Need advice for saving money on first time home purchase

[nboy22]

Hey everyone,

TL: DR at bottom

A couple of years ago I asked on here for some advice on buying a home for the first time. I decided back then that it wasn't a good idea at the time since I didn't have a safety net and was still $12k in debt with my car and just barely started making $40k/year before taxes. My landlord recently decided to raise the rent by a large amount starting next summer, I plan on staying in the Phoenix area where I'm currently at for the next 8-10 years, and those factors have made me think it's the right time for me to buy.

Since then, I've paid off my car and saved up $11k more, and my salary has increased to around $45k/year before taxes. I've also been working on building up my credit score and it's sitting around 784 and have no credit card debt and no debts whatsoever.

I want to purchase a home next spring, which will allow me to save up another $5k-$10k in which I would use in combination with a ~$10k gift from my parents. So my down payment will be around $15-20k by next spring. I plan on keeping $10k of the $11k I have saved up now for a safety net.

My target price is around $175,000-$200,000. I know it's a decent amount for my salary, but I was pre-approved for $175,000 a couple of years ago. Now my credit is better and I will have a decent down payment, so I'm sure that I can get approved for a little bit more. Things will get tight if I'm by myself, but I will have 1-2 room mates that will help me pay everything. I'm by no means relying on them if something goes sour.

I'm wondering what the best first time home buyer programs are and any other advice in real estate purchasing? I don't want to lose out on thousands of dollars of course. Is it best to just find the home I want to buy myself, arrange for the lender myself, and only go through the seller's real estate agent? I'm not really sure how all this works, but looking for any tips at this time!

TL: DR:
• Landlord is going to raise my rent substantially in the next 6-7 months, prompting me to think about buying a house.
• Will have $15-20k down payment next spring for a $175,000-$200,000 home in Phoenix area. Looking at qualifying for down payment assistance in addition.
• Planning on staying where I'm at for 8-10 years.
• 784 credit score, no debts at all, will have a $10k safety net stashed away after purchase of home.
• Looking for any advice for a first time home buyer that can save me money!

Thanks for any help you can offer!

 

[renz20003]

I'm wondering what the best first time home buyer programs are and any other advice in real estate purchasing? I don't want to lose out on thousands of dollars of course. Is it best to just find the home I want to buy myself, arrange for the lender myself, and only go through the seller's real estate agent? I'm not really sure how all this works, but looking for any tips at this time!

Unless the agent is shady they don't do this. Its illegal in some states.

 

[x26]

Hey everyone,

TL: DR at bottom

A couple of years ago I asked on here for some advice on buying a home for the first time. I decided back then that it wasn't a good idea at the time since I didn't have a safety net and was still $12k in debt with my car and just barely started making $40k/year before taxes. My landlord recently decided to raise the rent by a large amount starting next summer, I plan on staying in the Phoenix area where I'm currently at for the next 8-10 years, and those factors have made me think it's the right time for me to buy.

Since then, I've paid off my car and saved up $11k more, and my salary has increased to around $45k/year before taxes. I've also been working on building up my credit score and it's sitting around 784 and have no credit card debt and no debts whatsoever.

I want to purchase a home next spring, which will allow me to save up another $5k-$10k in which I would use in combination with a ~$10k gift from my parents. So my down payment will be around $15-20k by next spring. I plan on keeping $10k of the $11k I have saved up now for a safety net.

My target price is around $175,000-$200,000. I know it's a decent amount for my salary, but I was pre-approved for $175,000 a couple of years ago. Now my credit is better and I will have a decent down payment, so I'm sure that I can get approved for a little bit more. Things will get tight if I'm by myself, but I will have 1-2 room mates that will help me pay everything. I'm by no means relying on them if something goes sour.

I'm wondering what the best first time home buyer programs are and any other advice in real estate purchasing? I don't want to lose out on thousands of dollars of course. Is it best to just find the home I want to buy myself, arrange for the lender myself, and only go through the seller's real estate agent? I'm not really sure how all this works, but looking for any tips at this time!

