How do people in debt become homeowners??

[b4freedom]

This is what I would do and what I would advise everyone to do.

Stay in the apartment until the following conditions are met:

1)You have no credit card debts (aka, you’re not paying interest/fees to a cc company).
2)Any other debts are of extremely low interest (LOW meaning below what you’d earn in a money market account). For example, if you have a student loan and are paying 3%.
3)You have an emergency fund greater then six times your monthly net pay.
4)You have at least 10% down for your home.

Before you buy a home, start looking at the market. Look for months before you buy so that you’ll learn how to spot good deals and bad deals. Every Sunday you should be looking at open houses.

Before you buy a house, pretend that you already have one. Open a separate account and set aside what all of your bills would be to pay for that house: Mortgage, taxes, utilities, etc. This is a good way to start actually saving money towards the 10% down or emergency fund.

[Ima saver]

I have never had a room mate, so i would have a very hard time renting out a room to anyone.

[Mathew Green]

Originally Posted by b4freedom

Stay in the apartment until the following conditions are met:

1)You have no credit card debts (aka, you’re not paying interest/fees to a cc company).
2)Any other debts are of extremely low interest (LOW meaning below what you’d earn in a money market account). For example, if you have a student loan and are paying 3%.
3)You have an emergency fund greater then six times your monthly net pay.
4)You have at least 10% down for your home.

Under those conditions, half the people I know who own houses would never have been able to buy them. The two big killers are the six-month emergency fund and no debts with interest above ~5%. Both are excelent ideas, but impractical for most people.

Oddly enough, when I was in my early twenties and making very little money I could have qualified for a house under your guidelines. I was living in a cheap apartment with the furniture I grew up with. The rest of my worldly posessions amounted to <$1000. I had more than one year of income saved. I had no debt. Soon as I saved enough for the down payment I could have bought an inexpensive house, and in actuality I did. But by the time I was 30 (and making more money) I no longer met your debt or emergency-fund criteria. The same is true for most people I know. So perhaps the real lesson here is to be frugal and buy a house while you're young, before you have a chance to blow all your wealth on things that have less lasting value....

[Mathew Green]

Originally Posted by Ima saver

I have never had a room mate, so i would have a very hard time renting out a room to anyone.

I 've had a room mate several times, so I too would have a very hard time renting out a room to anyone.

Visiting somebody for a week or sharing a motel room on vacation is enormously different from living with them full time. Things as simple as whether or not to put bananas in the refridgerator, or what hour 'quiet time' should begin, or how chores should be divided become an issue when you actually live together, and even someone who's just renting a room from you will probably be sharing your kitchen and/or bathroom. So unless you know the person very well and are totally simpatico, my advice is "Duplex, si. Rent-a-room, no."

[disneysteve]

Originally Posted by Mathew Green

Under those conditions, half the people I know who own houses would never have been able to buy them. The two big killers are the six-month emergency fund and no debts with interest above ~5%. Both are excelent ideas, but impractical for most people.

I think lots of people who buy houses probably shouldn't, financially speaking. And I think that's a big part of the reason why 60% of Americans are living paycheck to paycheck. Owning your own home is part of the American Dream, but that dream can quickly become a nightmare when money gets tight. Homeownership in the US is at a record high, but so is consumer credit debt. I don't think that is a coincidence.

[Potato_Picker]

Originally Posted by Mathew Green

Under those conditions, half the people I know who own houses would never have been able to buy them. The two big killers are the six-month emergency fund and no debts with interest above ~5%. Both are excelent ideas, but impractical for most people.

Oddly enough, when I was in my early twenties and making very little money I could have qualified for a house under your guidelines. I was living in a cheap apartment with the furniture I grew up with. The rest of my worldly posessions amounted to <$1000. I had more than one year of income saved. I had no debt. Soon as I saved enough for the down payment I could have bought an inexpensive house, and in actuality I did. But by the time I was 30 (and making more money) I no longer met your debt or emergency-fund criteria. The same is true for most people I know. So perhaps the real lesson here is to be frugal and buy a house while you're young, before you have a chance to blow all your wealth on things that have less lasting value....

