Homeowners--first time buyer questions

[puma1552]

Me and the wifey-to-be will be looking at purchasing our first home in the next year or two, and I have some questions.

1) Our combined income will be around the $85k mark. From what I read, this means that, using the rule of thumb that you can comfortably afford a house that's 3x your income, we should be ok for a mortgage on a house costing upwards of $255k. Does this sound right for an upper ceiling with $85k in household income?

2) We probably won't be able to do 20% down + closing costs. We could certainly do 5% down + closing costs, or maybe 10% depending on the price of the house. We are looking at houses in the $200k-$220k range. Thinking about it, We could probably have about $20,000-$25,000 total to put towards the house, for both the house and the closing costs. How would this affect our ability to get a house in the ~210k range? Is a $210k house still realistic? FWIW I have an $18k student loan, which is $230 a month; that is our only debt.

3) What kind of rate can we expect? My credit scores average over 780, I'm turning 27 soon with four loans behind me (2 auto, 2 personal, all paid off early), a couple credit cards, and flawless payment history back to age 18. My wifey-to-be is Japanese, and will be immigrating to the US with me later this year, so she doesn't have any credit history in America. How much will this impact our rate? Or alternatively, since we will be married, could I just put the mortgage in my name initially, and still be able to use the combined income on the loan application since we are married and lock down the lowest rate, then just add her name to the mortgage after the fact?

4) I understand that paying 20% down gets you out of PMI, but I really doubt we will have 20% down, and thus will have to pay PMI. I understand that PMI is insurance for your lender in case you default when you owe more than the house is worth, or close to it; so on that thought, does PMI last the entire life of the loan, or only until you've reached a certain equity threshold when you are plenty comfortably ahead on mortgage loan vs. home value?

5) Are property taxes something you have to save up for all year and then pay as like a once-a-year bill, or are property taxes something that are just factored automatically into the loan that you don't have to worry about setting extra money aside for?

6) If a house costs $210k ("sticker price"), what other fees and expenses on top of that do I need to plan on? $210k + closing costs? What else? Basically if I see a house sticker for $210k, what is the real value that I need to plan on from which to pay closing costs and a down payment on?

7) The down payment is a percentage ONLY applied to the "sticker/sale price" of the home, correct? If the house is $200k, then regardless of the other fees involved to get it, 20% would be a de facto flat $40k, right?

8) I see a lot of people saying you need two year of work history to get a mortgage...but I don't see anyone saying it needs to be two years at your current job. Is this true? If I get a job in September, can I apply for a mortgage the following April? How does my fiance factor into this?

9) I'm sure I'll have more questions, thanks.

 

[QuarterSwede]

Me and the wifey-to-be will be looking at purchasing our first home in the next year or two, and I have some questions.

You're definitely asking all the right questions.

1) That's what they'll tell you but you'll most likely be house poor. You have to factor in utilities, mortgage insurance, etc. I'd shoot around $200k.

2) If that's your only debt (good for you!!!) then you'll be comfortable in that range. If your credit is good (in the 700s+) and since you're both working then you ought to be able to get a decent rate (APR). I'm not sure if you can still get a rate around 5% but that's what I'd shoot for.

3) I think you can use your combined income and only your score. I believe you could add her if/when you refinance (assuming rates get better). Honestly, I'd find a good mortgage company and ask them. They'll know. Remember, they WANT you to get the loan so they will help you in any way they can.

4) Honestly, I can't recall. I believe you pay it off first along with your interest but I may be wrong.

5) Don't remember but I think it's paid off with escrow (saved up for during the year).

6) In this economy and in most areas of the US the seller should pay the closing costs. It's a buyers market. As I said earlier, think about costs that don't have to do with your mortgage (utilities, HOA fees if applicable, insurance, etc). It's been a few years since I bought my house so I'm struggling to remember what else you'd have to remember that deals with the closing.

7) I think that's correct but we didn't have a down payment.

8) They want to see the last two years of work history. As long as your working and have a stable history you ought to be fine.

My biggest advice is:

a) Set your budget lower than you anticipate. It's way too easy to blow your budget especially when the lenders are telling you you're approved for a third more than you know you can actually afford (yes, do the math before applying for the loans so you aren't swayed by what you're offered). You don't want to be house poor.

b) Always, always, always get a house inspection. If you don't, you have absolutely no idea what you're buying. Yes, even on newer or new houses (seriously).

c) If you aren't watching them yet you should check out a lot of house buying shows on HGTV. Property Virgins is a good one that will show you what mistakes newbies make. After a few shows you'll be glad you did.

d) Get a good realtor, someone that knows the area you're looking in. However, don't be afraid to check out houses online and then ask to see any you like by the description. That's how my wife and I bought our first and we love it.

e) When looking don't get stuck on the colors of the walls and things that you can easily and cheaply change. Deal breakers ought to be things that will cost a lot to change (adding landscaping, A/C, having to renovate, etc.) or that you can't change (yard, layout of the house, etc).

 

[puma1552]

9) I was looking up escrow accounts a bit also; it appears property tax and homeowner's insurance are paid from the escrow account, and that you just automatically pay into the escrow account monthly as part of your mortgage payment. My question on that is--is the escrow money in addition to the calculated mortgage payment, or included in the calculated mortgage payment?

