been throwing $$ away on renting an apartment with paper thin walls and pet ownership restrictions for quite a few years. We invested in our family’s quality of life - can’t buy time that already passed. What is unwise is treating the house you live in as an asset, and not a HOME. Now, carry on.
It’s not too difficult. You need two things to buy a house, a realtor and a mortgage company. Before you talk to a realtor, call a bank or mortgage lender and get a FULL pre-approval. A pre-approval is a letter saying that you have guaranteed financing up to a certain amount. Realtors like to steer home buyers to their favorite lenders, because they get kickbacks.
For a first-time buyer, I would avoid getting a fixer-upper or an older house. Most often, they turn into money pits. Get something within 10-15 years. Even better, you could buy a brand new house with a warrantee.
If you get approved to a certain amount, it doesn’t mean it’s a good idea to buy a house for that much. I would recommend getting something modest. This way you can save money back for repairs. A/C repairs seem to be the most common, at least that’s my experience. Each time ours broke, it was about $350 to fix. Even recent houses can have unexpected repairs. Hazards covered by your insurance, you still have to pay the deductible, and that could be $2,000 or more.
Don’t let a realtor pressure you into a house that doesn’t work for you. Make them show you lots of houses and choose the one that works best for you.
^^ “stupid” was pointed at the ones taking out those interest only mortgages with 0% down, not you :-* Sooo many ways for those to blow up, and, of course, they did.
My greater point to all of this is don’t bite off more than you can chew. Young people tend to feel their circumstances will only improve and fail to protect against certain risks. I did it too. We certainly want things to always improve, and often they do, but it would be prudent to plan for less than optimal results and mitigate some risk up front.
As a financial advisor who has literally visited with thousands of people, from the back room to the boardroom, I would just share that there are way to many folks who are too leveraged. You ultimately lose choices when over leveraged as things have to just work out. As a business partner once told me, “Hope isn’t an action plan”.
This is why I wish any OP posting about a product need/want that involves a price range or budget limitations would somewhat list those right off the bat.
We don’t know what part of the country OP is in, what his price range/limit is, what his potential for a rise in income is.
It’s easy to say “wait until you save 20%” but depending on circumstances - and perhaps throwing away nearly as much rent as you might spend on a mortgage - circumstances may make 20% a difficult/timely wait.
@Data10 my 24 year old son and his 23rd year old wife got a 310k mortgage a year ago and their pmi is just over 80 bucks. BUT I will say that anyone whose credit is bad enough that they have to pay high risk pmi rates, should not be buying a house.
@deb922: No, lenders are required to drop the pmi once you have 22% equity in the home. You do nit have to refi to get put of the pmi…Except FHA loans…the govt gets to screw you for the life of the loan.
A starter home in our area is $375000 (that’s a 2 bedroom 1000 Sq ft sor fixxer upper ranch). In this economy, rising interest rates and home prices would move that 20% goal post farther and farther away while a young couple likely would take many years saving up the original $75kplus several thousand more for closing costs goal. And, even if they could amass that fortune, they’d be better off keeping some of that cash in an emergency fund or a Roth IRA (assuming 401 contributions are max’d out of course) than tying it up in a down payment.
With a little sweat equity and home price inflation, it is not unrealistic to think a young couple could dump pmi in less than 5 years, making it a relatively insignificant cost of doing business.
With the exception of one rental property we bought via an exchange, I don’t think we’ve ever put 20% down on a property. We’ve made a fair bit of our retirement fund and general assets from investing in property starting with our first house that we owned. Leveraging works well if one is willing to do their homework and the math - along with decent assessments of the economy in an area.
But if one isn’t willing, then carry on as you see fit. Leveraged debt isn’t for everyone.
@Creekland…a couple of times when we’ve refinanced, after doing all the math, we deliberately put less than 20% down, allowing us extra cash to either remodel, (which quickly brought our ltv up to no-pmi required levels), or use the equity to buy our current forever home while keeping the refi’d home for a rental (meaning renters were paying for both rental and significant part of our primary home), or post 2008, invest the extra cash in additional retirement funds, which paid off BIGLY.
For disciplined folks with a good credit history and stable employment, less than 20% down payment can be one tool that is part of an overall financial plan.
I own a rental property valued around 400K. We are getting 2000k rent from the renters actually about $250 below market too). But you know what’s stupid? With 10% down, they could own that house for about $100 a month more than their rent. That additional payment would be more than negated with the deductions they could be getting as owners.
In the neighborhood I grew up in (starter homes in midwest) homes are selling for about 100-120. Rents on those houses are 1200 a month. So, for only 5% down on a $120K house, those folks could be paying $875 a month including PMI to own the house. sheesh. Every time I go there, I shake my head at the renters who have a $40000 truck sitting in their driveway. But I digress.
OP: Here is some mortgage advice I posted on another thread:
All quotes are negotiable. Drill that into their heads. I have negotiated down the rate and/or fees on every loan I’ve ever gotten.
