Advice on buying my 1st home

In My Humble Opinion
1

My lease for my apartment will be ending this summer and I want to purchase a house. I don’t have much money to put down (only about 5k in my checking account), and I want to pay as little as possible for closing costs. My income is about 3k per month and I spend about $1500 per month so the rest is disposable income/savings.

I’d like to buy a house for about 150k to 200k. Should I go through a realtor? Should I buy a home that is for sale by owner? Is it a good idea to do a purchase money 2nd where I get a loan that is 80% loan to value and get the other 20% financing elsewhere to avoid the mortgage insurance?

What should I generally exepect for closing costs either way? Do I apply at my bank first to apply for the financing or find a home that I want and a realtor and then apply for financing? What intersest rate can I expect? If I get a 150k home for instance, what would the total payment would I be looking at for principal, interest, taxes and insurance per month?

Are other any other tips that any of you could offer? By the way, my fico score is 715 if that helps.

2

715 is nice, but where are you in the country? In my neck of the woods, 200K maybe gets you a trailer. Maybe.

Is 1500 that you spend including rent?

20% saved up and ready to be put down isn’t a bad idea, especially if we’re talking the 150-200 range. There are worse things than being house poor.

3

I live in Iowa, USA and the cost of living is relativley low. I live in a fairly new 2 bedroom apartment that is very spacious and it costs me $585 per month. In Iowa, 200k will get you a pretty nice home. The same 200k house in Iowa could sell for at least 600k in California.

The $1500 I spend per month includes everything, including my rent.

4

I’d suggest that you extend your lease for another year. With $1500 of disposable income, plus your current 5 grand, you could easily have 20 to 25 thousand for a down payment. With 20% down, you avoid Private Mortgage Insurance (PMI), which most lenders require on purchases w/ less that 20%. PMI does almost nothing for you, so it’s just a waste of your money to protect the lender. There’s a small risk that interest rates could rise, but there’s also a good chance that the market will weaken, giving an advantage to buyers.
Use that year and a half, or so, to educate yourself about your market and real estate in general. Get yourself a booklet of amortization tables, available where they sell office supplies. Barron’s puts out a good one, they’re about 10 bucks.
Consider buying a multi family house. While being a landlord can often be a PITA, it’s also an additional source of income and can leverage into more house than you can afford on your income. This shouldn’t be your “dream home”, it’s a “starter house” and you should concentrate on practical matters, not your wants. If you get a good location, a multi family will appreciate faster than a single family.
Always use your own attorney to advise you on contracts, inspections, and the closing. Remember that a real estate agent, or Realtor (a member of the Nat. Realtors Assoc.) works for the seller and not for you, no matter what they may tell you.
Learn what to look for and what to avoid, do lots of “tire kicking” and don’t rush into a deal.

5

I would avoid “For Sale By Owner”, unless you have a very good idea of the house’s value. In my experience, sellers often have an inflated sense of their home’s value. In any case, it is unlikely that any advantage involved in this kind of selling will accrue to the buyer.

Always get the house inspected. Never use an inspector recommended by the real estate agent.

6

Get this book

7

I would strongly recommend that if you decide to make an offer on the house that you write into the contract that any post-inspection repairs that the homeowner does must meet your approval, and that they must be done and re-inspected before closing. That saved our butts when we were sued.

What happened was we made an offer on a house and had the inspection done. It came up with serious problems (foundational) and the homeowner agreed to do the repairs, but they went with a cheap fly-by-night contracter who was essentially going to slap a bandaid on it. We invoked that clause and refused to buy the house unless the repairs were done correctly. They sued. We won, but without that clause we would have been royally screwed.

Don’t let your agent tell you that you “can’t” write in clauses like that. (Ours argued vehemently with us when we insisted.) You can put in anything you want-- the homeowner can just refuse the offer if they don’t like your contract, but I would be very, very wary of anyone who refuses to allow you to re-inspect and have final approval over repairs.

Secondly, don’t be impressed with a “home warranty.” It usually doesn’t cover anything but the appliances in the house, like the furnace. The house that we have now had one of those warranties. In six months, the basement started leaking, but, guess what, the warranty didn’t cover that.

8

First- contact your local City, County or State Housing dept, or perhaps Chamber of Commerce. They often will have special programs for 1st time homebuyers. Including such goodies as Mortgage Interest Credit, where your Mort interest paid gets (usually) a 20% tax credit. They will also have scads of helpful reading materials.

9

There is no reason not to have a realtor helping you find a house. I would recommend finding the largest realty office in the area you are interested and let them know what you are looking for. Sometimes they’ll have a listing come in and will let you know about it before it is officially listed. But remember, as was stated before, THEY REPRESENT THE SELLERS AND NOT YOU.

Realtor.com should become your friend. I also don’t think you should shy away from a home being sold by owner, but be sure you know the value of the home. You should be able to find other recent house sales in the area to make the determination. Check with the county for the record of home sales. In my area, those are actually available through the web. Zillow.com might be of some help, but from what I’ve seen they aren’t all that accurate.