For example, using the mortgage calculator here: http://www.bankrate.com/calculators/mortgages/mortgage-calculator.aspx

if I borrow 210,000 @ 5.5%/360 (this is just assuming no down payment for simplicity's sake), that comes out to $1192 a month. So my question is--is money for escrow taken from that $1192, or do I have to allocate additional money each month on top of the $1192 for the escrow account? Basically, is the escrow money accounted for in the calculated mortgage payment or do I have to pony up extra cash each month?

10) Also perhaps a clarification on the 3x your income rule--the 3x your income rule is the general guideline for how much you can borrow, in addition to the down payment, right? So, on an $85k combined income, we could in theory (not that we would) borrow $255,000 and combine that with say a $20k down payment to buy a $275,000 house, right? Really we just want something in the $210,000 range (been finding nice three car garage homes built within the last ten years in nice neighborhoods in nice St. Paul/Minneapolis suburbs for that price range which would be ideal), so if we can come up with $20k, then we would have a sub-$200k mortgage.

11) On having the seller pay closing costs--that sounds awesome. Is asking them to pay the closing costs normal/common/reasonable or is that pretty rude and uncommon? It would basically be the same as just making a lower offer on the price of the home, no? That certainly helps out.

12) Also is it common to get a house for less than the asking price? I realize it's a buyer's market, but is it common to lowball? For example the house I found that I really like (this is of course just an example since we're a ways off from buying still) is $210,000, would it be rude to offer less? How much percentage reduction would be a reasonable offer? 3-5% off from asking price?

 

[QuarterSwede]

9) Sorry I can't answer your question. Wife pays the bills and she's asleep so I can't ask her. Let sleeping wives lie

10) That sounds right but when we applied for our loan they approved us for 40K over the 3x rule. It was WAAAAAAY over what we could really afford. This was with a local reputable mortgage company too! From what I understand that's pretty common ... or used to be before the housing and lending market crashed. Come to think of it, I'm not sure now.

11) It's normal in a buyers market and it is usually in lieu of making a lower offer. If a seller doesn't want to pay closing costs or lower the price in this market, they're being greedy or have a bottom line they can't afford to go below.

12) Remember that it is a negotiation so you're essentially haggling the price but whatever you do don't lowball it (10%+) unless the asking price is overpriced based on comps in the area. If it's a reasonable price and you make a lowball offer it's considered extremely rude and an insult. On average, 3-5% sounds about right. Listen to your realtor on this one. They can tell you if a price is most likely too low. It helps to find someone that is reputable and that you feel you can trust.

Honestly, even if you're not going to buy for a year or two, I would contact a mortgage company and realtor and start asking these questions. They know your market better and will want your business. Remember, it can take a long time to find and buy a house. For us it was six months. Start the process and take your time. It'll be less stressful and you'll be happier.

 

[puma1552]

It's one hell of a buyer's market, I gotta say; I did some more digging trying to find more pictures of the house I liked, and I was able to find that it's been sitting for sale for 166 days so far with a current price of $210,000.

The purchase price paid in 2006 when new? $332,000.

Wow. What a terrible time to sell.

 

[QuarterSwede]

It's one hell of a buyer's market, I gotta say; I did some more digging trying to find more pictures of the house I liked, and I was able to find that it's been sitting for sale for 166 days so far with a current price of $210,000.

The purchase price paid in 2006 when new? $332,000.

Wow. What a terrible time to sell.

That's how bad the bubble was because that is about what the house should've cost in the first place.

 

[puma1552]

That's how bad the bubble was because that is about what the house should've cost in the first place.

Yeah I hope this buyer's market persists; this is a 3 car garage house, 3 BR/2 bath (1,500 square feet so kinda small but perfect for a young couple/family), built in 2006 in a yuppie suburb just outside St. Paul, with good school districts.

It's more or less a perfect house for a young couple with a man who wants a 3 car garage car hobby cave.

I'm actually surprised how many 3 car garage, post-2000 construction houses I can find for the $200k-$230k range. Didn't think these could be touched for under $300k+. Guess a few years ago they couldn't have been. Pretty crazy.

Was thinking all we could afford would be a pile but maybe not...

 

[helptheold]

You are asking some very good questions, wish I could answer all of them but DH took care of most of that stuff

What I would recommend if you get an ARM is to get as small of one as possible. We also made an effort to pay off more than just the interest each month (around $200 so we paid $500) which helped keep things from getting out of hand.

What you're looking at sounds perfect, my cousins have a 3,000 sf home and not only is it waaaay too big it's also dropped in price big time since they bought it which has made it difficult for them to refinance quickly.

 

[NickZac]

Get the best home inspector you can. Research them on the BBB, Google, RipOff Report, and any other means. Some will save you thousands, and some will cost you thousands. Spend a few more bucks on the top rated ones, it is well worth the money.

 

[decksnap]

A couple notes on PMI - you don't have to keep paying after your equity in the home grows beyond 20%. However, the bank will likely not tell you when that is so you'll have to let them know to end the payments.

One large problem I've had with PMI - now that the rates are so low, I tried to refinance under the new Making Homes Affordable plan. I was told by my mortgage company they wont allow it because I have lender-paid PMI instead of owner-paid PMI. This didn't matter at all when I purchased, now based on this technicality I'm the only ****** in a hundred mile radius who can't take advantage of the low interest rates.

Getting the seller to pay closing costs is just one negotiating tactic, it amounts to the same as asking for the price to be lowered by that amount.

 

[velocityg4]

Yeah I hope this buyer's market persists; this is a 3 car garage house, 3 BR/2 bath (1,500 square feet so kinda small but perfect for a young couple/family), built in 2006 in a yuppie suburb just outside St. Paul, with good school districts.

It's more or less a perfect house for a young couple with a man who wants a 3 car garage car hobby cave.

I'm actually surprised how many 3 car garage, post-2000 construction houses I can find for the $200k-$230k range. Didn't think these could be touched for under $300k+. Guess a few years ago they couldn't have been. Pretty crazy.

Was thinking all we could afford would be a pile but maybe not...

That's nothing there are some 3,000+ sq ft houses in my area for close to 100K. These are in good shape in safe neighborhoods. It's in a city too, not out in the boonies.

 

[Mac'nCheese]

I know a lot of these questions have been answered, but it was easier just to copy all your questions, and answer any I could, without checking to see if it was answered already. Sorry for the repetition. Which brings me to my first bit of advice: asking the same question to more then one person is a good idea. Get different points of views, get different advice, find what works for you. Anyway, I bought a house 11 years ago, did some things right, some things wrong, take my advice with a grain of salt, everyone's situation is different:


1) Our combined income will be around the $85k mark. From what I read, this means that, using the rule of thumb that you can comfortably afford a house that's 3x your income, we should be ok for a mortgage on a house costing upwards of $255k. Does this sound right for an upper ceiling with $85k in household income?

This rule of thumb is only a guideline and not a good one, imo. People have been saying this for years but in the meantime, mortgage rates dropped. Which means your monthly payments are less now then they were when this rule was made which means you can afford more of a home then your parents can. My parents interest rate was in the double digits, now its about 5%, right? Less money for interest = more money for principal. Brings me to my second advice: forget about the total price of the house. See what you can afford MONTHLY. Use those mortgage calculators, find out what the principal plus interest plus pmi is and then add TAXES, added costs for (probably) higher electric/heating/water (you are leaving an apartment or your parents house or a smaller rental place, a house might cost a lot more to heat or a/c). Do not judge what you can afford by month based on overtime, your wife's maybe future job....if you can comfortably afford it on your salary, then your wife's future paycheck, any overtime, bonuses, side jobs... that will be the extra you need for vacation, house repairs, cars, retirement, etc.

2) We probably won't be able to do 20% down + closing costs. We could certainly do 5% down + closing costs, or maybe 10% depending on the price of the house. We are looking at houses in the $200k-$220k range. Thinking about it, We could probably have about $20,000-$25,000 total to put towards the house, for both the house and the closing costs. How would this affect our ability to get a house in the ~210k range? Is a $210k house still realistic? FWIW I have an $18k student loan, which is $230 a month; that is our only debt.

Go to a mortgage company (web site, call, local bank) and get pre-approved for a mortgage. They will tell you exactly what you will be allowed to borrow and how much you will be paying for it.

3) What kind of rate can we expect? My credit scores average over 780, I'm turning 27 soon with four loans behind me (2 auto, 2 personal, all paid off early), a couple credit cards, and flawless payment history back to age 18. My wifey-to-be is Japanese, and will be immigrating to the US with me later this year, so she doesn't have any credit history in America. How much will this impact our rate? Or alternatively, since we will be married, could I just put the mortgage in my name initially, and still be able to use the combined income on the loan application since we are married and lock down the lowest rate, then just add her name to the mortgage after the fact?

Again, ask a mortgage broker but I'm pretty sure you can't add anything to a mortgage after the fact. That would require a new loan.


4) I understand that paying 20% down gets you out of PMI, but I really doubt we will have 20% down, and thus will have to pay PMI. I understand that PMI is insurance for your lender in case you default when you owe more than the house is worth, or close to it; so on that thought, does PMI last the entire life of the loan, or only until you've reached a certain equity threshold when you are plenty comfortably ahead on mortgage loan vs. home value?
It lasts until you reached the 20% but you have to make sure they are aware when you do. Some companies "make mistakes" and leave the PMI on well after you payed the 20%.

5) Are property taxes something you have to save up for all year and then pay as like a once-a-year bill, or are property taxes something that are just factored automatically into the loan that you don't have to worry about setting extra money aside for?

Your choice. My friend saves up all year and pays directly to his town, every three months. Most people pay extra on their loan and then the mortgage company pays every three months. People don't like this because you are giving your mortgage company a free loan for three months; other like it because its a no-brianer way to make sure everything is paid for.

6) If a house costs $210k ("sticker price"), what other fees and expenses on top of that do I need to plan on? $210k + closing costs? What else? Basically if I see a house sticker for $210k, what is the real value that I need to plan on from which to pay closing costs and a down payment on?

Go to a real estate company and get a realtor. Fees are different everywhere but you will be paying: closing costs, inspection fees, lawyer fees...etc.


7) The down payment is a percentage ONLY applied to the "sticker/sale price" of the home, correct? If the house is $200k, then regardless of the other fees involved to get it, 20% would be a de facto flat $40k, right?

That sounds right.

8) I see a lot of people saying you need two year of work history to get a mortgage...but I don't see anyone saying it needs to be two years at your current job. Is this true? If I get a job in September, can I apply for a mortgage the following April? How does my fiance factor into this?

