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So I'm a fairly recent college grad (graduated Spring 06, I'm 23), in the corporate working world for a little over a year. I'm not married, but know I would like to get married at some point, and so I'm trying to plan ahead a bit for purchasing a home in the future. The problem is, I'm pretty well clueless as to everything involved with buying a home and was hoping you guys/girls might be able to help.
Some information on my personal finances:
Annual salary (pre-tax): $38K
College loans: $36K (15 year payoff, 1 year in)
Car loan: $5K (5 year payoff, 6 months in)
Credit card debt: $0
Savings: $500 (I just paid off about $3k worth of CC debt)
Credit scores (from the 3 majors) were in the 730-740 range at last check.
Future considerations:
House
Engagement Ring
Wedding/Honeymoon
401k
Also, possibly considering added income (I'm guessing of equal to or less than my salary) of future spouse.
So for purchasing a house, what would be a good price range to look at? For down payment, what is a good amount? I see all this stuff floating around about 100% mortgages, 80/20 (does this mean 20% down?), 5%, 10%. Is there a good number to aim for? Is it bad to take a 100% mortgage? Are they common?
Anything else to consider that I haven't even thought about? Thanks in advance
Your credit score is good, keep making all your payments on time. The number that may hit you the hardest is debt to income. Generally the old rule was about 28% of your income. So if you're bringing home about $2500/month after taxes - that's about a $750monthly mortgage payment. Some lenders are easing up on that (they'll let you carry more mortgage debt), but with the recent tightening of standards the old rules look very sensible to prevent your from getting in over your head.
At today's rates, we'll give you 6.25% cause of your excellent credit scores (you might be able to do a little better), you could mortgage 125,000 and have a monthly payment of $769.
Now remember, you'll have to pay property taxes and mortgage insurance on top of that (if you don't have a 20% down payment). Or, you could take a second mortgage (80/20) for the 20% down payment and avoid mortgage insurance. Of course the second mortgage is at a higher interest rate than the first mortgage (that's just the way it works).
Keep saving your money. You probably can still get 100% financing loans, but they're viewed as riskier as essentially you don't have any "money in the game" - meaning if times get hard they figure you'll walk away. Where as if you put 10% down (20% is ideal), they figure you have a high stake in making sure you can afford the place.
Main thing is to keep your credit score high, look realistically at your monthly budgets and then don't necessarily spend all the money they approve you for. You'd be surprised how much "above your means" they'd be happy to have you living at!
Good luck!
PS: 80/20 (80% value of home 1st loan, 20% value of home 2nd loan -- avoids PMI)
80/10/10: 80% first loan, 10% second loan, 10% down payment.
ditto everything, with a few additional thoughts.
First check out if your Bank of America has what they call an 'ACORN' load, which here in California is up to 500,000, which normally qualifies as a Jumbo Loan with a hefty 7.5 percent cost for that money. The acorn loan right now is about 6.5 or so. Your credit score is important so don't buy any large ticket items before you purchase your home. No new car, no new Steinway.
I am not sold on BofA as a lender, there are plenty out there. I mention this only because someone recently reminded me of it, and for some people it's a good fit.
The acorn loan has really good DTI - that's the ratio mentioned in another brief - the debt to income ratio - in this case they make allowances up to 50%. You have limitations on what you can earn to qualify for this type of loan, you cannot be making over 104000 in CA.
Make friends with a trusty lender because these guys make their living finding you the right loan, and some are not interested in you as a person with a goal and a future, but only look at you as a commission. Ask them for their clients names and do some checking, make sure you get the right loan - with no prepayment penalty and ask a lot of questions. If it is unclear don't do it. Don't get a hybrid or interest only loan - those will backfire and put you in distress.
Other things you can look at are first time home buyer programs, where you are granted some money and don't have it pay it back if you stay in the home for 5 years or more - some of these kinds of things will give you 5-8K in cash for closing costs etc.
Once you have your lender in hand and know what sort of payment you can make with the right program - then you will know how much of a range you can purchase without distress. Let's say it's somewhere between 350K and 400K home. Don't forget to add to the mortgage the insurance and property taxes. That means it's not just the mortgage anymore, it's about another 300 bucks a month more, more or less.
80-20 means the first is 80% of the purchase price, and the 20% is the second loan which brings the total to 100% of the purchase price.
If you had 10% down, on a 400,000 home - 40,000$ then you could take out a loan for 90% of the purchase price. Figure out if you can get a loan without having to pay private mortgage insurance, which can be another expense to consider. You should get a loan without having to pay that.
Then pick a realtor and start touring neighborhoods! Make sure you get current paperwork on houses in the neighborhood you like that have sold, to see what they actually sold for. That means you might have to wait 30 days after the house sold and recorded before that information becomes public. If you go to an open house ask a lot of questions. Find someone you like willing to put you in their car and go shopping for a home every weekend.