If it were me, I’d save up until I had the 20% down. As others have said, PMI really gets you nothing but $100/month expense. I’ve heard of other people that did as you suggested and had a second loan to get their mortgage/value ratio below 80%.

Closing costs can be anywhere from 1% to 5% of the loan. However, by far your biggest expense is going to be the interest you pay on the loan. Shop around for a low interest rate.

You’ll have to check with your county for your tax rates, but those are again all public record. Principal and interest would be about $875/month on a $150,000 loan. Insurance is again going to be highly variable but check with an agent to get a ballpark figure.

You also need to consider other costs you might not have now: garbage, water, sewer, cable, etc. And don’t forget to set aside at least $100/month for maintenance. Also consider the age of the roof and furnace. Those can be huge expenses and if they are going to need to be replaced sooner than later you may want to set aside more.

The good news is that for the first several years pretty much your entire payment is deductible. In essence, Uncle Sam will be paying for 1/4 of your house payment.

Don’t forget you may need to make some purchases for your new house:
Yard equipment (lawn mower, hoses, etc.)
Appliances (washer/dryer)
Tools (ladder)

I would not buy a house that needs more than 3 or 4 “fixer upper” type things. You’ll likely never get to them.

For our house, we offered up a bounty to friends/acquaintances to find us a house. It worked. We found a house that a friend of a friend was planning to sell and hadn’t hit the market yet. They had been planning on using a realtor, so we split the realtor fee (6%). Saved us both thousands of dollars.

Other advice that has already been said but bears repeating:

  1. Find your own attorney to review the sales agreement. It will cost you $100 to $200, but it will be money well spent. Be sure you have a clause that says any problems need to be fixed to your satisfaction.

  2. Get the home inspected by a reputable home inspector.

  3. Real estate agents are not on your side. They want the sale and represent the seller, not you.

10

You can get away with less than 20% down by having a secondary loan. We did 10% down and are not paying PMI, the other 10% is a Home Equity Line of Credit, where we can pay down as much as we want, even drawing it back out again if we feel like it.

On Lissa’s point, we asked for money to be taken off the sale price, rather than have the seller do the repairs. That may or may not be an option for you, but either way, do not let the seller do the repairs without a clause like Lissa recommends. The seller has every incentive to go bargain basement.

An inspector is important, but there’s nothing better than knowing for yourself what is right and what is wrong, and being right on the inspectors heels as he goes through the house.

I like the shows House Detective, which is all about home inspections, and Holmes on Homes, which is about fixing other contractors screwups. Both talk about code and important home problems extensively. Get some books on home repair and improvement, that will give you an idea what steps will need to be taken to make various repairs.

11

My recommendation is to know how much a house will cost you yearly before buying one.
Like others have noted, you not only have your monthly principal and interest payment for the house, you have to figure in a monthly payment for homeowners insurance, private mortgage insurance, and property taxes.

Also, when choosing a house you need to look at the age of certain things that will need replacing. Furnaces require replacement every 20 years. Roofs need to be replaced every X number of years. Asphalt driveways every 20 years. Garage doors, windows, appliances. Everything has a lifespan and will need replacement at sometime over a 30-year mortgage.

And, like others have noted, maintenance costs. Exterior paint, yard maintenance, tools, hot water heater, cleaning supplies, etc. It all adds up.

Also, figure in monthly bills you may not of had before. Gas, electric, garbage pickup, water bill, cable, phone, etc.

And while mortgage interest is tax deductible, it is not a dollar for dollar refund. What it does is reduce your amount of taxable income. So, while you may pay $10,000 in interest payments your first year in your home, it will translate to a $2,000 refund in your taxes.

12

Wait a sec, you make $3k/m and spend 1.5k/m and only have 5K available???

Sorry the numbers just don’t work, you are either:
Underestimating your expenses
Overestimating your income
or just started making 3k/m

Either way you have to figure out why the amount you have available is only $5k, it sounds like it should easially be 4 to 5 times that, perhaps more - somethings wrong here.

13

This is excellent advice. Everything is negotiable. When we bought a house in NJ, the seller was moving to new construction in town. (We were renting in town.) We knew that all new homes were coming in late, so we wrote a complicated clause letting them stay, but invoking a penalty after a certain amount of time. It kicked in of course. Actually, everyone won - we were in a month to month lease, and didn’t mind staying put, and they got to stay in their house until the new one was finished, and didn’t mind paying a bit more for the privilege. In NJ you always use a lawyer, and ours helped us keep this from being a landlord tenant relationship, which has problems.

One more thing - since you’re local, keep track of the houses for sale and the realtors listing them. When you see a new person move in, ask them how they liked the realtor they used and the seller’s realtor. It might lead you to a good one.

