advice for first time home buyer?
 

Cliftnotes: Semi-newly wed 23yr olds thinking about home buying. Combined income of 72k. Looking at houses in the 110-140 range. I have no credit history. Any suggestions/what should I expect.

Background:

I'm 23. Married 5 months ago. Currently renting. I figure my wife (23) and I are about 6-12 months out from buying a house. Neither one of us knows much about real estate. We both moved to Huntsville, AL when I graduated college for my job. I work in project-management for a defense contractor. Good industry, good future. She works in retail. We have no plans to leave Huntsville in any foreseeable future. The cost of living is pretty low around here. We dont have kids, and plan to wait until we are about 30. Once we have kids, my wife will not be working.

Financials:

I make 42k/yr. I can expect 4-8% raises every year with my current position/job. However, 100k/yr is a extreamly attainable by the time I'm 30 as long as I switch jobs/positions a couple times. There are like a billion defense contractors in this city. My wife makes 30k/yr and it will probably not ever substantially increase.

Our only debt is 15kish in student loans from my wife. We just finished paying off her credit card that had about 5k on it. Her credit score should be pretty good. No late payments ever. I assume I have a credit score of 0. I've never barrowed any money. I just applied for a credit card last week for the first time. I was given a $1000 credit line. In general I hate debt. I plan on using the card and paying it off each month.

We have about 10k spread accross savings/checking. On our current budget we are saving 2k/month(I assume this will end up going towards a down payment.)




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I think (unless someone has some input on this) we will be looking for a house in the 110,000-140,000 range. I also think I would like to do a 15/yr mortgage. We would plan on living in this house until kids time, so a 3/2, 1250-1600 sq/ft house isnt too small, and is what we are looking at.

Any suggestions/input? Anyone have first-time home buying advice?

Re: advice for first time home buyer?
 

Credit history ratings are a very important part of owning a home. In order to get the best possible rate for your mortgage I would recommend 2 things. The first is to pay off that 15k student debt as fast as you can to get it off your credit history. After you have done that, you should probably co-sign with your wife as it seems her credit history is more established than yours with all her payments being on time.

It's good that you've already applied for a modest credit card. It would be a good idea to use it to try to build up your own credit history. I would recommend trying to get 1 or 2 more down the line (after you've had a good history with your first card) to show that you can handle purchasing on credit and making payments on time without a problem.

Re: advice for first time home buyer?
 

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The first is to pay off that 15k student debt as fast as you can to get it off your credit history.

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So given our current situation of wanting to buy a home within the next year, you feel we should pay off the student debt before saving for a down payment? Originally I was thinking along those lines, however recently I've been leaning the other way. The money we are saving is going to go towards on of the two things, which ever makes more sense financially. Your advice is actually the opposite from what most have told me. Are you considering our time frame into your advice?

Re: advice for first time home buyer?
 

It seems silly for you all to be buying a home.

Why are you rushing into this? I know that isn't your question, but I'm stumped as to why you feel the need to rush into a home?

Re: advice for first time home buyer?
 

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It seems silly for you all to be buying a home.

Why are you rushing into this? I know that isn't your question, but I'm stumped as to why you feel the need to rush into a home?

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Rent prices for a 2 bedroom apt in our area are aprox 800/month. Rent for a small house is aprox 1100/month. We have no re-location plans. We both hate living in an apartment and would like to get into a house. We also figure it makes more financial sense. Thats about our only reasoning. Why would buying be silly for someone in our situation?

Re: advice for first time home buyer?
 

You're so young, and you aren't planning on having kids for 7 years. Why need a big house?

And why do you need a 2 bedroom apartment? 1 bedroom is enough, no? I'm guessing you live in a 2 br apartment because you feel cluttered based on your "hate renting" comment.

I don't know man, owning a home is a big responsibility. It's kind of nice when you live in an apartment and the water heater/washer/dryer/dishwasher/refrigerator/stove/microwave/toilet breaks and you can just call the maintenance dude to fix it.

Owning a home comes with a lot more hassle and stress and mowing a yard. lol.

Re: advice for first time home buyer?
 

