How do people in debt become homeowners??

[PauletteGoddard]

I admit I'm not educated on this. Maybe I think too old-fashioned. I keep hearing that you can usually borrow up to three times your annual income. I'm in California; that won't get me a house in this State, even in my Northern rural county.

The prices are beginning to fall. I've looked at the OFHEO.gov site and played with a tool at paperdinero.com and yes, California has extreme prices. What I have learned as I educated myself about the housing bubble, is that even 70% of Californians can't afford $800,000 starter homes. In this case, it may be wiser to wait until the prices come down to meet your level. Some people are buying as if housing busts never happened ever -- 1991-1993 was somebody else's recessionary period. I've lived through a housing bust, we bought at 3x our income (we had a car loan debt too) and if I were to buy again I would still buy at 3x our income in this environment. One thing I must do, that is hard for me, is to let go of the belief that my peers who bought over the past two months are buying at 3x their income.

[lrjohnson]

Originally Posted by PauletteGoddard

One thing I must do, that is hard for me, is to let go of the belief that my peers who bought over the past two months are buying at 3x their income.

Yeah, that's good to remember. Lux and Steve, thanks for the input, and I'm listening to both of you. I plan to get more educated, get pre-qualified by my conservative, honest CU (I am not into being overextended to be a homeowner) and if it can be done, I'll do it. If it can't be, the I will keep paying $400 rent happily and socking away a lto of money for later. Reading this thread has given me motivation to check it out. Instead of wondering, I'll know for sure, and if it's "not now" I'll know what changes need to happen in housing prices/income/interest rate to make it happen.

[b4freedom]

Everyone is out to take your money. Everyone. Nobody cares about you. They just care about your money. Anyone can get a mortgage, it just might burn you in the end. But what will they care? They already got your money. They do mathematical risk assessments on you to figure out what they can get you for and then they sell you for the biggest piece of the American dream that they can. A lot of people buy it, and pay and pay and pay and pay and pay. Wait and see what happens over the next few years. Some people estimate that you'll see nearly a million foreclosures in 2007.

[lrjohnson]

Originally Posted by b4freedom

Everyone is out to take your money. Everyone. Nobody cares about you. They just care about your money.

The sad thing, or the good thing is I don't believe that. I believe some, or most, are out to get my money, but not all. I do trust my credit union. I would have trusted them even before my partner's mother started working in the home loan department!

I know a lot of folks who are on the edge as far as payments. They really wanted to "make it work" and they are mentally suffering every month scraping up another payment. It just is weird to me that a person could convince someone to overextend themselves. I know the buyers put themselves in that position, but it just seems so sad.

[Snoopy2645]

I know I am already seeing alot of forclosures around here. I am so glad I have it together I would hate hate & really hate to ever be in that situation!!! I really want a bigger newer house but I will wait a little while I have been here 7ys now & really want to wait at least 1 or 2 more years to do it. But I am still not gonna overextend if we do move.

What is really sad to me because I looked at a forclosed house today was the pipes had broke from the city shutting everything down the house was full of water & moled the lady showing it to me agreed it might not ever recover & have to be tore down & thier is another one by my daughters preschool its a modular & has sat empty at least 2 yrs & its less than 10yrs old it has basically rotted away so sad it could have been a nice house.

Oh & my grandmas old house after it was sold it was foreclosed on by whomever bought it has sat empty for at least 1 yr maybe 2 now hate to think of what it looks like now after looking at the old moldy house I seen today!!! Very sad all those homes are almost complete & total losses!!!!

the overextending is what I have to guard against most - I can see myself saying something like "ohh, but it's only 10 grand more! I'm not rich by anybody's formula but I still plan to buy at or below the traditional guideline limitations where a mortgage is concerned (28% of gross). basically, the nicer a house I want, the more I have to save to keep the payment within the limits.

where my concern really lies is that I'll be buying as a solo act, no second income to rely on if something dramatic happens. this also means lots of cash over and above that needed to make the purchase. that's my real challenge.

[disneysteve]

Originally Posted by lrjohnson

It just is weird to me that a person could convince someone to overextend themselves. I know the buyers put themselves in that position, but it just seems so sad.

Far too many people depend on the mortgage company to tell them what they can afford to pay. But the mortgage company has no idea what you can afford. Only YOU know what you can really afford. Since the majority of Americans live paycheck to paycheck and don't follow a budget, it isn't hard to understand how so many people get in trouble.

Before you go anywhere near the mortgage lender, you need to sit down and calculate how much you can comfortably afford to pay each month, including principal, interest, taxes and insurance. There are plenty of good calculators online to help with that task.

[LuxLiving]

Good advice disneysteve...take it a little farther.

These folks need to figure what they can afford and start putting the diffence in rent money and whatever difference there is between that and what house payment they think they can afford back into a Future Mansion Escrow Fund. (ack this sentence isn't right but hopefully you get the jist!)

Say you figure you can afford a 700 house payment and you are currently paying 450 in rent. Put the other 750 dollars back in that escrow account.

Oh I know what you're thinking -- that ol' Lux can't add worth spit...well yea, I can, because a home is going to cost you more if it's a house and not a condo or townhouse. A home is going to cost you in that you'll find you need a lawnmower and gas to power it, utilities if your landlord has been footing that bill, drapes/blinds/more furnishings, etc., house insurance, house taxes, and a few other things I'm probably forgetting at the moment. (Does any one know of a good calculator for adding such expenses to house payment to get true housing costs estimated??)

IF you can comfortably make the escrow payments for about 6-12 months, your credit history and your source of income are fairly secure then you are probably ready to pull the trigger.

[disneysteve]

Originally Posted by LuxLiving

a home is going to cost you more if it's a house and not a condo or townhouse. A home is going to cost you in that you'll find you need a lawnmower and gas to power it, utilities if your landlord has been footing that bill, drapes/blinds/more furnishings, etc., house insurance, house taxes, and a few other things I'm probably forgetting at the moment.

This is an excellent point that many people overlook. They get so focused on the monthly payments that they forget about the operating costs. I remember a few years ago seeing a couple on one of the talk shows, maybe Oprah, that bought a big beautiful house. They showed the inside and it was virtually empty. The couple could afford the house, but had nothing left for furnishing it. No drapes or shades, no sofa, no bedroom set. Just a mattress on the floor, a tv sitting on the floor of the family room. They looked like squatters.

Owning a home is costly. There is all the stuff you mentioned and more.

Many people today are being forced to sell their homes because of rising taxes and insurance. Our property taxes have more than doubled since we moved in, going from about $3,000 to over $6,300. Had we overextended ourselves to get into the house, an extra $3,300/year could have been a big problem.

[Mathew Green]

Originally Posted by LuxLiving

Say you figure you can afford a 700 house payment and you are currently paying 450 in rent. Put the other 750 dollars back in that escrow account... IF you can comfortably make the escrow payments for about 6-12 months, your credit history and your source of income are fairly secure then you are probably ready to pull the trigger.

Adding to what LuxLiving said:

If you figure your monthly mortgage payment (including property tax and insurance) is going to be $700, and you put that amount in a savings account for 12 months, you'll have an $8400 nest egg. That's 10% of an $84,000 house or 5% of a $168,000 house!

If house prices are higher where you live, your expected monthly payment would be higher too, so this Try-It-Before-You-Buy-It plan not only tests your ability to make the mortgage payments, it also provides you with an easy way to accumulate 1/4 to 1/2 of the downpayment.

BTW: Often the "mortgage payment" quoted by lenders or homesellers is only the mortgage payment and doesn't include the monthly Tax-and-Insurance escrow payment. Lenders do it when you "prequalify" because they have no way of knowing what the escrow payment will be until you give them a specific street address. Homesellers do it to make the house sound more affordable. So, always be certain what you are being quoted and how realistic it is. A $1700/year property tax bill plus $700/year homeowners insurance is $2400/year ($200/month!) And unlike the actual mortgage payment, property tax and insurance costs tend to increase every year.

probably not the brightest question and most certainly something I should be able to find out on my own but how do you tell how much the property taxes will be? I assume it's a percentage of the home's value but where do you go learn that value for your particular state / county?