TL: DR:
• Landlord is going to raise my rent substantially in the next 6-7 months, prompting me to think about buying a house.
• Will have $15-20k down payment next spring for a $175,000-$200,000 home in Phoenix area. Looking at qualifying for down payment assistance in addition.
• Planning on staying where I'm at for 8-10 years.
• 784 credit score, no debts at all, will have a $10k safety net stashed away after purchase of home.
• Looking for any advice for a first time home buyer that can save me money!

Thanks for any help you can offer!

Use a Buyers Agent--don't enter into a contract with Buyers agent though--
Find a good buyers agent to represent "your" best interests. It doesn't cost you anything--paid for out of sellers commission.

 

[nboy22]

Unless the agent is shady they don't do this. Its illegal in some states.

Thanks for that. This is the type of stuff I need to know!

 

[renz20003]

Also find a local lender if possible. My loan is local and they counted the appraised value vs purchase price toward equity. I didn't put any money down because of this and I didn't have PMI insurance tacked onto the loan.

 

[nboy22]

Use a Buyers Agent--don't enter into a contract with Buyers agent though--
Find a good buyers agent to represent "your" best interests. It doesn't cost you anything--paid for out of sellers commission.

Thanks for the advice!

Also find a local lender if possible. My loan is local and they counted the appraised value vs purchase price toward equity. I didn't put any money down because of this and I didn't have PMI insurance tacked onto the loan.

Okay, I'll check that out. I am not sure if the lender that I checked with a couple of years ago is local or more of a national-type lender. All I know that was a red flag was that when I did my prequalification they had a PDF form sent to me and there was a line that stated "Interest Rate Not to Exceed 4.875%" Now to me, that sounds like they were trying to screw me on the interest rate (30/yr loan). The rates back then should have been like 3.2-3.4% from what I understand, and should be similar even to this day.

I also saw some online lenders that want a ton of fees upfront (like $2,500), but the interest rate is around 3.4%. Then there were lenders that wanted $500 in fees, but would give me 3.9% interest rate. I think it would be a no-brainer to go with the higher fee one because interest will build so fast that it's worth it to pay more upfront.

 

[dave_the_nerd]

$15-$20k down on a $200k house? That'll barely cover closing costs and loan origination fees.

Prepare to get crushed on the interest rate and insurance premiums.

Good job saving up that much on that salary though. That's pretty impressive. Keep at it, regardless of whether you buy a house or not.

 

[MrSquished]

Thanks for that. This is the type of stuff I need to know!

I'm an agent in Northern NJ. Definitely don't go with the sellers agent. They have a contractually obligated duty to work for the best interests of the seller. They aren't on your side. As mentioned above don't sign an exclusive contract with a buyers agent either. Just find a good one who earns your business on their own by working hard vs having a signed contract. As mentioned, the sellers pay the commission of both sides, so the buyers agent is working for you for free essentially. I'd also go with a local mortgage broker. The big banks are notoriously hard to work with and ruin deals. Find a local mortgage broker who has lots more options. Most deals fall through because of mortgage problems, don't let that be you.

I'm only in the NJ area but I've never heard of 0 down loans in this crazy market here. Sometimes 5% down loans are ok here but that is super rare. It's almost always a 20-30% down loan. But everything varies by market.

 

[Sho'Nuff]

First things first, you are doing a great job saving. That said, I am concerned about the price point of your targeted home. You stated that you make 45k, but you are looking to buy a home that is $175-200k and you have about 15-50k, for a downpayment. That means you will be looking to borrow from 155-180k - which is well over three times your income on the low end and a little over 4 times your income on the high end. I am probably a bit more conservative than most when it comes to money, but someone once told me that you should avoid borrowing more than 2.5 -3 times your annual income. That is because you want your mortgage to be less than 25% of your net take home pay (or better yet, less than 20% of your take home pay). Otherwise you run the risk of being house poor and/or quickly defaulting on the debt if anything goes wrong with your job.

Second - if you only put 20k down on the house your loan to value ratio will be greater than 80%. At your income level lenders will almost certainly require you to have private mortgage insurance, which can easily add a few hundred dollars a month to your house payment. And that couple hundred bucks does does almost nothing for you - its almost a pure waste.