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So given our current situation of wanting to buy a home within the next year, you feel we should pay off the student debt before saving for a down payment? Originally I was thinking along those lines, however recently I've been leaning the other way. The money we are saving is going to go towards on of the two things, which ever makes more sense financially. Your advice is actually the opposite from what most have told me. Are you considering our time frame into your advice?

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By paying off the 15k before you apply for a loan as opposed to after, you may be able to save a large amount of interest added on to the loan by getting a substantially better rate. Every case varies obviously, but if you think you can save more by adding to your down payment then by all means go that route. My personal experience has seen that paying off large debts can have significant differences on loan rates, but I encourage you to do your own research for your case. My advice comes from helping a friend throughout his first home purchase after college and my not be applicable to your case.

Re: advice for first time home buyer?
 

BTW the student loan is a stafford federal loan with a 3.75% interest rate if that makes a difference. Obviously debt is debt, but I've heard certian debt like federal student loans are looked at differently.

Re: advice for first time home buyer?
 

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BTW the student loan is a stafford federal loan with a 3.75% interest rate if that makes a difference. Obviously debt is debt, but I've heard certian debt like federal student loans are looked at differently.

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I still have $11K left of student loans but am not in a rush to pay them off because I thought of all debts you could ahve, these are like the best. Low low rates and the monthly minimums are really low also they don't hound you when you fall behind.

I'm sort of in the same boat..could pay this debt off tomorrow if I wanted, but I'm looking to buy in 12-18 months and assumed the money would be best spent as downpayment. Basically I'd tell the loan dude "Would you rather me pay this debt off, or put it down on the house?" as I could go either way of course.

EDIT: Cantsit...do you and your wife have any car debt?

Re: advice for first time home buyer?
 

zero debt besides that student loan.

Re: advice for first time home buyer?
 

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BTW the student loan is a stafford federal loan with a 3.75% interest rate if that makes a difference. Obviously debt is debt, but I've heard certian debt like federal student loans are looked at differently.

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Yes this does make a difference. A loan officer would likely give you a lot more slack when it comes to debt from a Stafford loan as compared to an auto loan or credit card debt. Talk to your officer/broker and ask for how your rates would vary going each route.

Re: advice for first time home buyer?
 

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BTW the student loan is a stafford federal loan with a 3.75% interest rate if that makes a difference. Obviously debt is debt, but I've heard certian debt like federal student loans are looked at differently.

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Yes this does make a difference. A loan officer would likely give you a lot more slack when it comes to debt from a Stafford loan as compared to an auto loan or credit card debt. Talk to your officer/broker and ask for how your rates would vary going each route.

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Plus the interest is tax deductible.

Krishan

Re: advice for first time home buyer?
 

First, have you run your credit report? Having a bank account and student loans is a credit history, so don't sell yourself short.

Second, a $15k loan at 3.75 stretched over 20 years is having very very little impact on your monthly debt-to-income ratio, so it DOESN'T MATTER. As for debt, the bank doesn't so much care how much you have in terms of dollars, they only care how much that debt is costing you each month (i.e., if you've got $2 million in debt, thats fine as long as your income is sufficiently high to support all that debt).

Ok, so say you can save up $15,000 in one year. The question is whether its better for you to spend $15k on our student loans or spend $15k on a down payment. The bank will BY FAR prefer you to put that money into the down payment. Down payments are absolutely greater protection for the bank whereas lower debt-to-income ratio only implies greater protection - it demonstrate a better ability to pay, but the bank still has to rely on you to actually make those payments. When you put the money down as a down payment, the bank is more protected in the case that you default and they have to foreclose and resell the property, becaue their basis is lower.

Third, student debt is considered 'good' debt by banks. They look at it kinda like an investment that is paying monthly dividends (higher salary). So don't worry about it. Now if it were credit card debt or car loans or something, that'd be different. But student debt is ok as long as you have a healthy DTI.

Re: advice for first time home buyer?
 

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First, have you run your credit report? Having a bank account and student loans is a credit history, so don't sell yourself short.

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The student loan is not in my name. It's my wifes. I have never had a loan or a credit card.

Re: advice for first time home buyer?
 

If you plan to be in the house for 7+ years and your monthly payment is not much more than renting, you might as well buy a house. You'll end up saving quite a bit in taxes.