Interestingly enough, I bought my first house at a time when I didn't even come close to meeting those guidelines. Now 8 years later, I actually do meet that criteria AFTER buying homes (and selling our first two).

The lesson for me was to get into the housing game, and then take advantage of growing equity to get into a better house. I had to realize that my first house was not going to be my dream house, and then go from there.

[disneysteve]

43% of mortgages written last year were interest-only mortgages. I think that speaks volumes about how financially ready many people were for the purchase they were making. If you can't even afford to make principal payments when rates are at record lows, maybe buying a home isn't such a good idea.

[Potato_Picker]

Originally Posted by disneysteve

43% of mortgages written last year were interest-only mortgages. I think that speaks volumes about how financially ready many people were for the purchase they were making. If you can't even afford to make principal payments when rates are at record lows, maybe buying a home isn't such a good idea.

Wow. That's mind-boggling. Any break-down on whether these were 1st or 2nd homes? I'm wondering if a lot of people were trying to get into the property-flipping business by buying a 2nd home using an interest-only mortgage. Even if that's the case, your point still stands. If someone gets stuck with an investment property that they can't keep up with, then that's still a financial disaster.

Also, I shudder to think of someone buying their first home with an interest-only mortgage, and then furnishing the place with their credit card. Probably happened more than I'd like to admit.

I don't know about six months of pay but I have no problem with 6 months of expenses in an e-fund, that is an integral part of my planning. no way would I own a house with no cash.

currently my total expenses (all utilities and rent) are about 30% of my gross, 40% of my take home so I've some room left in there to absorb a house payment slightly higher than my rent plus the property taxes and insurance.

the 10% downpayment idea I'm on board with too, if I cannot come up with that much, I must not want a house as bad as I thought.

but of course I live in middle America, the houses I'm looking at range from $95,000 to $120,000, not the Trump like figures I see bandied about by folks from other parts of the country. it's always so important to make that distinction when discussing this.

I get more motivated towards this every day.

thanks folks

[disneysteve]

Originally Posted by rexdart

but of course I live in middle America, the houses I'm looking at range from $95,000 to $120,000, not the Trump like figures I see bandied about by folks from other parts of the country. it's always so important to make that distinction when discussing this.

I don't think that distinction matters all that much. Where home prices are lower, incomes and overall cost of living tends to be lower. Where home prices are higher, incomes and cost of living tend to be higher, so I think it balances out. The 10% downpayment shouldn't have anything to do with where you live.

[lrjohnson]

Originally Posted by Mathew Green

The two big killers are the six-month emergency fund and no debts with interest above ~5%. Both are excelent ideas, but impractical for most people.

Funny thing is that I have those down easy, but the "killer" for me is the 10% down. Maybe in another state I'd have it, but here that's one year net income.

I don't think it balances out all places, dis. Median income in my county 31226. Median house price 251746 in 2004.

Long term average price to earnings ratio is 3.5 according to one site. In my County it is 8.0, more than double. My county, Humboldt, may not be representative, but the cost of living is high compared to wages. When we hear about the highest gas price in CA, it's comical because we are usually 20 cents higher. At least in some places I do think that the 10% down payment has a lot to do with where you live.

[disneysteve]

Originally Posted by lrjohnson

Funny thing is that I have those down easy, but the "killer" for me is the 10% down. Maybe in another state I'd have it, but here that's one year net income.

At least in some places I do think that the 10% down payment has a lot to do with where you live.

Of course, there are exceptions. But I don't think that necessarily means that folks in the exception areas should be buying houses with little to nothing down. I don't think that's a good idea regardless of where you live.

