Should we take on a mortgage?

[sagremus]

A house opened up on our street and my fiance and I are going to visit the home this week. I'm trying to decide if this is right for us, or if we should wait.

Our current income is $4,800-$5,000 a month. This will increase to $6,000 a month (together netting $100,000/year) most likely next June.

We have rented an apartment for 3 years, and our rent is $790/month.

The house is on the market for $115,000, but I think we can get a better deal. This is the perfect price range in my opinion. I never wanted a quarter of a million dollar home. The house is only 700 square feet, but it has a yard, driveway, full basement, and detached garage - which in our city is unheard of. Payments are $550/month, but with insurance, PHI, and taxes, it's in the range of $850/month.

If that was the end of the story, we'd be living in the house already. But there are a few other details. I'm in about $60,000 worth of student loan debt. I've paid down about $10,000 in just the past year, and that's with taking a break (got discouraged, but I've been back in full force lately). The payments are roughtly $500/month, but I'm making double or triple payments currently.

We also will only have about $6,000 or $7,000 in cash saved up for a down payment and closing costs.

We are waiting to see if we absolutely love the house until we decide for sure if we're serious. We are also meeting with a bank this week to see what we would even qualify for. I'm wondering what you think. Thanks for the advice.

[disneysteve]

I'm wondering what you think.

Since you asked:

1. I wouldn't buy a home with someone you aren't yet married to.
2. I wouldn't buy a home if you can't put down 20%.
3. I wouldn't buy a home if you won't have a 6-month emergency fund when you do.
4. The student loan debt doesn't particularly bother me. I owed over 100K when we bought our house.
5. I think this house is very affordable for you. It just doesn't sound like you're ready to buy.
6. I think you should stop looking at houses until you are ready to buy.

[Goldy]

I would suggest you wait until you have enough money to cover a 20% downpayment. For the first 7 years you have less than $200 going towards principle and when you factor in PMI the effective principle drops to 50-100 per month for the first 7 years. You have a better return on your money renting just from that alone plus the HUGE bonus to renting of no repairs. Things always come up and they can be big. We just found out that our sewer line needs to be replaced and those range from 5-20k to fix. Given your current low savings account I would worry that one big ticket item could put you in a world of hurt.

What are the interest rates on those student loans?

[MonkeyMama]

In complete agreement with Steve on most points.

For reference, we bought our first home very young and quickly because the cost of ownership was about 50% of the cost of renting - very big numbers due to high-cost region. So, we were significantly motivated. BUT, we saved up 20% down payment first. Most our peers, neighbors, friends, etc. put around 0% - 5% down and are underwater and in foreclosure. What a MESS. The bottom line is that if they could not save up the down payment, then they could not handle the cost of ownership. I think you are probably perfectly capable of home ownership, but it will be a much more pleasant experience if you get your ducks all in a row first. I agree with Steve about the 20% down and the cash cushion. The student debt doesn't bother me, given your income.

I think there will always be a great deal and a "perfect" house.

[sagremus]

Thanks for your advice. We were not looking at house until this one on our street open up and my fiance really loves it. We have a set wedding date. Our low savings discourages me. I would love to have at least 20-40k in savings for a down payment and closing costs, inspection, and attorney's fees. I'm doing a modified Dave Ramsey (only difference is I have a bigger savings account instead of the 1k he recommends) so almost all extra money is going to pay off my student loans. My original goal was to pay them off at least %50 before considering a mortgage. I know Dave Ramsey would say absolutely NOT to more debt at this time. We're comfortable in our current apartment but it would be nice to have our own space as our neighbors all have small children that are noisy, and we both work off shifts.


DisneySteve I thought you were a physician? I know they make considerably more, so I'm wondering what your debt to income ratio was. I'm a nurse, so 60k in debt seems very daunting on even my generous wages.

My student loans are into three categories:
Private
$18,125 @ 4.75% (paying minimums on this)
$12,666 @ 7.24% (making triple payments on this one due to high interest rate)
Federal
$30,000 (consolidated at whatever the going rate is, I think it's in the %5 ballpark; making minimums on this until private loans are taken care of)
Other
$2,000 (through my university, this has like a %2 interest rate and really awesome terms, so I'm leaving this until last - minimums only).

[bzbee]

The only problem I see here, is that you are going to buy the house with someone you are not married to.

The other thing, that the house payment is not the only house expense you will get with living in the house. Utilities will be used more, even if you will really economize, trash pick up, water bill (usually free in apartments), repairs, remodels and things like that.

[disneysteve]

DisneySteve I thought you were a physician? I know they make considerably more, so I'm wondering what your debt to income ratio was.

When we bought our house, I had been out of residency for about 10 months. My wife and I together were making about 85K.

[kork13]

I'm pretty much agreed with the others. I like the plan you're working on with your SL's, and really I wouldn't change that at all. Once you have the 7.24% beast out of the way, THEN start building up your savings & work up to a 20% downpayment. Paying for PMI is just flushing money needlessly down the toilet... Better to wait until you can avoid PMI. You make a great income, and your cost of living (excepting your SL's) seems quite reasonable, so I'd continue along your present course for a while. Once you're in a stronger position with more available in savings, that's when you should consider buying a home.

[Jerry91]

I agree with others that saving 20% down payment is very important before you think of buying a property. If you cannot provide 20% down payment, you will have to go for a private mortgage insurance which will make your loan costly.