Third - you seem like you have thought this through so sorry if this is something you have already done. Make sure when you are determining how much house you can afford that you are consideirng the full PITI (principle interest taxes insurance) payment, and not simply the initial loan payment (which is usually just the principal and interest part). Most lenders require taxes and insurance to be escrowed, which means that your PITI payment will be at least a few hundred more than just the PI part of the equation.

All that said my honest advice is - as much as you have been doing a great job saving (and you really have), I would wait another year or two and buy the house when you have a true 20% down payment and you aren't going to have to borrow so many times your annual income.

To put this in perspective, my first house was a little more expensive than what you are considering - about $230k. At the time my income was 60k, so it was a real stretch. The reason I ended up buying the home at all was because my then girlfriend (now wife) and I bought the house together, and her income was slightly less than mine at the time. So I was comfortable with the transaction given that two people were on the note and we were only borrowing 2.3 times our combined income.

Put another way - if you make $45000 a year your monthly take home pay is probably around $2950. The principal and interest payment on a $180,000 loan at 3.9% is $850/mo. Lets say PMI is $100/mo, and insurance is $80/month. That means that your home payment will be $1030, or 30% of your net pay - and that is not even including taxes on the home, utilities, or the like! A house payment that is 30% of your net take home is too much IMO.

Good luck with whatever you decide. But honestly I would wait a little bit longer and save up some more dough. Either that or look at cheaper homes.

PS - Also - how old are you and what do your other savings look like? Are you saving for retirement yet?

 

[nboy22]

$15-$20k down on a $200k house? That'll barely cover closing costs and loan origination fees.

Prepare to get crushed on the interest rate and insurance premiums.

Good job saving up that much on that salary though. That's pretty impressive. Keep at it, regardless of whether you buy a house or not.

I know there's PMI involved and interest rate may not be the best, but I should be able to get by. And about the saving, Thanks! I pride myself in keeping things frugal and have been lucky to have a good rental agreement that minimizes rent. At one point I was only paying $325 a month for everything.

I've heard closing costs should be $5-8k, but I'm sure it varies a lot depending on situations.

I'm an agent in Northern NJ. Definitely don't go with the sellers agent. They have a contractually obligated duty to work for the best interests of the seller. They aren't on your side. As mentioned above don't sign an exclusive contract with a buyers agent either. Just find a good one who earns your business on their own by working hard vs having a signed contract. As mentioned, the sellers pay the commission of both sides, so the buyers agent is working for you for free essentially. I'd also go with a local mortgage broker. The big banks are notoriously hard to work with and ruin deals. Find a local mortgage broker who has lots more options. Most deals fall through because of mortgage problems, don't let that be you.

I'm only in the NJ area but I've never heard of 0 down loans in this crazy market here. Sometimes 5% down loans are ok here but that is super rare. It's almost always a 20-30% down loan. But everything varies by market.

I'm not putting 0 down though. I thought about that a couple of years ago and it wasn't a good idea. If I buy a 200,000 house, I should be able to throw down probably ~10-11% of that. NJ is nuts compared to here in Phoenix. Phoenix real estate is very cheap compared to a lot of big cities.

 

[Sho'Nuff]

...All I know that was a red flag was that when I did my prequalification they had a PDF form sent to me and there was a line that stated "Interest Rate Not to Exceed 4.875%" Now to me, that sounds like they were trying to screw me on the interest rate (30/yr loan). The rates back then should have been like 3.2-3.4% from what I understand, and should be similar even to this day....

I also saw some online lenders that want a ton of fees upfront (like $2,500), but the interest rate is around 3.4%. Then there were lenders that wanted $500 in fees, but would give me 3.9% interest rate. I think it would be a no-brainer to go with the higher fee one because interest will build so fast that it's worth it to pay more upfront.

Couple thoughts on this. First, your interest rate will be determined based on how much of a risk the lender sees you as. Just because there are 3% loans available does not mean you will be offered one. You have a great credit score, but a realtively low income compared to the house you are looking to buy. So its conceivable that lenders consider you an elevated risk. More risk means higher interest rate. So its entirely possible that the lender was just trying to hedge his bets instead of trying to screw you.

