Waiting to buy your first home

There are two schools of thought when it comes to buying your first home:

1. Wait until you save up enough money for a large downpayment and closing costs. This way you get a lower monthly mortgage payment.

2. Don’t wait: buy your home today, enjoy the personal and financial benefits of homeownership now. Finance as much of the price of the home as the bank will lend you: use very little of your own money.

You might be surprised to hear that I subscribe to the first concept. I believe it’s a fantastic idea to save up the money, and get the lowest monthly payment. Who wants a large monthly mortgage payment? The choice of course is that your struggle is in the years it takes to save up the money. I definitely believe in that idea: you see a real benefit from your years of hard work, sacrifice and saving.

Here’s the problem with that line of thinking: we live in the NY Metro area, one of the highest cost-of-living areas in all the United States. Even if you were to live on the most absurdly frugal budget, work three jobs seven days a week, and absolutely bank every penny of your money, it could really be a long while before you save up the considerable monies needed for a “large” downpayment and the closing costs for your home purchase.

Start with the closing costs: New York State has among the highest closing costs in the nation. On average, 6% of the purchase price is money allocated JUST to closing costs. That money does nothing to lower your monthly mortgage payment.

Now to the “large” downpayment: because rates are so low, if you are like most of my clients and you want to see a substantial reduction in your monthly mortgage expense (let’s say, oh, $600 or so) then you’re going to need a LOT of money down. In dollars and cents that means, if my proposed mortgage payment is $3100 a month and I want to pay no more than $2500 a month, I’ll need a whopping $94,900 towards the downpayment! Holy cow!

Even if you could work three jobs, seven days, live super-frugal, and bank every penny, the average family would still need to wait 4 years or more to save up that kind of money (assuming you could put away $30,000 a year).

So, while I love the first concept of waiting/saving, I live in the real world. It’s the rare individual or family that can come up with that kind of strict lifestyle to save such money. That’s why I’ve always specialized in low down payment (and now NO downpayment) mortgages. Because in the real world of the NY Metro area, we just can’t get that kind of a leg up on housing. Prices go up, interest rates change, etc, etc.

Financing the whole shebang (purchase price and some of the closing costs) seems like a crazy idea when you see the numbers (monthly payment), but realistically it works to your benefit.

The mortgage interest is tax deductible. Your take home pay actually increases because you own a home! You don’t have to live a no-frills lifestyle sacrificing for something that seems so far away and unattainable. You can have your home, improve your life both with the real financial benefits and the intangible benefits (pride of ownership, financial awareness) that come with homeownership.

It’s not complicated, it’s just the way it is.

Confusing Credit Issues: to pay in full or not to pay in full?

There is general confusion regarding the issue of paying credit card balances in full every month.

There is general confusion regarding the issue of paying credit card balances in full every month.

Sure, avoiding fees and interest is a great concept, but there’s more to the story.

In the mortgage industry, when we review a credit report, our loan decisions are not based solely on the score. We actually read the report. We want to see that an applicant actually uses the credit available to her.

If an applicant is in the habit of sporadically using credit, and then paying the balance in full when she does, then her report—while it may have a good score—may reflect this lack of use of the accounts. We get a bit skittish when we see that.

You might say, “But if I show I use my credit conservatively isn’t that good for the bank? It means I have more resources to pay my mortgage, thus I’m a good risk.” While that’s perfectly logical thinking, you must remember we are rating your entire set of qualifications based on the risk factors for making a loan to you. Therefore, we really do want to see that you use your credit on a consistent basis (and you pay on time, of course).

If you use your card(s) every month, paying them in full as you go, then this isn’t really an issue because we’ll see the activity. It’s those big holes of several months at a time when you don’t use credit that you want to watch for.

That all having been said, truly the only time you want to “worry” about your credit scores and this crazy useage issue is when you are planning on buying a home or a car. Since those are two big purchases, you want to have all your ducks in a row. Otherwise, worrying about your score all the time is a waste of time. Your score will always be good if you pay your bills on time, use your credit wisely and conservatively, and in general maintain an even keel in your credit life.

If you go to my “Links” page, there’s a link to MYFICO.com which explains how credit scores are determined. There are also other good resources there regarding credit.

The Seller’s Market

Lessons for First Time Homebuyers in this insane, crazy, wacky, greedy, lunatic-fringe “Seller’s Market:”

You will feel pushed around and rushed. Get used to the feeling. There’s seemingly no time to breathe before you’re putting your signature on binders, calling lawyers, engineers and mortgage bankers, and whoooooosh you’re in the middle of it.

Your first reaction as a buyer will be to pull back and demand some time for caution. This is the biggest decision of your life and you’re expected to decide, respond and sign in a few hours? Yes!

It’s a Seller’s market and these homeowners are calling all the shots.

Here’s a snapshot of my and my wife’s experiences over the past seven days with a buyer we’re working with:
-Tuesday last week, offer, counter-offer, new higher offer from buyer, firm answer on counter offer from seller, buyer agrees to counter offer price. This all happened over the course of the afternoon, five hours tops. You can bet the buyer felt rushed.
-Wednesday, last week: 9a.m. and the Buyer’s attorney receives the contracts of sale via fax. There’s a clause in the contract that NO buyer anywhere wants to see, “Time is of the essence.” This means if the buyer signs and doesn’t close by the close date (October 13th, less than a month!) the buyer could lose her downpayment!
-Sunday, the buyer’s only day off from work (she’s a nanny), she meets with the attorney and signs the contract. We agree our strategy will be to have her attorney hold the contract until the engineer’s inspection is satisfactorily completed (won’t even wait for the report, just the verbal okay on the day of inspection!).
-Monday, Lorraine, my wife spends the entire day trying to schedule an appointment for the engineer. The listing agent doesn’t return her call until 6 in the evening! Appointment set for Wednesday at 1:30pm
-Wednesday: engineer’s report goes off perfectly. Engineer calls the house excellent and sturdy. Minor problems to be addressed.
-Wednesday: at the very same moment the engineer is inspecting the house, the Seller’s attorney calls the Buyer’s attorney and cancels the deal! They’re taking another offer because the buyer is just moving too slowly! Holy Cow!
-Thursday, today: Buyer increases her offer by $4,000 after Seller’s attorney tell’s her attorney they’ll sign if the new, higher offer is faxed over this afternoon.

To be sure, the Buyer’s head is whirling.

It didn’t used to be this way; it’s nuts, it’s crazy, but it is what it is. Buyers are completely at the mercy of the Seller’s and the market conditions driving buyers against buyers.

Homeowners Insurance

The final premium depends on the type and construction of the house and the amount of coverage required for the mortgage.

I prefer to be conservative when estimating costs and monthly payments. Right now, when I qualify a client and calculate the monthy payment, I’m using the following figures for homeowner’s insurance. These numbers are based on an average of what my clients have obtained for closings over the past two years. Certainly it is possible to locate insurance that is cheaper, and, on the contrary, more expensive. The final premium depends on the type and construction of the house and the amount of coverage required for the mortgage.

1 family: $1200 a year ($100 a month)
2 family: $1800 a year ($150 a month)
Although for some two family homes I might increase the estimated premium to $2400 if it’s a larger house, or a brownstone.

better emails

This link talks about something near and dear to my heart: email.

This link talks about something near and dear to my heart: email. Good reading for anyone who spends a lot of time on the net. It’s from one of my favorite blogs, Lifehacker.com: