first-time homebuyer

[readytorock]

I plan on buying my first home (condo) about a year from now. I'm newly debt free (thanks to Dave Ramsey and this board). I own my own business with an average annual income of ~$80,000 (though this year is looking to be a little bit higher than average).

Before I get into too much detail, I'm looking for other home-owners' tips, advice, things-you-wish-you-knew-back-then, and other research I can use to avoid as many mistakes and surprises as possible. I read the majority of the threads here and feel prepared, but it never hurts to ask.

I have a fully funded three month emergency fund (which I'm working on upping to six months), and I've already saved a 20% down payment to avoid PMI. I hope to add to that down payment over the next year so I can take a shorter loan and have a smaller monthly payment.

I currently rent with a roommate, and the majority of the furniture is hers, so I will need to save for furniture. I estimate $7,500 to get me started (bedroom set, dining room table, recliners, chairs, couch, loveseat, etc.). My current roommate will not be joining me when I move, she will be staying in the house we currently rent.

The condos in the community I'm looking at are between $119,000 and $123,000 and were built in 2008, so they're almost brand new, which means little to worry about maintenance-wise for at least the first few years (hopefully). Some might suggest I can afford more home, but I don't need more home. The condos are three bedrooms, and I'm just one person. Even taking on a future spouse, we'd have more than enough room for the foreseeable future.

Any things I should know, plan for, or consider before moving forward with this plan over the next 11 months, would be appreciated. I don't know what closing costs would be. Or what other costs are associated with purchasing and moving in (luckily the new condos are in the same town in which I already rent, and I have limited "stuff" to move, so that should be cheap). Looking forward to your advice.

[snshijuptr]

As for furniture, have a lot of patience. Find nice inexpensive pieces on craigslist, garage sales, and thrift stores. Look for huge sales at World Market and other stores if really want new. Basically don't buy new at full price just because you feel you need furniture. You really don't.

[wincrasher]

Congrats!

There will be lots of expected costs. You should start studying up on the expected ones - appraisal, inspection, homeowner's insurance and all your closing costs. These are things that must be out-of-pocket. The seller can pay for some or all of these costs, depending on the market situation and pricing at the time.

The unexpected? Lots of little things. Drapes and window treatments are expensive. You'll probably want to paint. I'd suggest any improvements you want to do - do them before you move in.

Find out as much about the condo association and "health" of it's finances and the buildings as you can. Even though nearly new, there could be costly repairs needed - those will be special assements to the members. Also, see if the complex is approved by Fannie/Freddie - key to getting financing - there are rules/criteria for the condo to follow to get the underwriters to sign off on the mortage.

Good luck!

[jIM_Ohio]

I will offer a few random financial thoughts, some which pertain to the house:

1) Because you are self employed, plan for a longer EF (like 24 months expenses). Keep about 3 months in cash, keep the other monies liquid, but possibly in a conservative or moderate mutual fund.

1a) as part of this plan, being self employed, plan to pay off mortgage fast (regardless of rate) to remove that liability from your books (budget). I know a few self employed people, and one way they reduced their risk was to pay off house fast.

2) For furniture, go window shopping now- couches, kitchen table set, bedroom set. price out what you want (know what it costs). Then watch for sales. If you do this right, you can have them deliver to your house the day you close (we did this). Saved enough on the sale that one rooms worth of furniture was free (we saved enough on bedroom and family room furniture that living room furniture was "free" based on budget we established.

3) Plan for a 30% down payment. 20% down and 10% to incidental costs (moving costs, closing costs, other). You won't need all 10% extra, but moving has costs you don't think of associated with it. Things like curtains, paint or cleaners for example.

4) Moving sucks (to me anyway), so make sure you have a good idea what you want and get it. If you think a 2 BR condo is enough, then do that... but if you can get a 3 BR for the same cost (or just a little more) that might prevent you from moving again. Selling a house costs you about 6%, so if you buy for $100k moving out costs you $6000 in realtor fees, so finding a house for 106k should be in same budget, and it might prevent a move (or two) if you buy a little more.

