Saturday, January 14, 2006

When should I buy a house? 6 things to guide you


WHEN SHOULD I BUY A PLACE?!?!?


That question is popping up more and more frequently in my inbox as it is one of the top questions on many people's minds. I am not an expert in every local market, and I certainly can't know everything with regards to each person's individual financial situation. Yes, there are tons of good deals and special situations out there. What I am going to do is give some solid advice that will help guide most people who are looking to buy their primary residence. Again, everybody has a different situation, but I think the 6 things below are a good place to start, and will keep most people out of trouble. That said, here is my quick and dirty opinion on things.

6 things to do - you could be ready to buy when...

1. You have done your own homework. Sit down with your friend named "google" and do some research on your own. Plenty of info on the net about mortgages, and plenty of places to get property info like ziprealty.com and realtor.com. If you do your homework, you will be able to better spot the 'red flags' that might pop up if you are dealing with 'overzealous' or less-than-honest salespeople. By doing your homework, you will less likely to be taken advantage of. Also, just because a friend, or a friend of a friend and is going to "hook you up", doesn't mean you are excused from doing your own homework.

2. You realize that the market performance of the last 5-8 years...it is NOT an indication of future results. Just because somebody you know made 100k in a year by buying a condo, doesn't mean the same will happen to you.

3. You have an absolute minimum of 3 months of ALL living expenses in your savings acount if you are single, or 6 month minimum if you have a family. This money is seperate from any money used for downpayment or closing costs. Yes, it can be in a money market or other 'liquid' account. No, its not glamorous or sexy, but the fundamentals never are.

4. Have some sort of money to put down. Preferably 10% or more, but even 3-5% will do. I know that it is hard for people to save up for the large downpayments that would required in many high value areas today. I know that "no money down" and "use the bank's money, not your own" have been popular mantras the past few years, but I'm talking about buying the house you plan to live in. I'm not writing this from the standpoint of advising 'sophisticated' people who understand leverage. I'm writing this for the people who want to buy their primary residence. See this post for more info on leverage.

5. You can get a fixed rate loan with a payment you can afford! Even though rates are up some, they are still near historical lows. If the only way you can 'afford' to get a house is with I/O or neg-am, you should probably wait. Even if you have to do an 80/10 or 80/15 loan, make sure the 80% is at a fixed rate, and try to get a fixed rate 2nd. When you have extra money, pay down the 2nd as fast as possible.

6. Find a place that you like and where plan to stay there for a while. Realize that homes don't always go up, and you very well could be upside down for a few years. As bad as that might seem, if you have a fixed rate payment that you can afford, you still have your job, and you are not forced to move, then you will be fine. Bringing cash to the table when you sell your place is not the best feeling from what I have heard. Make sure you have a realistic time frame for the amount of time you plan on living in the house.

So there you have it. I'll sum it up right here:

Do your homework, forget past results, have some savings, put some money down, get a fixed rate loan you can afford, and finally, find the house that you plan on making a home for a while.

I think that if you do those things, the odds are in your favor that you will be a successful homeowner.

I want to add a few quick things as well. I'm not anti-housing by any means. I think housing is overpriced in many areas and people are using creative "credit" as a means to not be priced out "forever". I'm not here to debate the value of a particular house. If you can do the things above, and realize that the value might go down, and you are ok with it, go ahead and buy. I'm not here to tell people what to do, just help give them some information so they can make an informed decision.

About the other 'creative' loan products out there. They all have their place for responsible, financially savvy borrowers that understand the risks, and have the finances to handle those risks. The problem is that most of the people getting these loans, are not that type of person. There are a million situations where these loans can be used correctly and effectively. There are many situations where I could recommend some of the "exotic" loans for people, but for the average person looking to buy a house, I would say stick with the basics above.

Enjoy the long weekend...and as always, I look forward to the comments and e-mails on this one!

SoCalMtgGuy

25 Comments:

Blogger B. Durbin said...