Go to dinkytown.net. You can input all the variables in a rent vs. buy calculator there. Play around with some of the numbers and get a feel for how different scenarios change things. If you are comfortable after that, it sounds like buying a house could be right for you in this situation.

The main things to be concerned about will be time in the house and the difference between your mortgage payment and your current rent. There are a lot of fees associated with buying a house and you'll need several years for appreciation to make that back up.

Re: advice for first time home buyer?
 

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zero debt besides that student loan.

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Good answer. What about all the other stuff I wrote?

Re: advice for first time home buyer?
 

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You're so young, and you aren't planning on having kids for 7 years. Why need a big house?

And why do you need a 2 bedroom apartment? 1 bedroom is enough, no? I'm guessing you live in a 2 br apartment because you feel cluttered based on your "hate renting" comment.

I don't know man, owning a home is a big responsibility. It's kind of nice when you live in an apartment and the water heater/washer/dryer/dishwasher/refrigerator/stove/microwave/toilet breaks and you can just call the maintenance dude to fix it.

Owning a home comes with a lot more hassle and stress and mowing a yard. lol.

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"I'm guessing you live in a 2 br apartment because you feel cluttered based on your "hate renting" comment. "

Pretty much nailed it on the head. But is that bad? I would think "hating renting, wanting more space" is a pretty common reason to buy a house.

I dont consider a 1200-1600 sq/ft house, $110000-$140000 a big house. Infact I sort of figured people would be calling me a nit given our current wages. I feel I'm being on the very conservative side looking at houses in this range.

As far as all the hidden costs of owning a house per fixing things ect... I guess I could be underestimating things there, but again thats why I'm looking in this particular price range-So we dont get over our head in our first house. Also, I am very handy. I've literally never taken my car to a shop. Anything reletivly minor I can fix myslef. I figure it will be similar with most things at home.

Re: advice for first time home buyer?
 

Don't sell yourself short....buy a house in the 200k-220k range, and although those mortgage payments may seem a bit steep at first, in 5-6 years with inflation and your yearly increase in salary.... it'll be like candy.

Re: advice for first time home buyer?
 

I think the most common reasons people buy a home is because they have kids. Y'all are a long way from that.
And I find it surprising you can only get 1200-1600 sq. feet in Huntsville for $140K.

If you're a nit then I'm a huge nit, I'll be looking to buy in 12-18 months and will likely buy for 150-160K in Houston (and should be able to get 2000s.f.) on household of ~95K with already a lot saved up and a lot in Roth's and 401(k)'s. I'm really really conservative though.

My current rent is around what yours is. I'm just wondering if saving for a couple years would give you more options. I wouldn't just move into a home because you feel like it's the next step. You can save $50K in 2 years.

How are your retirement accounts?

Re: advice for first time home buyer?
 

I agree with the later posters: you do not have to pay off the student loan. As long as your payments are on time, it should not negatively effect your credit.

I would suggest you keep saving $2,000 per month, and try to build that up so that you can put 20% down on your house. 20% of a $125,000 house requires $25,000 down, which is only 12 1/2 months of savings. If you are able to put down 20%, you will not have to pay PMI (private mortgage insurance).

Keeping another $10,000 for emergencies is probably a good idea as well. (There are a lot of other expenses in moving and furnishing a new house.)

If you buy a $125,000 home and put down $25,000, your mortgage balance is $100,000. If you get a 30-year at 6.25%, your P&I payment is only $615 per month. You should easily qualify for this on a $42,000 salary. (Adding your wife's salary will help even more.)

Even if your payments on the student loan are $100 per month, these amounts are low based on your salary. If you allocate 28% or less of your gross monthly income to housing (P&I, taxes, insurance), the house will be very affordable. 28% of gross monthly on $42,000 is $980 per month.

You should check your own credit reports and credit scores. You can also talk to a lender, and maybe get pre-approved at some point.

-Tom

Re: advice for first time home buyer?
 

I'd strongly consider moving out to the county if you don't mind the commute and consider relocating later in the future to SE or Madison. Your 110-140k will go much much farther. Talk to a loan officer before you look at houses or talk to a RE agent. This is really gonna determine what you can buy.

Go 30 year on the mortgage, it'll give more flexibility without much more cost.