I'm beginning to make the calculations for what I can afford per month and that would be a helpful piece of data to have.

[Mathew Green]

Originally Posted by rexdart

probably not the brightest question and most certainly something I should be able to find out on my own but how do you tell how much the property taxes will be? I assume it's a percentage of the home's value but where do you go learn that value for your particular state / county?

Look in the phone book for YadaYada County Tax Assessors Office or a similar listing. The property tax for any street adress you can name is public information and the assessors office can also provide tax percentages and other helpful information.

Do the same thing with YadaYada City Tax Assessors Office or YadaYada City Hall to find out if there are seperate city taxes and approximately how much your garbage collection fees etc will cost per month.

While you're at it, a visit to city hall is a good time to look at floodplain maps and ask the planning department is the area you're looking at is likely to have a freeway/mall/factory plunked down in the middle of it during the next 10 years. There are many unhappy homeowners in my town who bought houses in a new subdivision without realizing a freeway was in the planning stages and land had already been aquired for it right next to their back yards.

[disneysteve]

Originally Posted by Mathew Green

Look in the phone book for YadaYada County Tax Assessors Office or a similar listing. The property tax for any street adress you can name is public information and the assessors office can also provide tax percentages and other helpful information.

Some towns may also make this info available online.

[Potato_Picker]

Oh boy, Neatdesign, there's a lot to chew on in your initial post. I've gone through a similar process, so I'll try to condense my experiences into a few thoughts:

1. CC debt: Sounds like you're adding to it, rather than reducing it. Before you even think about a house, you need to get to a budget where you're reducing your CC debt, not adding to it. THIS REQUIRES A LOT OF SACRIFICE! Believe me, I know. My wife and I have not gone on a grand vacation in years. We drive older model cars while our friends have the latest and greatest. We consider our clothes to be of classic style rather than fashionable But, we have no debt now except our mortgage, and our retirement savings total is now 6 figures and growing.
2. No savings: I'm guessing you probably don't have anything saved. There are mortgages now for no money down, but the interest rates are higher. Some loans are backed by the FHA, and you can buy a home with as little as 3% down. You still will need to come up with closing costs, though, which usually run into the thousands of dollars (first 6 months of prop taxes, loan costs, etc.). You can finance these things into a no-money down mortgage, but that will increase your loan amount. You'll need to make sure you can handle the monthly payment with all of these extras added to the price you pay for the house. Less than 20% down means PMI, too. That adds to your mortgage payment, sometimes $100 or more. You'll also see mortgages where 80% of the amount financed is a traditional mortgage, and the rest is a home equity line of credit. This is dangerous because the interest rate on HELOCs are variable (which usually means they go up).
3. CC debt: You can still have CC debt when you buy a house, but it's up to you to make sure you can continue to pay down your CC debt while still being able to make your mortgage payment.
4. Income ratios: In my own experiences, banks will qualify you for a mortgage that is probably more than you can comfortably handle. It's best to come up with a monthly payment that you can handle, and then go from there. Don't let the bank tell you how much you can afford. This requires you to be extremely candid about your budget, and be realistic about how much you really spend a month. When I initially went through budgeting exercises, I found I was too optimistic about how much I spent. You need to develop budget discipline. I'm still working on it.


I'd say the best place to start is come up with a plan to reduce and get rid of that credit card debt. My wife and I had almost no savings when we bought our first house, but we somehow managed to scrape together about $5000 for the down payment and closing costs. We've moved twice since then, each time getting more equity that helped us have bigger down payments on our next houses. We're now in our third house, and we had enough equity from our previous homes to get us to the holy grail of 20% down payment (no PMI!). What has also helped along the way are increases in our income. We didn't plan for them, but they happened. You may or may not be able to do that, but keep the faith. Getting into the home market does seem daunting, but if you can get in, it's usually a better deal in the long run than renting!

P.S. Neatdesign, one thing to consider is gifting from parents/in-laws. Unfortunately, my wife and I never got any financial assistance from our folks. But a lot of people have told us that their parents/in-laws gifted them some money for a down payment. If your parents are willing, they should talk to a tax accountant. Parents can gift a certain dollar amount per year to kids without the kids incurring a tax on the gift.