Again, try to get pre-approval. If your local bank turns you down, try someone else. Each lender will have different rules to follow. Its not as easy to get a loan as it was before the crash, of course. Lenders are probably more strict now. Work history, I believe, is based on your current job. They want to see a stable job, not someone who bounces around from job to job.
I think...

I was looking up escrow accounts a bit also; it appears property tax and homeowner's insurance are paid from the escrow account, and that you just automatically pay into the escrow account monthly as part of your mortgage payment. My question on that is--is the escrow money in addition to the calculated mortgage payment, or included in the calculated mortgage payment?

It is not. That's why YOU must remember to add all of this into your monthly budget (unless mortgage calculators now have a section for you to input taxes, insurance, etc.) Then, of course, it will be easier to figure out.


if I borrow 210,000 @ 5.5%/360 (this is just assuming no down payment for simplicity's sake), that comes out to $1192 a month. So my question is--is money for escrow taken from that $1192, or do I have to allocate additional money each month on top of the $1192 for the escrow account? Basically, is the escrow money accounted for in the calculated mortgage payment or do I have to pony up extra cash each month?

When you finally get a loan, settle on a house, your monthly payment will be calculated with all of that built in and your payments will be set. Don't think of it as extra cash each month, whatever that figure is, that is what you need to pay every month, for thirty years. (unless you don't get a fixed rate which you should probably not do).

10) Also perhaps a clarification on the 3x your income rule--the 3x your income rule is the general guideline for how much you can borrow, in addition to the down payment, right? So, on an $85k combined income, we could in theory (not that we would) borrow $255,000 and combine that with say a $20k down payment to buy a $275,000 house, right? Really we just want something in the $210,000 range (been finding nice three car garage homes built within the last ten years in nice neighborhoods in nice St. Paul/Minneapolis suburbs for that price range which would be ideal), so if we can come up with $20k, then we would have a sub-$200k mortgage.

Like I said above, I don't like the 3X rule but yes, if your parents all of a sudden say HEY here's 50K for a house, and you can afford 200K before this, now you can look for a 250K house.

11) On having the seller pay closing costs--that sounds awesome. Is asking them to pay the closing costs normal/common/reasonable or is that pretty rude and uncommon? It would basically be the same as just making a lower offer on the price of the home, no? That certainly helps out.
NOTHING IS RUDE! The seller is trying to get the most they can and will do anything to do so. You need to do the same, in reverse. Here's my rule, find your dream house... find your starter house (one that you will settle on and maybe add onto or move up from in ten years).... you will probably get something in the middle. If you find something you can afford and it is perfect! Don't nickle and dime them down, some people can afford to wait for their price and in the end, if they turn you down, you lose something you really wanted over what? a few thousand that over the life of the loan means nothing every month?

12) Also is it common to get a house for less than the asking price? I realize it's a buyer's market, but is it common to lowball? For example the house I found that I really like (this is of course just an example since we're a ways off from buying still) is $210,000, would it be rude to offer less? How much percentage reduction would be a reasonable offer? 3-5% off from asking price?]

See number 11. That's how its done. Time have changed of course, but usually, the house is listed for more then the owner will settle for. The buyer comes in and unless its a perfect home in a seller's market, they will bid lower. The final price will be somewhere in between. Now, times are a little different, homes might be owned by a bank, they might have been reduced so much that you would be foolish to waste time haggling over a few grand; someone else might find that house and jump on it. Or....it might be one of a dozen same homes that aren't selling and you have more then enough time to bid even lower on a few of them and see who bites. Everyone's situation is different, a good realtor will help you here. Again, nothing is rude and there probably isn't a % that every house is reduced by.

Take your time. IN the meantime, don't incur any new debt. No new cars, no big tvs. Pay down your credit cards and student loan. The quicker those payments are gone, the quicker you have more money for home repairs, mortgage payments, etc. Open up a closing cost savings account and have money from your paycheck go straight into that. Good luck, keep us up to date with new info.

P.S. You left out one important detail. Your wife-to-be....

is she hot?


KIDDING KIDDING.....

 

[zhenya]

Sounds like most of your questions have been answered, but I'll chime in with my experience.

In my opinion, even in this climate, banks will still offer to lend you way more than one can really afford on a given income. Personally, I would not be terribly comfortable taking out a mortgage that was costing me more than 30% of my monthly take-home income, including taxes, insurance, PMI, everything. You can't really go by the sticker price of the house as a basis, because that doesn't reflect the actual cost of ownership - you need to calculate in all these other costs first. In one market you might be able to afford a $250,000 house, but in another with higher taxes only $175,000. (completely hypothetically). Don't forget that houses require significant upkeep - so I'd suggest you keep some buffer room in your budget so that when you realize you need a new paint-job/roof/furnace/whatever you aren't completely stretched to put 5-10 grand into an unexpected project.

As noted, PMI is only required until you reach 20% equity of the original loan value. Make sure to keep track of this yourself, and contact the bank when you believe you have enough equity.

You can either pay taxes yourself or pay into an escrow account. If you are good at saving money and won't be stressed by large tax payments a few times a year, you can do this yourself, and your monthly payment will be significantly lower. Otherwise, there is little down-side to letting the bank take care of it, and having a fixed payment.