Re: advice for first time home buyer?
 

Not necessary to pay off your loan. Only necessary to not miss a payment. Repeat: since you have very few credit lines, how you behave on those lines will strongly affect your credit score (and subsequently, the terms on your future mortgage). A little debt is not a bad thing. Just make all your payments on time.

Re: advice for first time home buyer?
 

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Go 30 year on the mortgage, it'll give more flexibility without much more cost.

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If he were gonna go 30, these wouldn't be the reasons to do so. Go 15, unless you want to "leverage" your home, which is stupid IMO.

The flexibility should be a non-factor as you should be able to afford payments on 15 year loan if you can on 30 year loan. If you can't, then you are buying too much anyway. And it's a lot bigger cost to go 30, unless again, you are doing it for leverage.

Re: advice for first time home buyer?
 

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Go 30 year on the mortgage, it'll give more flexibility without much more cost.

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If he were gonna go 30, these wouldn't be the reasons to do so. Go 15, unless you want to "leverage" your home, which is stupid IMO.

The flexibility should be a non-factor as you should be able to afford payments on 15 year loan if you can on 30 year loan. If you can't, then you are buying too much anyway. And it's a lot bigger cost to go 30, unless again, you are doing it for leverage.

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Um... Explain how its a bigger cost. You make the same amount of payments you'd make on the 15, but if you decide to not make an extra payment... you don't. Assuming the rate on the 30 is no higher, its essentially the exact same loan when you apply an extra payment to principle.

Re: advice for first time home buyer?
 

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Go 30 year on the mortgage, it'll give more flexibility without much more cost.

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If he were gonna go 30, these wouldn't be the reasons to do so. Go 15, unless you want to "leverage" your home, which is stupid IMO.

The flexibility should be a non-factor as you should be able to afford payments on 15 year loan if you can on 30 year loan. If you can't, then you are buying too much anyway. And it's a lot bigger cost to go 30, unless again, you are doing it for leverage.

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Um... Explain how its a bigger cost. You make the same amount of payments you'd make on the 15, but if you decide to not make an extra payment... you don't. Assuming the rate on the 30 is no higher, its essentially the exact same loan when you apply an extra payment to principle.

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Rates are lower on 15 year loans.

Re: advice for first time home buyer?
 

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Go 30 year on the mortgage, it'll give more flexibility without much more cost.

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If he were gonna go 30, these wouldn't be the reasons to do so. Go 15, unless you want to "leverage" your home, which is stupid IMO.

The flexibility should be a non-factor as you should be able to afford payments on 15 year loan if you can on 30 year loan. If you can't, then you are buying too much anyway. And it's a lot bigger cost to go 30, unless again, you are doing it for leverage.

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Um... Explain how its a bigger cost. You make the same amount of payments you'd make on the 15, but if you decide to not make an extra payment... you don't. Assuming the rate on the 30 is no higher, its essentially the exact same loan when you apply an extra payment to principle.

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That is correct but usually the interest rate is a tad better on a 15 yr fixed.

I also disagree with if you can't afford a 15yr you can't afford a 30yr. It is just a matter of a opinion though.

Re: advice for first time home buyer?
 

Per Marketwatch.com 30yr fixed is 6.09% right now and 15 yr fixed is 5.72%

$140K loan comes out to following mo. payments:

30: $848
15: $1160

$165K in total interest on the 30 year (assuming you don't make extra payments of course) and $69K total interest on the 15 year.

IMO the extra flexibility is not worth it. If you can afford $850, you can afford $1160. And if you have little emergencies that month put them on your credit card and pay it off 4 weeks from now when you've got the money. At 72K household income this shouldn't be an issue as he's saving $2K a month.

Re: advice for first time home buyer?
 

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Go 30 year on the mortgage, it'll give more flexibility without much more cost.

[/ QUOTE ]

If he were gonna go 30, these wouldn't be the reasons to do so. Go 15, unless you want to "leverage" your home, which is stupid IMO.

The flexibility should be a non-factor as you should be able to afford payments on 15 year loan if you can on 30 year loan. If you can't, then you are buying too much anyway. And it's a lot bigger cost to go 30, unless again, you are doing it for leverage.