[Elgin526]

I'm still not sure how I qualified. DH and I were engaged when we bought our home. My credit was spotless but we had charged everything for the wedding on cards that were in my name only, so I had about $20k total in CC debt (no car loan, though). Because DH has bad credit we kept his name off the loan so we would get a better interest rate, meaning the bank couldn't consider his income, only mine. Now, I (we) did have 20% down thanks to the profits from the sale of my condo, but still, if you added up my monthly minimums and what the mortgage payment would be (including taxes and insurance) if we truely lived on just my income we'd have $200 a month for food, utilities, and transportation. The bank didn't know I was engaged so they'd have no way of doing just a *wink-nudge* and pushing the paper work through, knowing we really did earn enough.

Maybe the 20% down did the trick, they knew there wasn't much risk. If I (we) defaulted, they were almost guaranteed to get their money back. But still, why loan to someone that, on paper, should default in less than a year?

Oh well, by keeping DH off the loan we go a better rate and, because we qualified for less money, kept us from buying more house than we can afford. Our total monthly payment (loan, taxes, and insurance) is 25% of our net pay, and that's before DH's overtime and bonuses. Had we included his income, we'd have qualified for twice the amount!

[Mathew Green]

Originally Posted by disneysteve

Mathew Green wrote:
"Under those conditions, half the people I know who own houses would never have been able to buy them. The two big killers are the six-month emergency fund and no debts with interest above ~5%. Both are excelent ideas, but impractical for most people."

I think lots of people who buy houses probably shouldn't, financially speaking. And I think that's a big part of the reason why 60% of Americans are living paycheck to paycheck. Owning your own home is part of the American Dream, but that dream can quickly become a nightmare when money gets tight.

The fault is usually the homebuyer, not the house. People buy too much house because they've been told they can afford it or because they want to live in the 'right' neighborhood or because of other emotional factors. Very few people would over extend themselves buying a house if they looked realistically at the total average annual cost of owning a house and compared that to their actual after-all-living-expenses income. It's also the homeowner's own fault when they buy a house and then run up big consumer debt furnishing it.

Having a six-month emergency fund and only low-interest debt is a good indication that a person is thrifty and handles their money wisely, but such people are rare nowadays.

I think LuxLiving posted the right advice for most people: Figure out what your monthly house payment will be including the escrow payment, and put that much in a savings account for a year or so.

By doing that, you learn how hard it will be to actually make that house payment. You also automatically create a nest egg for your down payment (or to create an emergency fund, or pay down your existing debts.) Making payments always looks a lot easier on paper than it turns out to be in reality. LuxLiving's method gets rid of the rosy glasses and wishful thinking. Just having an emergency fund and zero debt won't do that and might even create overconfidence.

[disneysteve]

Originally Posted by Mathew Green

People buy too much house because they've been told they can afford it or because they want to live in the 'right' neighborhood or because of other emotional factors.

This is certainly true. That's why I said that nobody should walk in to the mortgage office without already knowing what they can afford. You can't leave it to the loan officer to tell you what you can afford because he has no idea.

As for people buying because of the neighborhood or other factors, that's true too. Often, when people say they can't afford to buy a house in their area, what they really mean is they can't afford to buy the house they really want in their area. In my town, we have everything from trailer parks to multimillion dollar mansions. It is a diverse real estate market with something in virtually every price range. So while someone might not be able to afford the fancy house in the swanky part of town, they could probably afford the smaller, older house in the working class neighborhood.

[neatdesign]

This thread has given me a lot to think about. In a way, I'm actually starting to feel better about the fact that buying a home is just not in the cards right now. I'm disappointed, naturally, but at the end of the day I'd rather be smart about it. I hate being in debt as it is, and I'd hate even more to be in over our heads. As they say, I don't want us to end up as another statistic.

The good thing is that despite our apartment being very small, it is in a nice, pretty neighborhood, with good management and maintenance staff, and in a very favorable location. Our commutes to work take only 20 minutes, and honestly, we live in an area where we probably couldn't afford to buy a house anyway. So it isn't all bad.

Potato_Picker, thanks for responding to my post. I know you didn't mean to offend me, I was just feeling defensive and needed to clarify things. I appreciate your advice.

~ Jenney