14

When you are ready to start house-shopping, get pre-approved for your loan. Not pre-qualified, pre-approved. Qualified means someone’s taken a quick look at your finances and believes you could get a loan. Approved means the paperwork is done, and the bank is just waiting for you to find a house so they can cut a check, and it means the seller doesn’t have to wait around to see if you can get a loan.

Don’t fall in love with a house and overbid. Be sanguine. If it doesn’t meet ALL your specifications, it’s not your house, so keep looking.

Remember, in addition to the costs of the house, you’ll also need money for repairs. You won’t be able to call the landlord anymore when the toilet overflows.

In Florida, you can get what’s called a Homestead Exemption for your primary residence. This knocks $25,000 off the value of the house for tax purposes. Many people forget to do this, and end up overpaying their property taxes. I don’t know if Iowa has something similar.

When you get insurance, get a high deductible ($1000 or higher) to keep your premiums down. Also get enough to cover your belongings as well as the structure of the house.

Drive by the house you think you might like at different times of the day. Are there loud neighbors? Kids playing basketball at 9pm? Is the next-door neighbor cutting his lawn at 6 in the morning? Do the other houses look neat and tidy, or are there cars up on blocks and uncut lawns?

Most sellers end up paying all the closing costs, since that comes out of their proceeds and it’s hard for a buyer to come up with several thousand dollars.

Above all, don’t be afraid to walk away. If a house doesn’t feel right, don’t force it. This is the single biggest expense you will ever have, and most people only do it two or three times in their lifetime. You want to make sure you will be happy in your castle.

Good luck!

15

By my rough estimation, you are looking at buying too much home for your income.

A really good rule of thumb is that the money you spend for your house should be no more than 1/3 of the money you bring home. If you have $3k per month income, you should be looking for a house that’s more in the $100k to $120k range. $150 would be absolutely pushing it. If you get a $200k house (which you probably will be able to pull off if you try) you may find yourself having a hard time affording things like decent furniture or a life.

You should probably scrape together a bit more in savings before you go into this. You’ll need about 5 percent down (which is what you have right now for a $100k house) and a couple thousand in closing costs, inspection fees, etc.

16

Just bought a house last month.

  1. Give yourself time to look at many houses. Some suck. Some are nice. There’s a lot of variety out there so look. Don’t just look at its initial appearance. Ask less obvious questions of yourself. How much storage space does it have? Will I need to buy a washer and dryer? And where do they go?

  2. Test every door in the house - every single one - and every window to ensure they close and latch properly. Inspectors tend not to look at this and they’re common problems and extremely irritating.

  3. Get a home inspection. Find a certified inspector on your own. Follow him around. Make sure he does a thorough job; ours spent two hours at it and he still missed a number of things.

  4. Trust nothing anyone tells you. If you’re interested in a house and the realtor says “Well, gosh, whaddya know, we’re supposed to get two offers tomorrow,” he/she is lying. They are getting no offers; you’re being played to put in a high offer. The sellers will always lie to you about what work the house needs. Trust only professionals that you are paying.

  5. Get a lawyer. You need a lawyer to do this right and to protect yourself. Lawyers are expensive. Not having a lawyer is more expensive.

  6. You need more money. No matter how much money you have, you need more. So buy your house but anticipate many expenses. You’ll want to replace that hideous light fixture, you know, the ceiling fan that looks like it was installed by Vikings. You’ll want to do this. And that. Oh, whaddya know, now you need a new dresser. And you want to install AC. And it goes on.

  7. Make sure you look at the house’s power capabilities if it is an older house. Some older homes only have 60 or 100 amp services, which are generally unsuitable. 150 amps is the minimum. It costs a lot to upgrade this.

  8. Ask for a copy of previous bills, especially heating bills. (Electricity is more controllable than heating. All humans need a reasonable climate to live in, but how much power you use is very elastic.)

  9. Shop around for the moprtgage. Be very clear that you are shopping around; tell the loan advisor you are also speaking with such and such bank as well as their bank. Allude to good deals the other bank offered, even if they offered you nothing. Banks’ mortgage offers invariably have higher rates or worse conditions than the offers you can get if you’re firm; they just want to stiff you if they can. Our bank started off talking about prime plus half floating, and we talked them down to well below prime fixed just by saying their competitors were offering us deals. If we’d taken the first offer we would have been hosed out of thousands of dollars.

17

Also check out various banks for special first time buyer mortgages. I only needed 5% down through my bank’s first time buyer mortgage.

No, you don’t; a realtor who knows what they’re doing is enough. I didn’t have the former but I did have the latter.

18

The seller’s real estate agent is not on your side, no. A real estate agent hired by you will be on your side.

19

A real estate agent hired by you is also better equipped to find houses in your price range–they have access to listings that haven’t hit the Internet (e.g.: realtor.com).

20

If they work for a different agency than the one selling the house, your chances are better that they will work for you.

Sure, most agents are probably honest, hardworking people who want what’s best for their clients, but I’ve had really, really* bad *experiences with realtors, and thus I’m extremely wary.