I am one of those people who cannot understand buying a house I wouldn't want to live in— unless, for whatever reason, I had the money and I wanted to turn it INTO a place I'd want to live in. (Sometimes I think I'm a little addicted to HGTV.)

Really, that's good advice for any purchase. "If things go wrong, could you live with the purchase?" If the answer is no, then why are you buying it?

If the answer to that is that you'll sell it, why do you think somebody else is going to want something you don't? Pay attention to your feelings on this. Even in a hot market, there are some things better left alone.

1/14/2006 6:46 PM  
Blogger r patrick said...

3. You have an absolute minimum of 3 months of ALL living expenses in your savings acount if you are single, or 6 month minimum if you have a family. This money is seperate from any money used for downpayment or closing costs. Yes, it can be in a money market or other 'liquid' account. No, its not glamorous or sexy, but the fundamentals never are.

As a single guy can I put in a caveat for 6 months versus 3months couples/housemates ( which is what a lot of my friends are doing on LI ) Because if I get laid off, and I did 2 months after I closed, my income with UI drops like 50% if 2 people our income drops 25%. And if I don't get work by the time the UI runs out I am working at Big Box Mart for 1/2 to 1/3 of my income.

I am still glad I did not get a gimic mortgage to get a bigger place. I'll probably get wiped out anyway because if 200K co-ops drop 50% who will buy a 40K co-op when for twice as much money you can get a bigger nicer place.

You or one of your posters mentioned reform in the market like requiting 20% for ARM. Is this for real, I really will be worried I will never get a house if thats required.

1/14/2006 7:19 PM  
Blogger Moneky said...

Let me add my own:

7) You are free of all consumer debt (credit card, auto etc.)

Good post, though. When I bought 3 years ago, I met all except 3) and 7). 2) was not really an issue, since I could not have told you how much rel estate had appreciated in the previous 3 years - I just knew my mortgage (fixed, 30 year 6%) of $835 was affordable.

1/14/2006 7:28 PM  
Blogger SoCalMtgGuy said...

r patrick.

I agree with you about 6 months or more. I said "absolute minimum" in my post. 6 months single, 12 months family is preferred.

I don't think there will be a 20% downpayment requirement for ARMs. ARMs have been around a long time, and they have their uses.

Where things get tricky is with ARMs that rely on stated income, I/O, and negative amortization. I think it is these loans that will be scrutinized more by any regulatory organization.

SoCalMtgGuy

1/14/2006 7:30 PM  
Blogger SoCalMtgGuy said...

moneky,

Good point.

I think that is great "financial" advice.

When I look at being able to "afford" a mortgage, all debt payments are taken in consideration. While having no debt is always preferred, a car payment or other debt shouldn't necessairly stop somebody from buying a house. It will just 'lower' the amount of mortgage they can get.

SoCalMtgGuy

1/14/2006 7:41 PM  
Blogger 41cadillac said...

Great 6 ideas for home hunters.

Also No. 7, no credit card debt.

Then Save, Save, Save, Monies. Keep looking, be patient until after 2007. If possible until 2008.

Write down exactly what you are interested in.

We all get caught up in what is seen. The unseen value of being patient must be recognized.

1/14/2006 8:28 PM  
Blogger CA Renter said...

SoCal,

You give excellent advice. How about checking the historical ratios of housing price/income and mortgage/rent? As far as "timing the market", I think it's important to know what these numbers are.

For anyone who thinks mortgage payments will always be more than rent...this is not always true. If you have 20% down, you can definitely find a home where the mortgage payment (PITI) is less than or equal to rent, depending on the area. IMHO, wait for this to happen before buying.

THANK YOU FOR THIS BLOG!!!

1/15/2006 12:04 AM  
Blogger Jim A said...

Perhaps because I have a pretty secure job, I'm not sure that I agree with the 3-6 month living expenses. After all, whatever you don't put down for your downpayment you're putting on your mortgage. You should be free of revolving debt AND saving a few $100 per month for a downpayment. If that's true, you should have a good credit score and a high credit limit. Relying on a credit card for emergencies, rather than monthly expenses isn't generally the sort of profligacy that get's people in trouble. Once you're in, you should continue to save for a contingency fund, but relying on your credit card for a few months as your emergency backup isn't that bad.

1/15/2006 5:50 AM  
Blogger MazNJ said...

In a two income family with no credit card debt, above par earnings, and a high rate of savings (for that big ol' deposit when the markets finally *gasp* normalize, in the real sense of the word), I find it hard to believe anyone would need more than two month's cash on hand. I'll gladly admit I use credit cards for one of my bills and for all my food/etc purchases above a certain dollar amount, but that's not because I have to but because its convenient. I also schedule about 4 or more payments a month to cover that and over the past 3 years or so I have yet to get an interest charge due to the grace period. It's simply, for me, more efficient and time saving and "safe" (I really wouldn't want to walk around with a thousand bucks in my pocket every time I wanted to go shopping). And while I keep 2 months' cash in my savings account (ING - max 2 days from withdrawal to hitting my savings account which keeps 1 mo expenses in it), I don't think I need more than that and if something god forbid happen that necessitated more than that, I have the 2K plus the credit cards plus I can simply liquidate an investment or wait for it to mature (due to current situation, for instance, have bills maturing every 4 weeks, so longest I'd have to go is 4 weeks on 2k providing somehow 2 incomes suddenly ceased to exist, not counting if i just wanted to rush and sell instead)... And regarding 12 months? That just seems an extreme amount of cash on hand... heck, if neither myself or my fiancee had to work also, my commute and eating out expenses alone dropping off would save me 600 bux a month and she would be in a similar situation. I definitely think very few people have adequate savings but i think setting limits that high might actually be counterproductive in encouraging them to start. I think this is a question really only the person directly in the situation can resolve as there are many many factors involved. A couple making only 30 or 40K a year would need more cash on hand for instance than a couple making 150k a year. The couple making 30 or 40k, god forbid, could have an auto accident and the copay alone could be 2 month's expenses for them. The couple making 150k might have a lifestyle expense that eats up 75 percent of income (food, entertainment, mortgage, taxes /// remaining going to investments etc). These people have the added bonus of being able to survive on far less if necessary (presuming they're not idiots).

1/15/2006 9:37 AM  
Anonymous Anonymous said...

Socalmtgguy-

First off, great site. I just recently discovered it and now I read it every day.

I live in LA and work in commercial lending for a small commercial bank. I agree with each of your 6 points. One thing I would like to add regarding banking and credit. I think what we are going to see is the classic "whipsaw effect". During the past 3-4 years, everyone knows credit requirements (if that's what you want to call them) has become increasingly loose. Well, from my experience in banking, when things start to go south and Banks begin loosing $$ (foreclosing on home), their loan portfolios do not look so good. What happens next is the regulators come in and tell the bank to "reserve" a certain amount of $$ for these bad loans. As bank loan portfolios continue to go from bad to worse, they "tighten" up. We saw this in the mid 90s due to the housing recession and we will see it again. And what I mean by the "whipsaw effect" is this. Banks have a history of going from one extreme to the next. We will see this in the way banks lend out $$. The people with a "clean balance sheet" - little or no bad debt, strong FICO, cash reserves, history of strong earnings (no stated BS)-will be the people getting loans. Will there be exceptions? Certainly - first time buyer programs will still exist. But, for the most part, the people with strong balance sheets will be to ones who do well during the next 3-5 years.

1/15/2006 9:46 AM  
Blogger r patrick said...

"but relying on your credit card for a few months as your emergency backup isn't that bad."

Depends my rate is something NASTY but I pay it off every month. I think I mentione don her once when I got my downstairs neigbors CC bill by mistake and almost threw up when I saw a 15k balance maxed out!

