Alright, it’s that time. My fiancée and I have decided to get a place in Philadelphia in the near future, in anticipation of my separation from the military. I just made Captain (4 years) so it’s a matter of public record what I’m making. She’s a starving grad student. Once we clean up our credit ratings, we’re going to start looking at two-room houses in Philly, probably in the range of $100k - $200k, with an intent to rent it out until we’re ready to move there.
This makes it qualify as an “investment” property, and I know that the rules are a little different, but here are some things I’m deeply ignorant on:
What the heck are “points”?
Fixed or variable rate?
If her credit sucks and we’re married, can I still take on the loan alone?
Should I?
What common “tricks” will a seller use to make a property more desirable?
What pitfalls do I need to look out for?
While I love a good horror story, I’d prefer anecdotes that relate to one of the questions above. Archiveguy, I know you just closed (congrats!) – what do I need to know?
My only bit of advice is to go with a fixed rate. a) rates are going up eventually, because right now they can’t get much lower, and b) if it DOES get a lot lower, you can refinance!
Hi Jurph, my SO and I are in the process of buying a home, so I may have some helpful info. YMMV.
One “point” is 1% of the loan amount. So if you’re getting a loan for $150,000, one point would be $1500. You may be asked to pay points to a mortgage broker who will shop around for a good rate, or a bank may offer you “discount points” to buy down your rate. For example, you pay 1500 up front and your interest rate drops from 6% to 5.875%. Only the latter type of points may be tax deductible (I say “may be” because I’m not sure whether discount points paid on investment properties are tax deductible).
As far as fixed vs. variable rate, it would help to know your intentions. Fixed rates are very low right now, but adjustable rates are lower still. If you plan to spend only a few years in the new home, you would probably be better off looking into an Adjustable Rate Mortgage (ARM). In Philadelphia right now, a 30yr fixed mortgage with no points can be had for a bit under 6% and a 5/1 ARM for around 5%. If you plan to be moving out of the home in five years anyway, why pay the higher rate for the five years you are there? The rate is still fixed.
AFAIK, there are some programs right now in Philly for people making under 55K, if you qualify, it may allow you to put less money down, or secure a more attractive interest rate. I don’t know whether these programs, or other “first time home buyer” programs may be applied to investment properties.
As far as a seller making a property more desirable, I can speak from experience in saying that, in today’s market, they don’t have to do much. In many Philadelphia neighborhoods, houses are routinely selling for more than the asking price! But houses, just like cars, tend to sell on looks, so beware of new paint, etc. covering old damage.
I would suggest going to www.bankrate.com and checking out their mortgage calculators. You can plan out various scenarios and see how your payments will work out.
I’m not sure what you mean by “clean up your credit ratings”, but pretty much any lender is going to need to see your entire financial picture for the past 2 years (and any serious negative stuff from the past 7 years) before they even think about giving you a loan.
Your first order of business is to narrow down your range. $100,000-200,000 is awfully broad. If you put 20%, or $20,000 down on a $100,000 house, you’re looking at a monthly payment of around $450/month (assuming a 5.5% 30 year interest rate). If you put 20%, or $40,000 down on a $200,000 house, you’re looking at a monthly payment of around $900/month – in essence, double what you’d pay for the former.
When you find a house or area you like, do some homework. If you plan on having children, is it a good school district? Call the local utility company and find out what the average gas/electric and water charge is. Is there a homeowners’ association fee? In other words, try to add in all the variables so that you can make a fiscally prudent decision about what you can afford. My BIL nearly bought a house until someone else pointed out to him the line that stated the property taxes were $4,500 a year. That added $375 to his monthly payment that he hadn’t added to the equation. The mortgage is just one piece of the puzzle.
Note that if you put less than 20% down, you’ll have to pay PMI so I would make a concerted effort to put at least that amount down.
Look at your budget REALISTICALLY and know walking in how much you can consistently (as in every. single. month.), comfortably afford. I implore you NOT TO LET THE BANKS DECIDE THIS FOR YOU by doing a calculation based on your income. Seriously. When we were looking for a house 10 years ago, we were pre-approved for double the amount we were personally comfortable with spending. Because, after all, we wanted to EAT most nights. Remember, the banks don’t care that you have a social life or that you might want to furnish the joint.
Shop around for the best interest rates. A lot of websites today will do the legwork for you. Use one bank’s rate as leverage, if needed, to convince another local bank to match that rate. Get pre-approved for the amount you’d like to spend before house hunting to make the negotiation process easier and to possibly give you an edge should there be another interested buyer.
Hire a realtor and be clear to him/her what you want. Insist that they only show you houses that you can afford. It’s okay to look at houses $5-10,000 above your budget if the realtor thinks the sellers will negotiate the price down to your level. But there’s no sense in looking at houses out of your price range. A lot of people have gotten into trouble because they walked into a house that was out of their budget, fell in love with it, and bought it despite the fact that 2+2 would never equal 3. Two years later they had to put the house up for a sale as distressed sellers. You’ll know the type because when you go through the house, there are no curtains or furniture. They simply couldn’t afford them.
Wow, thanks! This is a lot of really good information that I didn’t even know I needed to know, so I’m going to toss a few more questions out to see if I can get some more bites.
For what it’s worth, PunditLisa, I am almost certainly going to go with USAA as my bank for the loan – they treat me like royalty, they don’t bullshit me, they answer questions honestly and openly (“Why would I start with a regular IRA when I haven’t yet maxed out a Roth?” “You probably don’t want to do that.”), and their customer service over the phone is the best customer service I have ever encountered from any company, full stop.
Avoiding PMI
I understand that PMI is a rip-off, and you should avoid paying it because it’s basically money down the drain (please correct me if I’m misinformed!). Is there a way to borrow the down payment so you don’t have to pay PMI? Would the interest accrued on that debt be worse than the PMI?
Re-selling later on
My fiancée asked me this one, and I was kind of surprised that I didn’t have an answer. “So you buy the house, the house is its own collateral, and then you sell it to someone else, who uses it as collateral to buy it from you? Don’t you still owe the bank part of the purchase price? It’s a thirty year mortgage, but how do you sell it before you’ve paid for the whole thing?”
Closing costs
I talked to my bank and started the ball rolling today, and they pre-approved me for a loan. I doubt I’ll go that high, though. With closing costs (which are, of course, paid up front) I would have to pretty much empty out my checking and savings accounts. Not something I really relish, you know? Anyhow: I know you pay closing costs to the realtor (something like 7% split between the buyer’s agent and the seller’s agent?) but I don’t really know the etiquette. What’s standard? Will anyone in the industry go lower, and if they will, should I be worried? If they want more than the norm, should I tell them to go to hell? What other costs are associated with closing on something like this?
I don’t know how much this will really apply, since you will be renting it out at first (something i know nothing about), but one thing that I learned when we bought our house was that your more or less bleed money for the first three months. Remember your first apartment when it turned out that towels and soap and Windex and toilet paper cost a thousand times more than you ever bargained on? Your first house is like that, but worse. It’s garden hoses and a drill and hedge trimmers and approximatly 3000 lightbulbs. It’s a hornet’s nest in the gutters that was dormant during the inspection and an air conditioner that worked fine until asked to run 24 hours a day and then needed freon. Plan on at least one major appliance self-destructing in the first three months. More to the point, you suddenly want to spend money cause all the sudden you are living in your house, not some temporary place and all the things that didn’t bother you at all when you were thinking “ah, this is only temporary” suddenly really irritate you because this is your home and you want to do things right.
Now, sense you won’t actually be living in it for a few years, your situation is a bit differnet, but I strongly recommend you budget in such a way that you can put a little aside each month in a house fund. You will so enjoy having the cash to make a few things the way you want them in your home–even if it’s just to replace the horrible wallpaper in the kitchen or get real bookcases instead of cinder-blocks and planks.
Lash yourself to the mast, Jurph. I just bought my third home and am about to buy another one for investment (if all goes well)…
PMI is simply insurance the bank takes out to guarantee payment of the loan should you default. Sadly, it’s THEIR insurance and they make YOU pay the premiums. It’s effectively lost money to you. Nor is it deductible on your taxes.
Ways to avoid PMI:
Put down 20% as your downpayment.
Find a lender willing to do a special type of loan called (variously) an 80-15-5 or 80-10-10. In both cases the lender gives you 80% for the mortgage then ANOTHER note to make up the difference. Since the second note is NOT technically a mortgage it can be used as a downpayment to avoid PMI. Don’t ask me why they do it that way…they just do.
You may sell that house at any time. Technically you and you alone own it. Sadly, you hold this loan (your mortgage) which is secured by the property. So if you sell it you have to pay off that note (or arrange something else with the loan holder).
So you can sell at any time but when you do you have to pay off the balance of your mortgage immediately upon selling. If fact, you can’t even give good title to the home to another buyer if there’s still a lien against the home.
Example: You buy the house tfor $100,000. Over 5 years you pay off $10,000. Then you sell it for $120,000 (happiness!).
The closing attorney (a lawyer who makes sure the sale abides by all federal, state, county, etc laws) takes the $120,000 the buyer gives to you…then gives $90,000 to the bank that holds YOUR mortgage…then gives $30,000 to you (it’s a heady feeling…I’ve been there). So you’re mortgage is paid off, the buyers have a different mortgage, and you have your profit.
Warning: unless you roll that $30,000 into another house in fairly short order you can take a substantial tax hit on that cash. But if you DO roll it into another home then you dodge that hit.
The SELLER (usually) pays the realtors out of the proceeds from the home you’re buying (at least for every house I’ve bought and sold (MD, VA, OH) it’s been that way. Don’t let someone game you on that. I’ve never known an agent to go lower than 6% but you might find your region of the country is different.
But closing costs are FAR more than just the realtor’s fee. There’s insurance, inspections, attorney’s fees (they earn it, trust me), and all sorts of miscellaneous fees that are involved with the purchase of a house. These can add up to a chunk of real change. Make sure when you deal with your buyer’s agent (more below) that they give you a good rough approximation of closing costs.
In addition, WHO pays WHAT closing costs can be negotiated. In my recent purchase (in OH…a depressed market) I stood firm until the sellers agreed to pay $3000 of the closing costs (almost all). So I brought little to the table except my downpayment. OTOH, I just SOLD a house in VA where the market is hot hot HOT. And I forced the BUYER to pick up ALL closing costs or I wouldn’t sell to them. So I needed to bring NO cash to the table and didn’t even attend the closing. So what you pay for closing costs is ALWAYS in play.
On the subject of ‘buyer’s agents’ I recommend them heartily. You’re aware of the concept that a realtor sells a house for an owner, right? Well a buyer’s agent represents YOU, the buyer, in the transaction. They’ll go through the MLS listings of available houses and find you places you might like. They’ll represent you to the selling agent in terms of negotiating closing terms and move in/out schedules, they’ll find you insurance and inspectors. And they’ll make sure that the closing attorney isn’t ‘best pals’ with the selling agent if you get my drift. Buyer’s agents are an unmitigated good, IMHO.
And best thing? They cost YOU, the buyer, NOTHING. They get paid when they find you a house to buy and their payment comes from the 6% I mentioned up there as the agents fees. 3% to the selling agent and 3% to the buying agent. It’s a good thing and you get a pro on your side.
Just about all of the posters here covered everything for you, but seeing as I am in your region (I’m in NJ, but I know a lot about PA Real Estate) I will give you a few more hints.
Around here…there really is no such thing as a buyers agent. The only thing you can really do is not use the Realtor (or company, for that fact) that listed the house. If you see a house you like and you call the number on the sign in front of it and talk to the Realtor who listed it, they are now a “dual agent”. They work for both you and the seller, which is really not what you want. You want someone working for YOU. The only upside to a dual agent, is they have more to lose if the deal falls apart. 2 commissions, not just 1.
If your fiance’s credit is really bad (and I mean bankruptcy), you may have to go for a FHA loan. You cannot get a conventional loan if your bankruptcy has not been discharged for at least 2 years. FHA loans are 3% down. There are + and - to both loans, so look into them before you decide what house you want. This is going to decide how much you put down vs. how much your monthly payment is.
The typical Realtor commission is 6%. Ever since this area has become swamped with discount brokers, most Realtors have been cutting that to 5.5% or even 5%. You don’t pay them, though, so I wouldn’t really be concerned with it. Your biggest bargaining issue is the closing costs (as Jonathan Chance said).