Good LUCK!
one other thought - you might fare better for the first two or three years getting into a very very decent highly resellable and well located Condo. Find out if they appreciate at all, not counting the current housing slump - because when the slump ends the homes will trend back to where they were trending before, just make sure it is up!
After you have equity in the Condo and have increased your earning power then you can start looking for a single family. Don't think of your home purchase as your last purchase in real estate but only the first. The first one should be something you think of as in investment rather than as a quality of life decision. Two different things.
Last edited by eddierosenthal; 09-12-2007 at 05:11 PM..
I don't want to sound moralistic, but with an annual pre-tax salary of $38k and $500 of liquid assets, I don't think it is a good idea to buy a house. I'd work on getting a few good pay raises and save some money.
And don't even think about a jumbo loan with those financials.
Remember -- there are still parts of the world where you can get a starter home for 80K or so! If you live in one of those places (midwest mainly, but possibly other areas), and you think you're ready for a home in the next couple of years - I'd work mainly on saving up some money (so you can put down a bigger down payment) and keeping your credit rating high. 38K is reasonable money for being just out of school, it just depends on where you live. Obviously in California that is essentially poverty. In the midwest - outside of Detroit, Cincinnati, etc.. you could find a fixer upper, or a small starter home, or even a condo. And with foreclosures due to mortgage resets, you might find more than that.
Just remember most importantly - its not just the mortgage payment and the taxes, its the fact that you pay all your own utilities (there's no landlord picking up the heat bill), you may even have to pay a garbage fee and a sewage fee. More importantly, if something goes wrong with the house (you don't get a home inspection and find out you need a new roof) - that's all coming out of your pocket. So, having a savings account isn't just important for the money you can put down on a house, but its important to keep you from going into credit debt on normal wear and tear upkeep after you buy the house!
that said - good luck - if you decide to buy, just be rational and you'll do fine!
Yeah, there are cheap starter homes, all right. But $500 (five hundred) of liquid assets. And no stock portfolio or assets and a whole year pre-tax income in debt. I am sorry, but the last thing you should do is finance (I am not calling it buying) a home.
Yeah, there are cheap starter homes, all right. But $500 (five hundred) of liquid assets. And no stock portfolio or assets and a whole year pre-tax income in debt. I am sorry, but the last thing you should do is finance (I am not calling it buying) a home.
$500 total is horribly little cash.
Thanks for the replies so far guys :-)
I should've clarified a bit, when I mean the future, I'm talking about well after I get married (seeing as how I've only been dating someone for about a month). A conservative estimate would place a home purchase at 5 to 7 years down the road).
I do realize that the $500 is very little, however I've more or less acquired all of the essentials and a few 'wants' that I forsee purchasing for some time. So for a little further breakdown of current finances:
I'm currently renting (with 2 housemates) a house in Upstate NY. After all utilities, rent, insurance, loan payments, phone bills, food (which total approximately $1050/month), I've been spending approximately $450/month in dining out, entertainment, and non-necessities. This ends up leaving about $500/month to go towards savings or towards spending (which it has primarily been).
At this point, post-taxes, health insurance premiums, etc. I'm bringing home $1050 every 2 weeks. So I actually end up with close to $1k/month in 'disposable' income (and I have realized that I've been basically throwing money away on going out and having fun, I figured I deserved a break since I worked my a$$ off through college and had no fun).
That is basically why I'm here, to begin the process of planning ahead, and start using my 'disposable' income more wisely.
As far as other assets, I did forget that I have somewhere around $1000-$2000 in savings bonds (currently available, gift from grandparents when I was a baby) and another $1000 in a mutual fund (but I haven't touched it in 8 or 9 years).
I would encourage you to go to your local library and educate yourself a bit. Home Buying For Dummies and 100 Questions Every First-Time Home Buyer Should Ask by Ilyce Glink are two easy to read books that give great overviews of the home buying process, and how to prepare for it.
Don't forget to throw some of your hard-earned savings into some sort of a retirement fund, too.
Here's my two cents... most women are going to want to pick out their own house and will most likely not want to live in your house, so save, save, save, your money and when you find Ms. Right, you'll be in a great financial position to start your marriage off with a home that you both picked.
Trust me on this one, I know of what I speak.
Good luck!!
Oh, and try not to pick a Ms. Right who comes to the table with no cash and a pig pile of debt. Love is cool and all, but it don't pay the bills.
Planning ahead....I would take a portion of your disposable income and first pay off that car post-haste. When you finish that, take that money plus what you are already paying and go after the student loans as hard and fast as possible. You could probably pay it all off in about three years if you worked at it. Next, take all that money you were using to pay everything off and stick it in a savings account or CDs to make up your down payment for the house plus an emergency stash (after three years you won't miss the extra cash to play with). Did this myself and bought my house and just payed cash for my new car. It very freeing only being in debt on the house which, now that the new car is accomplished, I hope to pay off in 5-7 years (30 year mortage w/ no prepay penalty).
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how to buy a home