Second - the fees you are talking about are often referred to as origination fees and/or "points." One point equals 1% of the loan value (e.g., 1 point on a $100,000 loan is $1,000. Paying points on a loan can be advantages in some instances, but it really depends on how long you are going to stay in the home, what the difference in interest rate is, and what the rest of your finances look like. If you are only going to spend a short time in the home (<7-10 years), paying points may not make sense. Lets take the scenario you mentioned - Lets say lender 1 will lend you 180,000 at 3.9% for 30 years with a $500 origination fee. Lender 2 will lend you the same amount at 3.4% for 30 years with a $2500 origination fee. You might be surprised that the monthly principal and interest payment on the first loan (3.9%) is only $50 more than that of the second loan. Which means that you would have to stay in the house for at least 4.1 years before you started to reap the benefits of the 3.4% interest rate. The longer you stay in the home though, the more the lower interest rate saves you. For example, the 3.4% loan will save you about $22,000 in interest over the life of the loan, or, about $19500 over 30 years when you factor in the 2500 point payment.

 

[Red Squirrel]

I would try to look at lower price point, whatever the bank says you are approved for, you want to go lower. They don't take into account all the other costs of living like hydro, gas, insurance, taxes etc... All that stuff goes up every year too, so you want to make sure you have a decent buffer of extra income. But if you still have raises left ahead of you then that will help in the future as well.

If I recall, I put 12k down on my house and it was 165k total. There was a certain amount that you have to put in order to not have to pay extra interest or something, I forget. So I basically put that amount. So the money you have saved is pretty good especially if you continue to save more. Spring is a good time to look too, try to do it when most of the snow is melted, that's when you'll catch any water related issues such as with the basement.

 

[nboy22]

First things first, you are doing a great job saving. That said, I am concerned about the price point of your targeted home. You stated that you make 45k, but you are looking to buy a home that is $175-200k and you have about 15-50k, for a downpayment. That means you will be looking to borrow from 155-180k - which is well over three times your income on the low end and a little over 4 times your income on the high end. I am probably a bit more conservative than most when it comes to money, but someone once told me that you should avoid borrowing more than 2.5 -3 times your annual income. That is because you want your mortgage to be less than 25% of your net take home pay (or better yet, less than 20% of your take home pay). Otherwise you run the risk of being house poor and/or quickly defaulting on the debt if anything goes wrong with your job.

Second - if you only put 20k down on the house your loan to value ratio will be greater than 80%. At your income level lenders will almost certainly require you to have private mortgage insurance, which can easily add a few hundred dollars a month to your house payment. And that couple hundred bucks does does almost nothing for you - its almost a pure waste.

Third - you seem like you have thought this through so sorry if this is something you have already done. Make sure when you are determining how much house you can afford that you are consideirng the full PITI (principle interest taxes insurance) payment, and not simply the initial loan payment (which is usually just the principal and interest part). Most lenders require taxes and insurance to be escrowed, which means that your PITI payment will be at least a few hundred more than just the PI part of the equation.

All that said my honest advice is - as much as you have been doing a great job saving (and you really have), I would wait another year or two and buy the house when you have a true 20% down payment and you aren't going to have to borrow so many times your annual income.

To put this in perspective, my first house was a little more expensive than what you are considering - about $230k. At the time my income was 60k, so it was a real stretch. The kicker was my then girlfriend (now wife) and I bought the house together, and her income was slightly less than mine at the time. So I was comfortable with the transaction given that two people were on the note and we were only borrowing 2.3 times our combined income.

Good luck with whatever you decide. But honestly I would wait a little bit longer and save up some more dough.

PS - Also - how old are you and what do your other savings look like? Are you saving for retirement yet?

Thanks for all the advice, it's great! And thanks for reinforcing that I'm doing a good job - I'm definitely trying to reach my goal of being a homeowner soon! I understand the concern with the 20%, and that's how I originally wanted to do it. I could wait out, but I would have to move to another place still once summer hits since my electricity bill is going to be crazy. I think I could be possibly house-poor for some windows of time, but I planned on renting out at least 2 of the rooms. As mentioned before, I'm not relying on those people either. I know I could make it work if I didn't have any renters, it would be tight. If I had the two renters though, I'm calculating at most I'd be paying $700 a month for mortgage + insurance + utils during the peak months.