Your next biggest bargaining issue is the home inspection. Don’t cheap out! Paying a company $225 for an ok inspection is not better than paying a company $400 for a great one. Sure, you save yourself $175 now…but after you move in and everything starts to break, was it really worth it?? I recommend going to www.ashi.com to find your inspector (actually, in PA it is law that home inspectors are a member of this group or another national organization similar to this one).
The only thing Jonathon Chance said that is somewhat incorrect is about the profit you make on the house and rolling it into another house fairly quickly. Federal tax laws have changed on that. You ONLY pay capital gains if you did not live in the house for 2 years before selling it. If you rent it out for 2 years, live in it for 5 years, and then sell it - you don’t pay capital gains taxes (as long as your profit is under $250,000). I think he was referring to the investment part of Real Estate rather than the residential part. If you and your fiance are planning on renting it and then moving into it, you will be ok on the taxes (as long as you live there for a minimum of 2 years).
Just make sure that the realtor you use is not employed by the same company which is representing the seller. Although you’ll be given a “dual agency” form, there’s really a conflict of interest there. I ran into a lot of trouble on a real estate deal with this one. It’s just better to have an agent who doesn’t have any vested interest in the sale of that particular home.
Secondly, I highly reccomend altering the contract with adendums which cover you in case of problems. The way the contracts are written now doesn’t adequately protect you.
For example, put in a clause in the contract that if the inspection finds that there are major problems with the house, you can cancel the contract. As it’s written in to the printed contract, if a flaw is found, the owner has the option to fix it or release you. However, sometimes a problem is so severe that it’s better just to walk away, because there really is no fixing the problem permanantly, like with some foundational issues that just get worse over time.
In our clause, we wrote that if we decided to let the owner fix any problems the inspection report disclosed, we had to approve of the repair. The homeowner in our case wanted to use a shady fly-by-night contractor who had the lowest price, and whose solution to the problem was a “band-aid fix” at best. If we didn’t have that clause, we would have had to accept the shoddy work, and probably would have had to re-fix it shortly afterwards.
It’s best to also specify that all repairs must be completed and re-inspected before closing. In our case, the homeowners were going to put the money to pay for a repair in an escrow account and the repair would be done later. However, if something had happened during the work that meant the price went up, we really would have had no recourse. We insisted everything be done before closing to avoid that possibility.
Remeber that you can write anything into the contract that you wish. If the seller doesn’t want to agree to it, so be it, but at least you’re covered.
Ask your lender for the highest loan amount for which they’d approve you. This is NOT the same as the amount that they’ve already pre-approved for you.
Live well within your means, as houses are expensive toys. If you can afford a $200K house, aim for a $150K (ish) house.
ALL negotiations must be in writing! Even if you (or your agent) sends the seller (or their agent) nothing more than a fax outlining the latest points of agreement, put everything in writing.
If the seller rejects your offer and doesn’t promptly submit a counter-offer, walk away. (Had I known this tip last year, I would have saved myself a lot of aggravation.)
If something doesn’t “feel right” about the negotiations, walk away without regrets. (Again, this would have prevented a lot of aggravation for me.)
Allow 10% of the purchase price for closing costs, and another 10% for move-in costs.
Well I bought a house about 2 years ago, and it was my first.
One of the best things I bought was “Buying and Selling a House for Dummies (Canadian Edition)”. It paid-off in spades.
When it came to a home inspection, be wary. My realtor suggested an inspector, and a few people at work recommended him as well, so I used him.
Total waste of money, he pointed nothing out except the obvious, he made recomendations that would have violated electrical code. I then found out that in Canada, they belong to no recognized body, and are not held liable for anything they missed!
In th future, I will just get friends who are in the construction industry to go over the house, it’s way cheaper (a case of beer) and they do as good of if not better job then an inspector.
A funny anecdote from when I was buying my house, I needed $1000 to secure my offer, I was cashing in my RRSP’s (retirement fund, like a 401k I think) and the money had not come through yet. I had collecting my extra change for a while, so I rolled it up and took it to the bank, I had $978 in change laying around! So I secured my house offer with spare change!
My wife and I just bought our second house, here’s my advice (in addition to all the good advice above):
When you are doing the Purchase and Sales agreement - the contract where the purchase price, terms, dates, etc. are spelled out between you and the seller - get an attorney to review it for you and add some clauses to protect you. The form the realtors used is usually very biased in the seller’s favor. Our attorney added stuff like “if the house burns down between now and the closing - the buyers can get their deposit back and walk away”.