15K @ 18% is 2700 dollars a year in interest. OUCH!

SoCal and others-
Ok so it used to be harder to get a loan? I have read stuff about it but really I missed this stage last time. It's always been a lending party since I became "money aware"

I have up on brokers since they all wanted me to "minimize my payment" and I was in "Pay the thing off as soon as possible"

What did it used to be like? I remember the ad's on TV for "the money store" I have no comprehension of a retrenchment and neither do I think most 20 somethings.

And won't there always be a place for those sub500mortgage company.com businesses? Or was below 500 in the past no-man's land?

1/15/2006 10:41 AM  
Blogger Selam said...

Thank you, SoCalMtgGuy, for this great site. I am a new visitor and I been coming to this blog for the past two weeks. I have learned a lot and enjoy both your insight and the comments from your readers. Thank you all.

Selam

1/15/2006 1:52 PM  
Blogger LV_CPA said...

r patrick-

I remember getting my first mortgage during the 90's. The only thing they didn't ask for was a DNA sample. Three years of 1040's, W-2's, employment history, etc. And this was for a $130K house w/ a 15% down and a perfect credit rating.

There was a subprime market back then, but they penalized the borrowers with incredibly high interest rates. Not the case right now. That risk premium disappeared, but should be coming back soon.

1/15/2006 1:57 PM  
Blogger need 2 leave CA said...

SoCal - excellent advice. We will be following all 6 points, as well as no debt, for our home purchase in Albuquerque. Thanks for an awesome site. Keep up the good work, and we'll spread the word to help keep some unsuspecting people from being FB'ers.

1/15/2006 9:47 PM  
Blogger Lou Minatti said...

Perhaps because I have a pretty secure job, I'm not sure that I agree with the 3-6 month living expenses.

Depends on the industry. I know a lot of tech people who were out of work for more than a year post 2001. It was a very humbling experience for them after 5+ years of riding an endless gravy train. They thought their skills were so valuable that they'd never be canned. Lots of folks in the Rust Belt 1978-1983 had to pick up and move to another state, starting their lives over. They lost everything except their cars and as many posessions as they could fit in a U-Haul trailer.

I don't think 3-6 months should be considered a minimum for anyone except people in ironclad professions (doctors, policemen, nurses, etc.) Everyone else should have at least 1 year's worth saved up in liquid accounts. I wouldn't be able to sleep at night with 3-6 months.

1/16/2006 8:33 AM  
Blogger Rob Dawg said...

Rule 1b/6b The neighborhood. Know the neighborhood and what you can expect it to be like in 8-10 years even if you plan on staying only 5. Are there plans for a freeway or Walmart next door? Is the own/rent ratio changing? Crime, schools, etc. even if you don't care in 5 years your buyer will care.

1/16/2006 10:34 AM  
Anonymous InAtThePeak2 said...

1 years back up fund? Sounds extreme. I would agree with 1 year for blue collar job, 6 months if you are in a white collar job and 3 months if you are a Dr or Lawyer, Ivy league dude ;-)

Great Advice SoCal. When I refied last year I scoured the net and picked up a RE for Dummies book written by a seasoned broker caled 'Mortgages 101'. It helped with more than just the basics.
Also, for getting rid of debt I picked up "total money makeover' both on Amazon. Good common sense that is not commonly used so its a reminder.

1/16/2006 12:02 PM  
Blogger loonofficer said...

The idea of having 6-12 months' living expenses as an emergency fund should be ANYBODY's primary objective, homeowner or not.

LIFE HAPPENS. Okay, so everything's fine and dandy TODAY but all you need is a divorce, layoff or huge medical bill your insurer refuses to cough up for and things start heading south at an alarming rate.

NEVER underestimate the importance of having emergency reserves. They contribute immensely to one's ability to sleep soundly at night.

1/16/2006 12:40 PM  
Blogger loonofficer said...