It’s MUCH easier to compare apples to apples if all their quotes are for 0 fee loans (not 0 cost). In that case they only thing they need to compare is the rates. Have them check the APR. On a 0 fee loan quote, if the APR is not the same as the advertised rates, then there are hidden fees somewhere.
Title insurance, appraisal, inspections and prepaid insurance and taxes are not fees. Those expenses are roughly the same from company to company.
They should buy as much house as they can comfortably afford for their first home (meaning they can still sock away some money in retirement and emergency funds every month, but they might have to eat macaroni and cheese and watch library movies the first couple of years). Those payments will seem much easier in a couple of years AND they are more likely to stay in that first home longer if it is better and nicer than a cheaper home now. In the long run, the longer they stay in their first home, the more money they will save.
They can choose to pay a slightly higher interest rate in order to get a credit at closing that will cover some of their 3rd party expenses and prepaids. You have to do the math, but in my experience, that has always made more sense. The break even point is usually 4-7 years AND they get to keep more of their cash invested now(or they’ll need less down).
If they are putting down less than 20%, under no circumstances should they get an FHA loan. The difference in the rates are negligible at best, BUT with an FHA loan you have to pay the mortgage insurance for the life of the loan. With a conventional loan you can get out of the mortgage insurance once you have 20 to 25% equity in the home.
For the past 10 years or so, I’ve always gotten much better deals from a lender I found on bankrate or zillow (or last year, on Costco), than from a local lender. Do not let a local lender convince them that the service will be much better. As long as the lender has a lot of good reviews, and they have all their documentation in order, they will be fine. They just need to get through the loan process. After that, “service” is a non issue. They’ll make their payments by automatic draft and will likely never deal with the lender gain. Also, there is probably about a 75% chance their original loan will be sold to a different lender or service within the first couple of months after closing anyway.
7)Once they apply for the loan and sign a rate lock agreement, and start getting documents from the lender, they need to compare line by line every number in those documents. Many times, I have caught mistakes that were never in my favor.
This next piece of advice only applies to disciplined home buyers: IF they are easily tempted or flaky don’t share it. If they are pretty certain they will stay in their house less than 7 years, they are probably much better off getting a lower rate with an adjustable rate mortgage that is fixed for 7 years and either 1) investing the mortgage savings every month (preferable) or 2) making the same payment they would have paid with the fixed rates loan (thereby building up equity faster). In addition to saving or building up equity faster, they are also giving themselves the option of a smaller loan payment in the event of a real life emergency.
Do they have substantial deductions? If not, make sure they understand that with the new 24000 standard deduction for married couples, there won’t be any additional savings from interest or property tax deductions. As a young couple they should run from any agent or lender who tries to convince them they can afford a bigger mortgage payment on that basis.
Get to know what you want, what works for you, and what doesn’t work for you. There’s no perfect house except in the context of a specific set of desires, so figure out if you care about a fireplace or walkable streets or a huge yard or new amenities or old stained glass and woodwork, and then learn what the tradeoffs might be. An authentic old house with great woodwork and built-ins frequently comes with zero closet space. Walkable neighborhoods and huge yards don’t always mix because everything ends up so far apart. An old house in the burbs or a new house in the middle of the city are not always available. Decide what you’re looking for.
Instate near mom and dad or take the chance to move away? Most kids go to college near where they grew up because in-state universities are much more affordable than cool places far away. The neighborhoods most people can afford are not the cool ones they were checking out when first thinking of home ownership, so means will affect options.
The money part is super important, so learn how the financing works and really focus on what you can truly afford (rather than how much you’ll free up “when you need to.”) If you think the FAFSA was confusing just wait for the blizzard of home loan options. At least most schools only use that one set of paperwork, or maybe the CSS as well. Real estate is not so simple. Also, property taxes may not work like you expect, so learn everything before you jump in.
Don’t overreach. It’s more expensive than you think, and spending a bunch more just to get into the perfect area isn’t always worth it (but spending the absolute minimum in the face of actual drawbacks isn’t wise either.) Going for the highest ranked school you can get into is more expensive because it frequently means foregoing any hope of merit aid. Same with neighborhoods and school districts. But the value later in life or in resale might not justify the cost.
What you choose now and how you live there can determine what happens when you’re done. Did you let the place go to heck or did you do maintenance, which is the analog to “Did you go out four nights a week and major in, um, something or other that you could get the credits together for by May?” Put in the work and protect the investment. Going to a great school and screwing around negates some of the benefit of getting in and spending that money.
On the other hand you get the main benefit of home ownership right away: a place to live. It may not be exactly as you envision it, but once you get the family room cleaned up or paint those bedrooms or whatever it’ll be pretty close. So unless you’re expecting a fanciful amount of return on your real estate investment there’s no “someday I’ll turn this degree into a cable TV series like Jack Hanna” nonsense. You buy, you use, you may change or repair, then you sell. There’s some good concrete feels to be had.
Had we waited to get that 20% down, we would have been throwing $$ away on renting an apartment with paper thin walls and pet ownership restrictions for quite a few years. We invested in our family’s quality of life - can’t buy time that already passed.