[LuxLiving]

I'd also consider waiting a short spell to see how the bubble pops...there will be some real bargains out there...and loads of people wanting out at any cost!! It might soon be a buyers market - so save your $$'s, get your credit cleaned up and start watching the prices roll back. I'm noticing more and more here in our metro area that prices are being reduced on those houses currently listed for sale. They are slashing prices here already.

[disneysteve]

Originally Posted by LuxLiving

It might soon be a buyers market - so save your $$'s, get your credit cleaned up and start watching the prices roll back. I'm noticing more and more here in our metro area that prices are being reduced on those houses currently listed for sale. They are slashing prices here already.

Here too. My mom is trying to sell her house in Philly. Listed it in June for $168,000. Got it under contract 2 weeks ago for $145,500. Just heard from the broker today that they buyer can't get financing so it is going back on the market. Hoping not to lose more this time around.

[LuxLiving]

Yep it's not a good time to be selling in my opinion...which I tried to tell The Hubster back in early January that they needed to hurry and get FIL's house on the market...but oh no, they took the slow train (see my blog for the whole gory story) and we just listed it this week. So, here's hoping that things stay somewhat stable until WE sell 'eh disneysteve? I'm sure everyone feels that way. Already told our agent to be sure and prequalify anyone who comes w/an offer before they bother to even bring the offer to us...I'm not willing for what happened to your Mom (sorry) to happen to us.

[neatdesign]

Thanks to all of you for contributing to this thread. My feelings are mixed, of course, because I'd like to get out of this apartment and into our own place but my gut tells me that it simply is not a realistic option for the time being. We will continue to plug away at paying off our debt and adding to our savings.

To Potato_Picker: While I appreciate your comments in general, you have made several assumptions about our situation which are incorrect. Firstly, we are definitely NOT adding to our credit card debt. Since we stopped using our cards over 9 months ago and always pay way more than the minimums due, our balances have been coming down every month. I don't know where you got the idea that we're adding to our credit card debt, that is simply untrue. Secondly, we DO have savings -- not a lot, but it exists nonetheless. I mentioned this in an earlier post. I'm sorry if I seem offended but it is only because I feel like we're making progress any way that we can, and that just because we have debt does not mean that we're not doing something about it.

~ Jenney

[Callan]

My message would be to buy the house and use it as an investment to pay off the loans. You could let out a room or two for the first couple of years to get the bills down.

Many people have gotten onto the property ladder by using this method. It's not ideal but within no time you will be in a much better position financially.

[Potato_Picker]

Originally Posted by neatdesign

To Potato_Picker: While I appreciate your comments in general, you have made several assumptions about our situation which are incorrect. Firstly, we are definitely NOT adding to our credit card debt. Since we stopped using our cards over 9 months ago and always pay way more than the minimums due, our balances have been coming down every month. I don't know where you got the idea that we're adding to our credit card debt, that is simply untrue. Secondly, we DO have savings -- not a lot, but it exists nonetheless. I mentioned this in an earlier post. I'm sorry if I seem offended but it is only because I feel like we're making progress any way that we can, and that just because we have debt does not mean that we're not doing something about it.

~ Jenney

No offense intended, neatdesign. I'm glad to hear you're paying down your CC debt and saving. The only reason I was concerned was the amount of CC debt you stated in your original post. Something in the neighborhood of $20K; that generates a lot of interest payments quickly. But since you are paying it down, I applaud you for that. Sounds like you're developing that fiscal discipline that most people are missing. You'll be homeowners before you know it!

There are lots of other good points on this thread, too. Planning for mortgage payments/home expenses. Buying a home and renting out part of it for awhile. Maybe buying a two-family and renting out the other unit. In most areas, prices are at least stabilizing if not dropping. There are a lot more homes on the market now. The only other thing I'd recommend is that even if you don't intend to buy now, get out and look at properties. That way when you're ready to buy, you'll know a lot more about your local housing market. Again, maybe you're already doing that, so I don't mean to be pedantic. Sorry again for any offense, and I wish you the best of luck.