You don't mention if you are going fixed or adjustable. I hope it's fixed. Interest rates are at an all-time low. Don't get sucked into the lower short-term costs of an ARM.

 

[snberk103]

Can't give you specific advice since my experience (my experience is Canadian).... but I will give you three thoughts that should work in the US.

1) Find a good realtor. Best way to do that is to ask other people who have bought/sold houses. A good realtor will get rave reviews, and the others will only get lukewarm reviews. A good realtor will walk you through the complexities of the negotiations, etc etc. They will also spot mistakes in the paperwork (we just sold a house last month, and the other realtor was sloppy, and we had to keep making corrections to their paperwork. Our realtor caught a couple that we missed. This is the 3rd time we've used this realtor). The seller (at least here) pays the realtor's commission, so don't go with a discount realtor.

2) Once you have bought the house and moved in, make every effort to make extra payments towards your mortgage. Even to the point of waiting a year or two to do any major redecorations. I know that the temptation is to make this "your home", and you need to do so....but do so cheaply. In the first years of your mortgage, virtually your entire monthly payment is just to pay the interest on the loan. Any extra $$ you throw at the mortgage goes to the principle, which means that less of your payments are interest, and more of the payment goes towards the principle, which reduces the interest portion and allows more to be towards the principle, and so on.... Basically, you get compounding to work for you. Even a $thousand or two in the first year has a Huge impact in 10 or 20 years. I am assuming that you plan to be married and in a house in that time frame, so do think ahead.

My wife and moved 4 times in the past 20 years. Each time we saved our $$ and took advantage of the early payment privileges. As of Jan 1st we are now mortgage free, in house that we had designed for us and built. It's a great feeling, let me tell you

3) Congratulations!! Have fun.... don't rush into anything. Keep in mind that interest rates are only going to be going up.

 

[QuarterSwede]

2) Once you have bought the house and moved in, make every effort to make extra payments towards your mortgage. Even to the point of waiting a year or two to do any major redecorations. I know that the temptation is to make this "your home", and you need to do so....but do so cheaply. In the first years of your mortgage, virtually your entire monthly payment is just to pay the interest on the loan. Any extra $$ you throw at the mortgage goes to the principle, which means that less of your payments are interest, and more of the payment goes towards the principle, which reduces the interest portion and allows more to be towards the principle, and so on.... Basically, you get compounding to work for you. Even a $thousand or two in the first year has a Huge impact in 10 or 20 years. I am assuming that you plan to be married and in a house in that time frame, so do think ahead.

My wife and moved 4 times in the past 20 years. Each time we saved our $$ and took advantage of the early payment privileges. As of Jan 1st we are now mortgage free, in house that we had designed for us and built. It's a great feeling, let me tell you

Great advice and congrats to you! That's a ton of money in your pocket every month now (if you're still working). Enjoy it!

 

[snberk103]

Great advice and congrats to you! That's a ton of money in your pocket every month now (if you're still working). Enjoy it!

Thanks! Still working, but working fewer hours. We are now able to start sitting on community non-profit boards, etc, travel, etc -

 

[puma1552]

Great advice here, really taking it all in, and looking forward to more opinions/advice from those who've done it before.

Any calculators that allow me to find the true monthly payment (or very close to it making a few assumptions if necessary) for a given house, including taxes, PMI, insurance, etc.?

The bankrate.com calculator is good but it seems to just work on the house cost, and doesn't factor in the other stuff.

*I should also note, I'm not interested in anything but a fixed 15/30 (30 realistically) year mortgage; those ARMs are what caused all the problems, and I have zero interest in playing with my housing. My credit is excellent and rates are low, low, low, so I definitely won't do anything but a fixed rate.

I'm thinking if we have $85k combined income initially, that's about $6650 a month gross, which I guess would probably be ~$4000--$4500 net per month? I think from that, about $1300/mo for the grand total would be the most I would want to spend on the mortgage payment, including PMI, taxes, escrow, etc., which is between 29-33% of our net income. $1150-$1200 would be even better.

Does that sound doable or is that a bit high? We do both plan on buying new vehicles over the next 30 years, and I still got that student loan hanging over my head...which brings me to my next question:

13) I currently live in Japan, and paid into Japanese pension for the first two years; but, when I leave, I get all of that back, which will be about $6000--$7000 at the current exchange rate, tax free. I also have a Roth IRA with about $12,000 in it ($10k of which is contributions, kinda lame I know for having it four years), and to my understanding I can withdraw penalty free for a first time home purchase. Aside from that, I understand I can withdraw contributions tax free anyway, so either way I can take about $10k out penalty free. So if I took $10k from there, plus my $6000 or so, that gives me $16k to start with. There's a possibility (slim) that I may get $5000 from my dad, as he gave my sister $5000 for her wedding a couple years ago (we aren't having one, house is more important). Her parents also may give her some money before we go to the states.

Basically I've got $16k more or less guaranteed, and could possibly see as much as $30k in a best case scenario. Now--in either situation--given an $18k student loan--would I be better off putting all the cash towards the house, or eliminate the student loan and go with a much smaller, if any, down payment on the house?

I know they say never touch a Roth to pay off a student loan, but they do generally give an OK to do it if you are putting it towards a house. Using it to wipe out the student loan is effectively the same thing, no?