[kork13]

Another consideration on PMI... It's not like when you pay down your loan to the point you now have 20% equity, it automatically goes away... You need to request that it be removed, and your mortgage holder will need to establish present value to determine eligibility to end PMI, and they may actually require you to have more than 20% equity (like 25%-30% equity) before allowing it to be terminated. PMI is a bad idea established to help people make bad choices. Take your time, don't rush into ownership based on emotional decisions.

[sagremus]

We went to see the house and the Realtor believes we can get 90,000-95,000 for the house. This is almost too perfect to pass up It does need a lot of TLC but has a new furnace and water heater, a new kitchen and bathroom. The roof is also new.

[kork13]

We went to see the house and the Realtor believes we can get 90,000-95,000 for the house. This is almost too perfect to pass up It does need a lot of TLC but has a new furnace and water heater, a new kitchen and bathroom. The roof is also new.

hmmm.... the seriousness with which you seem to be considering this may be changing my mind a little bit... So I'll say let's have a closer look and give you a chance.

BLUF: If you are going to have a chance this, you both will need to dedicate yourselves to remaking your finances very quickly.

1) When are you actually planning to get married? Under almost no circumstances is it a smart idea to buy a home with someone before marriage, so this is sort of a veto item... Don't plan to buy anything until you actually tie the knot. It's simply a matter of safety & security for both of you.
2) What is the real estate market like in your town? Are homes similar to this one selling quickly, or staying on the market for 4-6 months or more? What is a reasonable estimate for the home's actual market value? The realtor can help answer these. (if the market is slow, you may have a chance)
3) Could you detail your finances a little more? -a- What are your average expenses each month? -b- What assets do you currently have in cash savings, any investments, and retirement? -c- How much do you currently save/invest in each of those areas each month? -d- How much (dollar figures) are you currently paying on each of your student loans right now? -e- If you were to cut down your expenses to bare bones, what would your expenses be?

What I'm getting at is this... If you can slash your monthly expenses to the point where you're able to save $2,000-$2,500/mo, and can maintain that level for at least 12-18 months, you could potentially have a shot at this house (but otherwise, it's not feasible)... I say this mostly because you do have a good income (which will be improving), and the home is relatively low-priced. If you can do that, this would be the plan: Cut your expenses to the absolute minimums--live like paupers if necessary. Continue to pay the minimums on all of your student loans. Over the next 4-6 months, save everything you can toward building up a downpayment. Your minimum levels to consider buying would be a 3-month emergency fund, plus 10% downpayment+closing costs. Assuming the home is still on the market, you can consider a purchase. After that, you would need to continue on your bare-bones budget for at least another 6-12 months, while you pay off the 7.24% student loan & apply principle payments to your mortgage to bring you up to at least 25% equity, so that you can get the PMI monkey off your back. Only after the high-interest loan & PMI are gone would you allow your budget to (carefully) rise back up to a normal level. At that point, you would still want to aggressively pay down your student loans, starting with the highest-rate loans first.

Sounds pretty radical, no? Even as I write this, I'm wary to even post it, because IMO it borders on bad advice... but what I'm saying is that you should scrap & save everything you can for the next 4-6 months, then take another look to see if you're in a better position to POSSIBLY buy this house (if it's even still on the market). Right now, it's simply not a smart or practical choice for you. In 6 months, it still very well might be a bad idea. But if you both buckle down and work hard for it (and get married sometime in there), buying this home MIGHT be a possibility.

[MonkeyMama]

I don't agree with kork at all.

I think it all goes back to Steve's #6. If you don't look at houses, then you aren't enticed to buy them. It's really that simple.

I have no doubt there will be a BETTER deal for you further down the road. Heck, whose to say someone won't buy the house and then put it up for sale again in a year or two?

[sagremus]

I understand the getting married part, and we have a wedding date set. But we've been together for almost ten years, and lived together for the past three. I'm just wondering what it has to do with anything. Is it concerns that one of us may bail, leaving the other strapped with the mortgage?

Here's my monthly budget:
3,000 NET INCOME / MONTH

-384.50 rent
-45.99 internet
-160 food
-100 pets (see my other thread, planning to reduce this at least by half)
-75 car insurance
-100 gas
-16 renter's insurance
-30 phone
-6 subscription (gaming)
-100 laundry, hygiene, household items
-306.07 student loan #1
-160 student loan #2
-40 student loan #3
-100 for misc expenses (gifts, cat's medicine, eating out)


1,623.56 NET EXPENSES

Leaving 1376.44 extra each month. Usually at least $500 of this goes to extra on student loans, and $200 goes to savings.



My fiance makes $2,000 a month and his net expenses are $1,380 a month. He is a lot worst with his money and has luxury items like a more expensive gaming subscription, a $100 phone bill, etc (I cringe just reading that). He's working to drop at least $100-200 off of his expenses, though.

Therefore we have about $1,900 extra a month with our bare bones budget.

[bzbee]

Another consideration on PMI... It's not like when you pay down your loan to the point you now have 20% equity, it automatically goes away... You need to request that it be removed, and your mortgage holder will need to establish present value to determine eligibility to end PMI, and they may actually require you to have more than 20% equity (like 25%-30% equity) before allowing it to be terminated. PMI is a bad idea established to help people make bad choices. Take your time, don't rush into ownership based on emotional decisions.

when you want to remove the PMI, you will also have to have an appraisal for the house which might cost 200-300. And what if you pay for the appraisal and it still comes under the 20% value because the house prices went down or something. I had to remove a PMI before on our old house, it took over 2 months to get the mortgage company to remove the PMI after I submitted the appraisal report and other documents for it. I had to call them almost every day and argue with them -- for 2 months!!! But I got it my way.