I will have PMI, no question about that. I think PMI rates seem to be around 100-150 a month here. Definitely wasted money I agree, but if I do it now there's no way of avoiding it. Do you know if most people find it worth it to refinance after they hit 20%? I realize the answer is probably just hit the 20% and not have to pay extra fees to refinance in the first place.

I'll have to look into the PITI, but I think I've got a good idea on what the overall payment would be at its worst. It would help to get another pre-approval process going to see what the lenders can offer at this point.

I just turned 29 a couple of months ago and I just started my Roth 401k a couple of years ago. Company matching at 5% and I'm putting in the 5%. I would like to put in more, but kind of waiting to get the house and then figure out my situation from there.

 

[x26]

ETA: Get several estimates on Financing--Ask for a "Good Faith Estimate" in Writing outlining Interest Rates, Closing Costs, "ALL" Fees associated with making a Loan from them, etc.

 

[nboy22]

Couple thoughts on this. First, your interest rate will be determined based on how much of a risk the lender sees you as. Just because there are 3% loans available does not mean you will be offered one. You have a great credit score, but a realtively low income compared to the house you are looking to buy. So its conceivable that lenders consider you an elevated risk. More risk means higher interest rate. So its entirely possible that the lender was just trying to hedge his bets instead of trying to screw you.

Second - the fees you are talking about are often referred to as origination fees and/or "points." One point equals 1% of the loan value (e.g., 1 point on a $100,000 loan is $1,000. Paying points on a loan can be advantages in some instances, but it really depends on how long you are going to stay in the home, what the difference in interest rate is, and what the rest of your finances look like. If you are only going to spend a short time in the home (<7-10 years), paying points may not make sense. Lets take the scenario you mentioned - Lets say lender 1 will lend you 180,000 at 3.9% for 30 years with a $500 origination fee. Lender 2 will lend you the same amount at 3.4% for 30 years with a $2500 origination fee. You might be surprised that the monthly principal and interest payment on the first loan (3.9%) is only $50 more than that of the second loan. Which means that you would have to stay in the house for at least 4.1 years before you started to reap the benefits of the 3.4% interest rate. The longer you stay in the home though, the more the lower interest rate saves you. For example, the 3.4% loan will save you about $22,000 in interest over the life of the loan, or, about $19500 over 30 years when you factor in the 2500 point payment.

Thanks! This is really great info... I really like the comparison math because that's one of the questions I had floating around in my head. Also, what is your thoughts on putting the 20% down right away vs 10-11%. Do you know what the interest savings would be in the long run? I think I could figure it out, but it might take me some time to think about the math.

I would try to look at lower price point, whatever the bank says you are approved for, you want to go lower. They don't take into account all the other costs of living like hydro, gas, insurance, taxes etc... All that stuff goes up every year too, so you want to make sure you have a decent buffer of extra income. But if you still have raises left ahead of you then that will help in the future as well.

If I recall, I put 12k down on my house and it was 165k total. There was a certain amount that you have to put in order to not have to pay extra interest or something, I forget. So I basically put that amount. So the money you have saved is pretty good especially if you continue to save more. Spring is a good time to look too, try to do it when most of the snow is melted, that's when you'll catch any water related issues such as with the basement.

I will consider things that are lower. I have found a couple of places that are nice for around 175,000, but usually anything below that becomes less ideal in terms of space, location, or age of the home. I might be able to find something lower, but would probably need some interior work anyways.

I think nowadays it's 20% down payment or else you face PMI, which can be around $100-200 extra a month. Fortunately here in Phoenix we don't really have basements to deal with, so I need to inspect the roof and A/C more than anything. The foundation is important too, of course.

 

[Sho'Nuff]

Thanks! This is really great info... I really like the comparison math because that's one of the questions I had floating around in my head. Also, what is your thoughts on putting the 20% down right away vs 10-11%. Do you know what the interest savings would be in the long run? I think I could figure it out, but it might take me some time to think about the math.