4a) it is amazing how you plan today, then in 7-10 years life tells you to want something different (or you need something different). For example I purchased a 2 BR townhouse with my wife before we were married, and it had 1800 sq ft, but because it was 3 levels, we decided it wasn't kid friendly 2-3 years after we lived there (600 sq ft was in finished basement, so tough to keep track of kids and cook at same time, for example).

I assume you are young and single? I would suggest to get a single family home over a condo if you think life will change in 10 years- it might prevent you from having to sell and move if you get married and have a family.

4b) part of 4 and 4a is knowing your school district- few people without kids think of stuff like that. You don't need to live in the best school district, you just don't want to be in a bad one.

5) because you specifically mentioned condos, do the following 3 things as you price shop

a1) contact a realtor and ask them to show you single family homes in same price range
a2) check the condo fees and look for a history of the home owners association dues. Some HOA change (increase) costs often, so on top of a $1000/mo mortgage payment, you might have a $300/mo condo bill too.
a3) if anyone is building in your area, check new construction out. They often have programs for first time buyers. It costs you nothing to look.

My wife and I looked for about 9 months-15 months before we moved to our current house. Checked out 5-7 builders and 20-30 floor plans. Window shopping is cheap (pay gas) and educational.

[readytorock]

Thanks for all the great advice guys.

Jim, I do plan on saving over the next year for a much larger downpayment. I already have the 20% saved. My expenses now are pretty low with a pretty high income. I plan on being able to put 50% down and then pay off the rest of the house in 3-5 years.

I'm young and dating, not single. But she has at least two more years of college left before we'd even entertain the idea of moving in together. And I wouldn't get married without living with someone for at least a year first. My parents were divorced, I'm quite cautious about it all. So by that time the house will be paid off, if we decide to change locations or need more space.

I've been window shopping for the furniture I want, but haven't really been making a note of prices, that's changed as of this morning, thanks for the tip.

The HOAs for the community I was looking at $100/month. And taxes are about $4k per year. I've already worked those into my budget.

Also, good tip on the larger emergency fund. I'll hit the 6 month mark very soon, but will be sure to up that to 12-24 months as soon as I've got the other goals for the house met.

Thanks again.

[rizzmo]

The biggest mistake most people make is buying way more house than they need. Avoiding that mistake up front will save you tens of thousands in interest payments and even save you some on taxes. Sound like you are definitely on the right track!

[jIM_Ohio]

Thanks for all the great advice guys.

Jim, I do plan on saving over the next year for a much larger downpayment. I already have the 20% saved. My expenses now are pretty low with a pretty high income. I plan on being able to put 50% down and then pay off the rest of the house in 3-5 years.

I'm young and dating, not single. But she has at least two more years of college left before we'd even entertain the idea of moving in together. And I wouldn't get married without living with someone for at least a year first. My parents were divorced, I'm quite cautious about it all. So by that time the house will be paid off, if we decide to change locations or need more space.

I've been window shopping for the furniture I want, but haven't really been making a note of prices, that's changed as of this morning, thanks for the tip.

The HOAs for the community I was looking at $100/month. And taxes are about $4k per year. I've already worked those into my budget.

Also, good tip on the larger emergency fund. I'll hit the 6 month mark very soon, but will be sure to up that to 12-24 months as soon as I've got the other goals for the house met.

Thanks again.

A few other points as I re-read this.

Condo's have a condo assosciation, and that has fees not included in mortgage.

My condo fee covered pool maintainance, trash pickup, water bill, insurance on the structure (this one is important) and a few other things I might be forgetting- snow removal, lawn mowing and probably other things. It was $130/mo on top of the $1000/mo I paid on my mortgage.

I point this out because if you are looking for a specific mortgage cost (like $700 or $1500/mo) and do not include the condo fee in that, you might be able to get a single family home without much additional cost.

130k financed at 30 years for 5.5% is a mortgage payment of $740.
If the condo fee on this was $160 then you have a payment of $900

If you purchased a single family home for 158k and no condo fee (financed at 5.5% for 30 years) that payment is also $900/mo.