Buy the owner’s Title Insurance. To summarize - the lender will make you buy a Title Insurance policy for their protection. This is a policy that protects them in case of faults in the title that were not found at the time of the sale - like an owner from the early 1920’s forged his ex-wife’s signature when selling the property and her heirs now claim to own half your house. However, this policy doesn’t protect you - only the bank. You need to buy your own policy for a few hundred dollars. This is handled at the closing and is added to the closing costs. This is optional, but every agent and attorney I’ve talked to has highly recommended this - it’s a low probability event, but it can save your house in case something really strange happens.
Lots of others have given good advice on the financial side. Let me give you some advice about making sure it is liveable.
If you see a place you like, visit it many times at all hours. Is it difficult to get to during rush hour? can you get out of the driveway at this time? Are there partiers at night in the neighbourhood? If you see any flags in windows instead of curtains, or beer bottles on window sills be wary. What do the neighbour’s yards look like? Since you are thinking of using this as an income property for a while, you’ll probably have to be in a certain type of zoning. What are the limits to apartment size in this zone? What is the average age of resident in this neighbourhood?
I think all of your other questions were answered, but I didn’t see this one.
My husband has really bad credit and little income. We just applied for a home equity loan, and the bank was basing it solely on my income and credit, which is very good.
In Ohio, if you’re married, your spouse has dower rights. It won’t hurt your wife not to be on the mortgage papers. I have no idea whatsoever if it could hurt you, should the marriage end. That’s a question for a lawyer.
Regarding the 20% downpayment, or not, as the case may be.
I think this is a really important point. My mortgage company gave me a loan for 80% and I put in 5% phat cash. The other 15% came from a home equity line of credit – which is the name they gave to a second mortgage so I could use that money to put in 20% downpayment. Got that? (My wording was a little squirrelly).
What this meant to me was: If I paid PMI, then that was roughly $65 per month (on a 100K house) down the drain with no benefit to me whatsoever. Just money in the bank, for the bank. Boo. Bad. With the home equity line of credit – which was an interest only, 10-year loan with a balloon payment, the amount of money going out per month was exactly the same. Only if I paid more than $65 per month, I’d be paying down on the principal and building equity on my house. And the interest on the second loan was just as tax-deductible as the interest on the first. And therein lies the difference. Why flush $780 down the toilet each year when I could deduct that same amount on my taxes AND own more of my house? When I thought about the tax and equity advantanges, paying PMI was like playing the lottery: only suckers would buy into that one!
FWIW, I used Wells Fargo Home Mortgage. They claim that they do not sell mortgages.
If her credit sucks and we’re married, can I still take on the loan alone?
Should I?
In Minnesota, the mortgage acceptance is based on the income of both, but the best credit history of the 2 (or was for my SO and I)
Other random info: inspections - Inspectors are only allowed to inspect what they can see without moving stuff. They can’t get on the roof. They can’t move the TV stand to see what if behind it. They can tell you that the wiring is 60yrs old and probably not up to code.
realtors - Your realtor should be working for YOU. If after a couple of times looking at houses they aren’t getting a good idea of what you are looking for, or if they are pushing you to look at houses you aren’t interested, tell them to knock it off. I have never had to sign a contract with a realtor when I was buying, and if I wasn’t comfortable with them, I would consider walking away and finding a new one.
** adjustable rate loans** There are a couple of things that you have to look at when getting an adjustable rate loan. What is the starting rate? (usually a percent or 2 below a fixed rate loan). How long is that rate good for? (1 yr, 5 yrs, 7 yrs…). How much can they raise the rate by, and how often, after that time? (ie 1% a year, every year?) What is the maximum amount total that they can raise it? As someone else mentioned, an adjustable rate loan can be a no brainer if you aren’t planning on living in the house for that long. If I’m planning on being there for 5 years, and the initial rate is good for 5 years, what’s to lose? If you think you are going to be in the house for 30 years, then a fixed rate is probably a better option. Rates are low right now, and not likely to get any lower. Why not lock it in for the long run.
misc Be sure you know what is staying and what is going. If all the applianced are going with the seller, you are going to have to buy new ones. Or the mirror you love may not be staying. Definately visit the house you find several times at several different times of day/days of the week. You might not reallize that the neighbor likes to listen to his music REALLY loudly. Or having the school bus stop in your front yard may bother you.