I have a feeling I'd still be better off keeping the debt and putting the cash towards the house since it would cut the house payment down a bit and it would probably save a lot in interest over 30 years compared to my 6.8% student loans, but I just thought I would run this by here to get some input on that as well. I have 8 years left on my student loan.

EDIT: One interesting thing, is that I see a lot of people saying don't worry about the house cost, look more at the monthly payment, whereas with a car they say it's pretty terrible to go into a dealer looking for a monthly payment (because the dealer will use any tactic necessary to get you to hit that target monthly payment, usually resulting in longer terms or other ways of screwing you knowing they have the advantage when someone is more concerned with the payment than the price), and instead to worry about the price of the car and let the monthly payments fall into place once you agree on the out the door price. Interesting how it works a little different with a mortgage.

 

[zhenya]

I certainly was aware of that incongruity vis-a-vis the monthly payment when giving you that advice. I think that the house is different though, because with a car you are only paying down the value of the loan, interest, and fees. If you go to a dealer telling them you can afford $350/month, if you aren't careful, you could end up in a stripped Nissan Versa for that payment, when if you were more educated, that same money could buy you a decent Honda Accord. They can play all sorts of games with the interest rates and terms to meet your payment target.

With the house, you are not negotiating the sale price based on the monthly payment, just educating yourself in advance as to how much you can truly afford to offer. You still negotiate the transaction price as a whole (including any discounts you can get based on that all-important home inspection). The other thing is that your monthly housing costs also include a significant portion from local taxes. So much so that in some markets, even if you pay off the property, you'll still have a significant monthly (or yearly) payment due to the government.

Personally, I would not recommend taking the money from your IRA. Don't think of it as taking out $10k now, think of it as taking away that money's value at retirement (could be $100k plus?). Retirement money is completely dependent on time in order to gain value, so the money you put in earliest is the most important. A house is far less of a guaranteed money-maker than that retirement money.

Otherwise I think your budget seems totally reasonable. Your take-home will depend on your local tax rates and what you are able to deduct, etc. and if you contribute to a 401k (which you should - at max rate - especially if your employer matches!), etc.

 

[ejb190]

My opinion and mine alone -
- When you move back to the US, rent for a while, save up your 20% down and work off that student loan before buying a house. It gives you a goal to get financially fit.
- My mom was a loan officer at a small regional bank. Pre-approvals were greatly appreciated by the bank as well! Occasionally people would walk in the bank Friday afternoon and ask her for a loan for a closing on Monday!
- The advice I have heard (Dave Ramsey) is your payment should be no more then 1/4 of your take home pay on a 15 year fixed rate. Sounds like a big squeeze on how much house you buy, but if you already have your 20% down... It's not bad. Keep you from buying too much house and leaves room for a new furnace (been there), new AC (been there), new front door (been there), new bathroom remodel because the tub is leaking into the basement (been there), etc. Also, do the math on a 15 vs. 30 year (or even 20). The difference in interest is amazing!
- As far as Escrow, the banks can and do make mistakes like not charging you enough when tax rates go up. So they come back to you to make up the difference. I just assume do it myself as opposed to staying on top of someone else doing it.
- Oh! Don't touch that IRA!!!!!

 

[Mousse]

Another piece of advice: Walk around/ask around the neighborhood to get a feel for what your future neighbors are like. You don't want to end up like this guy selling his house:

 

[iJohnHenry]

You don't want to end up like this guy selling his house:

Mmmm. I think he just wants to vent.

 

[mscriv]

My opinion and mine alone -
- When you move back to the US, rent for a while, save up your 20% down and work off that student loan before buying a house. It gives you a goal to get financially fit.
- My mom was a loan officer at a small regional bank. Pre-approvals were greatly appreciated by the bank as well! Occasionally people would walk in the bank Friday afternoon and ask her for a loan for a closing on Monday!
- The advice I have heard (Dave Ramsey) is your payment should be no more then 1/4 of your take home pay on a 15 year fixed rate. Sounds like a big squeeze on how much house you buy, but if you already have your 20% down... It's not bad. Keep you from buying too much house and leaves room for a new furnace (been there), new AC (been there), new front door (been there), new bathroom remodel because the tub is leaking into the basement (been there), etc. Also, do the math on a 15 vs. 30 year (or even 20). The difference in interest is amazing!
- As far as Escrow, the banks can and do make mistakes like not charging you enough when tax rates go up. So they come back to you to make up the difference. I just assume do it myself as opposed to staying on top of someone else doing it.
- Oh! Don't touch that IRA!!!!!

Great advice from EJB here. He's right on target and I would recommend you follow up on checking out Dave Ramsey. He's a no nonsense money guy that will give you straight advice on how to live a debt free lifestyle. His website has good information. Here's his page on home buying tips.

I'd also like to chime in real quick on the PMI thing. With conventional loans you can stop paying PMI once you've crossed the 20% threshold, but some other loans require PMI for the life of the loan. You just need to ask your mortgage person about this and make sure you get the kind of loan you want and need.

Last, please follow the advice people are giving about getting "pre-approved". My father has been a real estate agent for 40+ years now and he tells people not to even look at houses until they have been approved. The last thing you want is to "fall in love" with a house and then not be able to get it. When you shop with the knowledge of knowing what you can afford it makes it much easier and much more enjoyable. I promise you that you don't want your wife comparing every house to that "perfect" one that was beyond your budget. Know what you can do before you even start to look and don't waste your time or cause heartbreak by looking at homes you can't afford.