[/ QUOTE ]

Um... Explain how its a bigger cost. You make the same amount of payments you'd make on the 15, but if you decide to not make an extra payment... you don't. Assuming the rate on the 30 is no higher, its essentially the exact same loan when you apply an extra payment to principle.

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Rates are lower on 15 year loans.

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I know. Otherwise it wouldn't even be a question.

Re: advice for first time home buyer?
 

am I missing something? Did you guys say a 30y loan will cost you as much as a 15y loan?

I feel i may have misread something, or myabe I just dont understand financing as well as you guys.

I was always led to believe that you will save a ton if you are not paying interest for those extra 15 years. If you guys could clear this up I would be greatful.

Re: advice for first time home buyer?
 

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Go 30 year on the mortgage, it'll give more flexibility without much more cost.

[/ QUOTE ]

If he were gonna go 30, these wouldn't be the reasons to do so. Go 15, unless you want to "leverage" your home, which is stupid IMO.

The flexibility should be a non-factor as you should be able to afford payments on 15 year loan if you can on 30 year loan. If you can't, then you are buying too much anyway. And it's a lot bigger cost to go 30, unless again, you are doing it for leverage.

[/ QUOTE ]

Um... Explain how its a bigger cost. You make the same amount of payments you'd make on the 15, but if you decide to not make an extra payment... you don't. Assuming the rate on the 30 is no higher, its essentially the exact same loan when you apply an extra payment to principle.

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Rates are lower on 15 year loans.

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I know. Otherwise it wouldn't even be a question.

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I thought you were assuming the rate on the 30 was no higher. Obviously, if the rates were the same it wouldn't make any sense to tie yourself to the 15, but I don't know if that scenario would ever exist. You'd also have to make sure there was no pre-payment penalty even if you did find that scenario.

Re: advice for first time home buyer?
 

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am I missing something? Did you guys say a 30y loan will cost you as much as a 15y loan?

I feel i may have misread something, or myabe I just dont understand financing as well as you guys.

I was always led to believe that you will save a ton if you are not paying interest for those extra 15 years. If you guys could clear this up I would be greatful.

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You wouldn't pay off a 30 year loan in 30y. You pay it off in 15, but you gain extra flexibility through having the choice if a medical emergency comes along, wanting to take a vacay, someone loses a job etc. Its mostly a utility question. If you can significantly increase happiness by moving to a new price point etc etc.

Rates are higher on a 30y which is why you'd have to weigh this out. If they were equal, everyone in every circumstance should just get a 30y.

Re: advice for first time home buyer?
 

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am I missing something? Did you guys say a 30y loan will cost you as much as a 15y loan?

I feel i may have misread something, or myabe I just dont understand financing as well as you guys.

I was always led to believe that you will save a ton if you are not paying interest for those extra 15 years. If you guys could clear this up I would be greatful.

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You wouldn't pay off a 30 year loan in 30y. You pay it off in 15, but you gain extra flexibility through having the choice if a medical emergency comes along, wanting to take a vacay, someone loses a job etc. Its mostly a utility question. If you can significantly increase happiness by moving to a new price point etc etc.

Rates are higher on a 30y which is why you'd have to weigh this out. If they were equal, everyone in every circumstance should just get a 30y.

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okey so you take the 30y loan w/ plan to refinance, but in case something drastic happens in your life you have more options than you would w/ the 15y loan? This makes sense.

Re: advice for first time home buyer?
 

john,

Did I say anything about refinancing? You just make the difference up in payments on principle. So you'd pay the same each year. I have not run numbers on the difference with a 6.1 v a 5.8 or something of that sort, or what value you'd place on that and the additional flexibility. But its something that deserves consideration before its written off the board.

Re: advice for first time home buyer?
 

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I have not run numbers on the difference with a 6.1 v a 5.8 or something of that sort, or what value you'd place on that and the additional flexibility.

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I did this literally a handful of posts up.

Anyway John, I thought you were levelling so I didn't respond. There most definitely is value in being able to decide which months you can and can not pay more towards your mortgage.

It is my opinion, however, that if you can't afford $1160 a month on your shelter, then you probably can't afford $850 either. The $300 when you are pulling in 6K a month should never be the hinge on whether or not you can "make it". If it is, you are spending too much on other crap like cars, etc.