Another point I thought of, regarding the home equity line of credit: Since it’s a line of credit and not a second mortgage (officially), that means when I’ve paid it off I already have a $15K line of credit approved and available to me. The damn thing even came with its own credit card. So if the dying dogwood tree in my front yard takes a dive on my front porch, now that it’s hurricane season here, I could draw down on the LOC (line of credit) at a much better interest rate than my MasterCard – assuming I haven’t saved up enough cash to be a nest egg that would pay for a new roof or whatever.
[Martha Stewart voice]
It’s a good thing.
[Martha Stewart voice]
My only other advice to any one who plans to live in Florida: start looking for insurance now!
As I’m about to log off and go get groceries, you might also search for the thread I did about a year ago in MPSIMS. It was something about “What I learned when I bought my first house” or titled along those lines. Just search on my user name for about a year ago – a lot of people posted some really cool advice in that thread. And you’ll get to read about all of my closing and move-in shenanigans.
Yes! This makes perfect sense to me. You get one bank to front you the (relatively small) amount of money that the other bank demands that you place up front. Then every dime you spend is on your house or interest. Much better. I’m a little fuzzy on how you were able to use the house as collateral twice, but the only people I can see getting screwed on that are the banks, so I’m not terribly worried.
Whoa - a bank can sell your debt to another bank? I can see any number of bad things about this, but right off the top of my head: what if the bank to which your mortgage gets sold decides they want more interest? Is it a pretty solid contract?
Thanks to all for the excellent replies, by the way. I’ve got another question to throw on the fire, if there are any takers:
I keep hearing “don’t buy a condo” because the side fees are a sunk cost and the continuous construction of new ones makes your old one less desirable. But within my price range, damn near everything is a condo. Anyone want to warn me off vehemently, or pat my back and tell me everything will be fine?
Whatever I say here refers to Wisconsin state, but MAY apply to other states as well.
The “agent” is not the company. It makes no diff if I am handling the buyer and someone else in or out of my company is handling the seller. Neither is a dual agent in this case.
If I have no buyer’s agency agreement with the buyer, I still am working for the seller. So is the listing agent. Neither is a dual agent, and neither is the company each or both work for.
A dual agent/agency is when one agent (person) handles both sides of the transaction. Although you may logically cry, “conflict of interest!”, we are bound to treat both sides fairly and not show bias to either according to ethics and state laws. :dubious: I know, I know, but some of us really do try.
Nevertheless, I highly recommend, if you are in the market to buy, that you sign a Buyer’s Agency agreement with a Realtor[sup]TM[/sup] – who should then include FSBOs in his looking as well. If a transaction occurs with a “typical” sale, the seller will pay his commission. If you buy from a FSBO, you will. And both are negotiable.
Jurph, note that both these mortgages were from the same lender. And there’s supposed to be a difference between a mortgage broker/lender and a bank. One difference is that some lenders can sell your mortgage – don’t worry, all the terms remain the same. Your interest rates would not change. The only thing that changes for you is the address to wherever you send your payment. Unfortunately, when mortgages change hands like that, some people experience problems with their payments getting to the correct mortgage holder at the correct time. Usually you are not penalized for it, as it’s obviously not your fault someone else decided to use your mortgage as a moneymaking pawn.
Here’s the thread I mentioned, that I started last year. I wrote some interesting stuff about my realtor you might find useful.
As for the condo question, I can’t imagine why anyone would want to live in one. But then again, I’m a gardener. I couldn’t live without my own yard. Further, I got so sick of apartment living and all the BS that goes along with that, I even rented a house for four years before I bought one. I just can’t stand sharing a roof or walls with others. Or having someone else’s hot water heater leak into my place, etc. and so forth and so on. I guess if you are all about someone else doing the maintenance I could see it. I think if you just keep looking and maybe rearrange your list of priorities as you shop (your standards will change as you go along and see what’s available in your area), you can probably find a single-family house and avoid the whole condo thing. (Association fees… Bah! Humbug! I’m allergic to those too.)
Once we clean up our credit ratings, we’re going to start looking at two-room houses in Philly, probably in the range of $100k - $200k, with an intent to rent it out until we’re ready to move there.