 

[stockscalper]

Puma, if you use Numbers or (hold my nose) Excel there are some templates that will show these factors for you. Do a Google for Mortgage Amortization templates and you'll find some free ones. Also some of the new sophisticated financial calculators like the HP 30b should be able to do this too.

The three times rule still applies. PMI insurance is required if you put down less than 20%. It is to protect the bank in the event of foreclosure and the property doesn't bring enough to pay off the debt. The theory is that if a buyer is well invested in the property (ie, puts more than 20% down) they are less likely to default and if they do there is sufficient cushion for the bank to recover their loan. Obviously, the more you put down or the closer you get to the 20% mark the easier it is to qualify for a loan. The bank will require you to escrow your insurance and property taxes for a loan with less than 20% down. One more thing, don't get discouraged if you get turned down. Banks have tightened their belts now. It will probably be easier to get a loan through a mortgage broker, but without elaborating further, avoid that route if you can. Try going to your local banks. I think you'll find the process a lot easier than the mortgage broker route.

 

[GoCubsGo]

My responses, which are entirely my opinion, are in red.

Me and the wifey-to-be will be looking at purchasing our first home in the next year or two, and I have some questions.

1) Our combined income will be around the $85k mark. From what I read, this means that, using the rule of thumb that you can comfortably afford a house that's 3x your income, we should be ok for a mortgage on a house costing upwards of $255k. Does this sound right for an upper ceiling with $85k in household income?
You need to factor in your debt to income ratio based on net income. The bank will factor gross earnings, that is pre-tax earnings. Guidelines have not changed much in this regard so you need to be on the lookout for yourself. Making $85k a year will allow you to comfortably afford a $200k house, even if you only put down 3.5% (if you get an FHA loan) and escrow your taxes and insurance. That means, you pay the bank a bit more each month, they save it in account and depending upon your state, you could earn interest on that money. When the premium is due on the insurance the bank will pay. Should they fail, they are liable; they generally don't fail but funnier things have happened. When your taxes are due, they will also pay. Should they fail, they're on the hook for penalties and interest.

2) We probably won't be able to do 20% down + closing costs. We could certainly do 5% down + closing costs, or maybe 10% depending on the price of the house. We are looking at houses in the $200k-$220k range. Thinking about it, We could probably have about $20,000-$25,000 total to put towards the house, for both the house and the closing costs. How would this affect our ability to get a house in the ~210k range? Is a $210k house still realistic? FWIW I have an $18k student loan, which is $230 a month; that is our only debt.
Figure a $200k house, figure coming in with at least $8k if you get an FHA loan. Have your seller pay closing costs. If you're in a position where there are multiple offers on the house then reducing or completely doing away with having the seller pay closing costs is a good negotiating tactic. You can cross that bridge if and when you come to it.

3) What kind of rate can we expect? My credit scores average over 780, I'm turning 27 soon with four loans behind me (2 auto, 2 personal, all paid off early), a couple credit cards, and flawless payment history back to age 18. My wifey-to-be is Japanese, and will be immigrating to the US with me later this year, so she doesn't have any credit history in America. How much will this impact our rate? Or alternatively, since we will be married, could I just put the mortgage in my name initially, and still be able to use the combined income on the loan application since we are married and lock down the lowest rate, then just add her name to the mortgage after the fact?
You fall under what is considered "prime". That is, you should be able to expect the best rate available at the time. However, your credit score can be quite high but your debt to income ratio can be exceedingly high. If this happens (think 50 debt to income) then you could be paying slightly more towards the rate as they consider you more of a risk. That is why the cost of the house, the payment, escrow and all other liabilities on your credit report must stay below a certain percentage of your gross pay. At the same time, you should work off net pay to ensure you're not house poor.

4) I understand that paying 20% down gets you out of PMI, but I really doubt we will have 20% down, and thus will have to pay PMI. I understand that PMI is insurance for your lender in case you default when you owe more than the house is worth, or close to it; so on that thought, does PMI last the entire life of the loan, or only until you've reached a certain equity threshold when you are plenty comfortably ahead on mortgage loan vs. home value?
People have already answered your question, however, one thing to consider is if you can wait to put down 20% then do. If you cannot, if you feel you found the house you want to live in for x number of years and you believes rates are where you want them to be, then you can go for it. There are ways to pay down your loan to get rid of PMI faster. And yes, PMI is there to protect your investor, not you but should you default, the amount of loss you will be on the hook for can be reduced by having PMI as the lender (or loan servicer) will file a claim offsetting their losses. This amount, the net loss, will be reported to the IRS and you will take a hit depending upon your state and IRS laws at the time.
5) Are property taxes something you have to save up for all year and then pay as like a once-a-year bill, or are property taxes something that are just factored automatically into the loan that you don't have to worry about setting extra money aside for?The lender will pay property taxes for whichever installment is due. If property taxes are due once a year then you will likely pay a prorated amount at closing. These aren't factored into the loan but considered when a bank is calculating your debt to income ratio (DTI). Your best bet is to escrow your loan, keep close watch on when your premium and tax bills are due, ensure they're paid in a timely manner so you are protected. Your lender (loan servicer) will pay these as they must protect their interest in the property. However, they don't need to should they wish to exercise their right under your security instrument. You want to look out for yourself because the bank won't be doing that for you. They will say that is how they run, but in fact, they answer to a higher power and that is the investor (note holder) of the loan.