Meaning you get "more house" for same payment (even though the house cost is more). The condo fee is not tax deductable and could be looked at as pure overhead.

If you plan to pay off the property within 5 years, I would advise doing a single family home if costs are equal. Single family homes are easier to sell than condo's (at least they are where I live in Ohio). If you live in a big city (like New York) condo's might sell fast, but in general where I live my realtor said only two demographics buy condos- seniors which want less space, or young couples (or singles) just starting out. It's not the easiest demographic to market to- so don't think your condo will follow the same sales trends (when you want to sell) as a single family home right around the corner.

[ktmarvels]

To piggyback on Jim's comments, we looked at condo's before purchasing our house. Another thing to realize is that condo fees will never go away and can be increased almost at will. Trash rates go up, so do condo fees. People move out/go through foreclosure, condo fees go up. Insurance rates increase, condo fees increase. Roofs need replacing, condo fees can go up (hopefully they were budgeting for this, but you never know...).

The thought of still having to pay a monthly fee, even after we bought our condo, made us look more heavily at houses. Plus I wanted greenery and nature around our home, not concrete parking lots like the majority of condos.

[mdcrim]

The condos in our neighborhood have both condo fees AND HOA dues. In addition to the monthly condo fees, there are sometimes added assessments to cover large projects. Several years ago, we chose a townhome over a condo because we could get the townhome for the same price, once all the fees were factored in.

Another thought about condo living-make sure the walls and floors are well insulated against noise. There's nothing worse than listening to your neighbor at all hours of the day and night...

[snafu]

1st rule of home ownership is location, location, location. Phone police, for crime stats if you plan to make an offer. The listing price is not the selling price. The selling price is what you or any other interested buyer and the seller negotiate.

What services are available nearby? Bank, gas bar, grocery chain store, convenience store, medical services, transportation corridors etc. Don't pay attention to furnishings as new units are 'staged' which has nothing to do with day-to-day living. Owner's furniture doesn't come with the unit but you can ask for it. If the place is messy, you can bargain harder on the listing price.

Demographics of potential neighbors; young married, lots of kiddies etc. Layout of the condo must work for you, your lifestyle with emphasis on what is important to you. If you like to cook, pay attention to kitchen layout, appliance triangle and cupboards. If you prefer shower, don't opt for soaker\jacuzzi tub; if you like to sleep-in chose a unit whose master bedrm is at the back, not streetside. Know the difference between laminate and hardwood flooring. Storage and parking facilities are very important. Don't worry about things that are simple and inexpensive to change like paint colors.

If you plan to buy new furnishings, it is often cost efficient to use the services of a decorator. They can save you money as they have access to wholesale outlets, can explain the pros/cons of various features, prevent newbie mistakes, make placement work and everything flows so you don't bump your shins getting past a coffee table. You can buy furnishings in tranches, 1st level, 2nd level, 3rd level.

[JBL]

Definitely look carefully at the condominiums available. You will want to see their budget, and when you do you will want to see a healthy amount of their income going into capital reserves. A lot of newer developments will keep monthly common charges low to prop up the resale value and appease residents, but will not be adequately funding their reserve accounts, so when something needs to be replaced there is no money and everyone needs to pony up for a special assessment. If available, definitely look at single family options in your price range and older condos. Some older buildings have been very well managed over the years, with excellent ongoing maintenance and healthy reserve funds, and these are really the best investment. In a new building, you don't really know what it will be like five or ten years out.

We lived in condos for about 12 years, and last summer we sold and bought a two family house. Wonderful decision. It costs about the same amount to own, but we have so much more control and can anticipate and plan expenses so much more easily. Condo boards can be opaque at best, downright corrupt at worst, or just generally incompetent. The governing body of the condo you buy is probably one of the most important considerations in buying a condo.

[seen]

Meaning you get "more house" for same payment (even though the house cost is more). The condo fee is not tax deductable and could be looked at as pure overhead.

I did not know this!