I have done loans for janitors who have more months' reserves than doctors, lawyers and even CEOs of large corporations.

SoCal did a post on here before about living within one's means. I think many of you who do not get the chance to peek into people's finances would be disgusted by the money some people make but have little/nothing to show in liquid assets.

"The Millionaire Next Door" tackled this issue head on and it is right on point.

Just because somebody makes $300K- $500K per annum does not mean that it is not all eaten up immediately on a $2M mortgage, fine dining, shopping trips to Rodeo drive, holidays in the south of France, tailor made suits, Bentley note and membership to the country club.

There are those who live in that world who are still living paycheck-to-paycheck.

I've seen it with my own eyes. all too often, unfortunately.

1/16/2006 1:03 PM  
Blogger Cannon Fodder said...

Great advice! Thanks! I have yet to buy a home, but I am on the right track (no CC debt, savings, etc). This was reassuring advice. Thanks SoCal!

1/16/2006 1:19 PM  
Anonymous Anonymous said...

Loonofficer,
true what you say. My brother is a good example. His career has taken off in last 10 yrs and his sallary has increased gradually. But everytime he gets a bump up, the less money he seems to be saving. As soon as he gets a raise, hes already thinking of ways to spend money not yet in his hands.

1/16/2006 2:26 PM  
Blogger Wes D said...

The best financial book I've read is called "Good Debt, Bad Debt". I think I'll reread it every year to keep it fresh in my head.

1 yr. living expenses is a little extreme but it depends on your situation. Does anyone's figures include cashing out a 401K or is it simply cash in the bank? I'd like to maintain 6-months or more at all times, but it's really hard to do.

1/16/2006 3:45 PM  
Blogger r patrick said...

Ironclad professions, and then your back gets messed up or you lose your license to practice, get shot ect. So now your on disability and trying to figure out a new job.

Everyone needs reserves no matter what. Short, Medium, and then your Investments.

But most people especially my age ( mid 20's ) have no money other than the checking account. Paycheck goes in bills and food goes out.

SO when things get tight they go on the CC bill at 18+%

As far as doctors and spending go, remeber doctors wages in the last couple of decades have been under downard pressure and against Easy Money Al's inflation.

Remember when making 6 figures was something that girls noticed and a millionare was "big money"

MOST doctors don't make the money but they still have to live at the hospital during residency and pay 300-500k for school. Add to that 40-50K of malpractice they cannot deduct because they pay AMT.

150K is nice but it's not 1980 anymore.

1/16/2006 4:11 PM  
Anonymous Anonymous said...

I nedd some advice. What would you do?

...a scenariosI know you all won't be crazy about:
What if home price go NUTS again this spring, would you sell your house if you could get over 200k profit out of it and move to another state? Maybe rent or buy a ome cash in some remote place? I dont know. I missed the 'cash out' boat last time. I am thinking 'if' it goes erzerk again, maybe I should call it quits. My wife thinks i am nuts.

1/16/2006 4:23 PM  
Anonymous Anonymous said...

Thanks so much for this post. My husband and I earn approx. 145 - 155K per year but about 120K of that is from my business and I try my hardest to lower my tax burden (I'd say I show a profit on paper of about 90K out of the 120K) so we've been advised to go with a subprime loan (my fico is 749) and stated income. The offers I've had have been for 80/20 loans with a fixed 1st but a variable second and I didn't like that option as someone who is very responsible with credit. We have no debt and our cars are paid off, we have one student loan payment of $65 a month (this is why we don't have a serious down payment, we've been paying off two new cars rapidly). I appreciated your advice because I realized that waiting isn't such a bad thing to get a proper deal. I just wish I had a crystal ball so I'd know which way this market is finally going to go. I hope to have 40K saved by the end of this year towards a down payment, of course - that'll be 10% down of a rat infested shack of 400 sq. feet here in Los Angeles but...

Great blog~~!

1/23/2006 7:53 PM  

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