6) If a house costs $210k ("sticker price"), what other fees and expenses on top of that do I need to plan on? $210k + closing costs? What else? Basically if I see a house sticker for $210k, what is the real value that I need to plan on from which to pay closing costs and a down payment on?Closing costs, look that up. Consider that you need to pay for an appraisal and home inspection before your loan closes. You can lose this money should the inspection come back dirty and you elect not to buy the house. It is a small price to pay for peace of mind. Also, with FHA you must have a home inspection and it must be an FHA approved inspector. Consider yourself halfway lucky in that case because generally the inspectors want to remain on FHA's good side so they'll generally skip being stupid.

7) The down payment is a percentage ONLY applied to the "sticker/sale price" of the home, correct? If the house is $200k, then regardless of the other fees involved to get it, 20% would be a de facto flat $40k, right?
Anything you pay out excluding the appraisal and inspection (and any other costs that you pay up front prior to (outside) closing will be applied towards the price of the home. The loan amount will then be reduced. It is not as though they lend $210k and you pay it down before you even move in. The lender's goal is to lend as little as possible. This is why you are on the hook for certain costs unless you have your seller pay them. Remember, the seller pays both the seller's agent fee and the buyer's agent fee. This is usually around 6% of the price of the house (the sales price not their asking price). Whatever you want them to pay on top of that is up to you, whether they accept it is another story.

8) I see a lot of people saying you need two year of work history to get a mortgage...but I don't see anyone saying it needs to be two years at your current job. Is this true? If I get a job in September, can I apply for a mortgage the following April? How does my fiance factor into this?
The person who makes the most money will be considered the borrower whereas the other will be the co-borrower. If your wife to be makes more than you and her credit is poor then you need to wait this one out a bit longer or skip using her income. She will still be able to be on title but only your income and credit score will apply. Your lender can help guide you through this.
9) I'm sure I'll have more questions, thanks.

In many ways you are asking all the right questions but I also saw someone mention that once you get back to the states you should wait this one out just a bit. I agree. You should talk to a lender today just to get an idea of where you are at, however, you may want to rent for a year and establish residency here again. Lenders are now stricter than ever. Expect to be sending in 50-100 pages of personal information and anticipate more. They will ask why you left the country, this is going to be a big question for them. You will likely have to write a letter of explanation (LOE) about that. If your wife to be is not a current resident then she cannot get a loan. She has to be legal.

Look up amortization calculators, as someone mentioned. This will help you understand how much of your payment is going towards principal (the money you borrowed) and interest (the profit your lender (investor) is making). Don't get cocky and think you can somehow manage to come up with hundreds or thousands of dollars each year to pay insurance and taxes. Escrow that loan and know that you always have it. Sod's law is that you will need to pay that lump sum one year and something will happen that causes conflict. If you have an FHA loan you'll be required to escrow anyway. I realize some will say that banks can make a mistake and not collect enough, it is real easy to figure out whether you have enough being collected. I don't ever understand why people don't get how they can figure this out. Insurance premium amount / 12 months = monthly escrow collection. It is not science.

I created an excel file that calculates my net and gross income, gave me the debt to income ratio from each and told me the lender would give me $100k more if I wanted it but logic said to cut down the purchase of my house to ensure that I was not house poor.

It was mentioned that you should avoid a broker, you should really avoid a broker. If there is a broker on this board who is upset with this fact then too bad. Brokers cost you money, there is no need to work with an independent broker because they will be submitting your file to a bank, the same bank you could have gone to. They're also more prone to shop your loan around. If you hit up an independent make sure they're funding that loan on their own and immediately transferring the servicing of the loan to a servicer. This is common practice and you should not worry about it.

Don't rob peter to pay paul (paul being your down payment). You're young, you're about to have a new wife, wedding etc etc. There is no need to marry and buy all at once unless you have it. If you want to pay no more than $1,300 a month for PITIMI (principal, interest, taxes and insurance + pmi) then you're looking at a much less expensive house. I realize you like to be flashy, maybe a $200k house is not a good starter home for you. Consider what a starter home looks like. You're probably not buying this house to keep forever. It could be the case, but that is usually not the case for young buyers. Keep that in mind.

 

[Sdashiki]

I am completely surprised no one has mentioned FHA loans.

If you can't find 20% down, I dont know if too many lenders even want to deal with you...though today that could be changing.

FHA loans, being backed by the Govt, have alot looser restrictions on up front costs.

3.5% minimum down is all you need.

Also, at least here in Florida, there are Agricultural/Farm type mortgages that only have to deal with your physical home's location in respect to, usually, highways. Those loans require 0% down!

A little research can go a long way in saving up front costs when you havent gotten the equity to find 20% down on the next home you buy.

Closing costs, demystified:

up front property taxes, pro-rated, maybe in ESCROW (sometimes a seller will pay this)
up to 6 months or so of homeowners insurance in ESCROW
up to 6 months of PMI in ESCROW
flood insurance/hurricane insurance if applicable, again up to 6 months in ESCROW