There are a lot of sites around that have calculators that can help you figure out the math. One such site is http://www.goodmortgage.com/Calculators/Compare_Two_Loans.html

That said, assuming a $200k home, if you put 10 or 20% down the financed amount will be $180k or $160k. Assuming 30 year fixed at 3.9% interest, the $160,000 loan will cost you $34000 less over the life of the loan. At 3.4% interest, the $160,000 loan will cost you $32,000 less over the life of the loan.

Note - the savings gained from having a lower loan origination amount significantly exceeds the savings that will be gained from a reduction in interest alone. The difference in total payments for a $180k loan at 3.4% and one at 3.9% is $18262. For the $160k loan, the difference in total payments for a 3.4 vs. 3.9% loan is $16236.

Obviously, the best course of action is to make your original loan amount as low as you reasonably can while also minimizing your interest rate. For example, the difference in total payments between a $180k loan at 3.9% and a 160k loan at 3.4% is $50194 over the life of the loan!

I will consider things that are lower. I have found a couple of places that are nice for around 175,000, but usually anything below that becomes less ideal in terms of space, location, or age of the home. I might be able to find something lower, but would probably need some interior work anyways.

I think nowadays it's 20% down payment or else you face PMI, which can be around $100-200 extra a month. Fortunately here in Phoenix we don't really have basements to deal with, so I need to inspect the roof and A/C more than anything. The foundation is important too, of course.

I have purchased 5 homes in my lifetime, and the one thing I have come away with from that experience is that every home will have problems. It doesn't matter if its brand new or 300 years old, there will be some issues that you will either have to fix or live with. Just remember - many interior projects (paint, drywall, laying laminate or tile floor, installing new toilets, installing new sinks, etc.) can be done by the average homeowner at the fraction of the cost of a contractor. You just need some time, gumption, a few basic tools, and some decent google/youtube searching skills. The stuff you want to look out for are big items that might be best fixed by a professional (foundation issues, roof issues, rotted window sills, stuff that is high up in the air, etc.). Inspect the house multiple times and go in with a check list of things you want to look at. There are lots of websites with those sorts of checklists available for free. See, e.g., http://www.totalhomeinspection.com/totalhomeinspectionchecklist.pdf; http://www.popularmechanics.com/home/interior-projects/how-to/a3431/best-home-inspection-checklist/; etc.

Good luck.

 

[OILFIELDTRASH]

Pmi is going to be for the life of the loan if you go with a fha loan. I don't see you qualifying for a conventional loan at that income to debt ratio. You can not afford a 200k house right now. If the 200k houses are what you ultimately want you will need significantly more down payment . 40k plus about 7k in closing costs. The 20 percent down does not include your closing costs. So you have to pay 20 percent and closing costs in full to actually be at 20% down.

 

[dank69]

Avoid PMI at all costs. It would be better for you to turn tricks for extra money until you have 20% down payment than have PMI.

Seller should be paying the closing costs. That's home buying 101.

 

[TwiceOver]

I know renting feels like throwing money down the drain, but that's a LOT of house for your income. Granted, income rises and all, but I'd be very worried about your monthly stability. After taxes and your Roth you're probably down in the $3000/mo take home area. That much house I'd imagine is around $1200 with all the add-ons for 30 years. IDK, maybe that is what rent goes for there?

You're doing a good job saving. Just keep going. But it's your money man if you've already made up your mind, there's no way we are going to be able to change it for you.

 

[lykaon78]

Regarding the realtor: When I bought my home, a new spec home, I didn't use a buyers realtor. My father-in-law was our acting realtor so he gave us some pointers and helped us through the process but when we negotiated the final price we indicated that we would be acting without a realtor and negotiated our best deal including a 3% discount that represented the portion of the realtor fees that would have been paid to our realtor. The selling realtor made us sign a document certifying that he was not acting as our realtor but otherwise it was a painless transaction and we saved 5k or so in fees.

Don't go hosing a realtor that takes you around to see homes only to be cut-out at the purchase. Work on you own and it can help save some money.

 

[FelixDeCat]

Pay the higher rent or find a cheaper place IMO.