It is also my opinion that many people (esp. Americans) would get the 30 thinking the exact same thing "I'll get the 30 but pay it off in 15-20". LOL. I'm not suggesting this is you, Thremp. Or anyone else in here, but for most people they might do this for about 4 months then go "wow we keep having a few hundo extra every month. We're balla!" and lose sight of their original goal.

Re: advice for first time home buyer?
 

Prohorn,

I didn't see it. Thank you.

My point was to put the extra $300 each month into your mortgage and only use it when necessary if it fits your utility curve.

But yes, I do agree with what you're saying. Most Americans suck [img]/images/graemlins/frown.gif[/img] Then again I get buyer's remorse for spending like <20% of my gross monthly income each month instead of only spending like <10% so I'm just a degen in that regard.

Re: advice for first time home buyer?
 

Guys I wasnt levelling. This is porlly only fourm I keep leveling down to a minimum (maybe uNL as well).

I just wasnt aware that you can take out a loan for 30y that say equals to paying $850 a month, and pay more (say whatever a 15y loan payment would be) every month w/o being penalized.

At this point this is what I am understanding.

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Anyway John, I thought you were levelling so I didn't respond. There most definitely is value in being able to decide which months you can and can not pay more towards your mortgage.


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so you are saying: a 30y loan can essentially be a 15y loan, the only difference being the interest rate?

Thanks for being patient w/ me guys.

Re: advice for first time home buyer?
 

John,

Yes. There might be a prepayment penalty but thats only at the extreme end.

For my situation (mostly due to my risk preferences), I'll attempt to get a 15 year loan for my first home. I will then attempt to pay this off in <3 years. The reason I want a 15 year loan is that if I lose my current form of income and result to 9-5ing it... I will then be only able to make that payment. I pay a small amount extra, but give myself a huge insurance in being 100% sure I'll be able to pay off the loan.

For someone with a slightly variable income (sales for example), they might be inclined to go for a small amount of flexibility in their loan. Its just something that needs to be considered.

John, aren't you British as well? I'm uncertain of how loans work there.

Re: advice for first time home buyer?
 

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so you are saying: a 30y loan can essentially be a 15y loan, the only difference being the interest rate?

Thanks for being patient w/ me guys.

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Sure, why not? You can pay any loan down faster. Why couldn't you? Have you ever declined someone who owed you money? lol. As long as there was no pre-payment penalty. But I think pre-payment penalties are for sub prime loan types. If you have decent credit and decent income there's no reason you shouldn't be able to get a mortgage with no prepayment penalty. I just paid my car off the other day 5 months early and verified this, as I had no idea when I got the loan about prepayment penalties and stuff.

Thremp brings up a good point about variable income. My father and brother are salesmen and it seems like it's a lot harder for them to get a grip on their finances than myself who has a typical 9-5. In their case it may be worth the extra peace of mind to go 30, and to give up some EV on their loan.

Re: advice for first time home buyer?
 

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so you are saying: a 30y loan can essentially be a 15y loan, the only difference being the interest rate?

Thanks for being patient w/ me guys.

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But I think pre-payment penalties are for sub prime loan types.

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I would use the word exotic in place of sub prime. Prepayment penalties tend to be attached to loans like option ARMs with teaser rates where a savvy buyer could float for a little while at a sub market rate. But I would still be careful as such penalty clauses often resulted in broker bonuses and thus tend to sneak in.

OP,

This:

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I make 42k/yr. I can expect 4-8% raises every year with my current position/job. However, 100k/yr is a extreamly attainable by the time I'm 30 as long as I switch jobs/positions a couple times.


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seems quite optimistic and non specific.

J

Re: advice for first time home buyer?
 

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I think the most common reasons people buy a home is because they have kids.

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I think the most common reasons people buy a home is because other people do it.

I think the most common justifications people use to support the buy a home decision is because [insert terrible armchair economic reasoning].


--

Not to say there can't be good reasons, but the reasoning process itself is almost always done in such a manner as to lend absolutely no actual merit to the conclusion. More often than not it results in an exercise of justifying a decision that has already been made, and is now in need of support.