First time homebuyer

[rutgers07]

Hello everyone!

My wife and I are in the very very beginning stages of looking for a home. We are not quite ready due to her student loan debt and me with a 16ish car loan. My car loan can be wiped out quickly, but her loan debt is going to take some time. I know you guys will probably say do not buy a home without her loans knocked out (at least that's what Dave Ramsey would say), but we don't have much other debt and because her income is low, the repayment amount is pretty low.

My biggest question involves a mortgage. My base salary at one job is about 38k and with my 2nd job which is very stable, I can count on at least 10k a year. I get a ton of OT at my primary job which this will and last year have brought me up to just around 60k. My gross this year will be near the 70k mark. Due to the car being under my name and being the only debt I have. My monthly expenses are otherwise minimal, totaling probably 300 at most. I see that I can apply for a mortgage without my wife on the name but how much of an impact will her debt have. With her income we will bring home over 100K this year. We are looking at homes in the 100-200 range here and we can get a decent sized house eg a .35 acre house for 140,000 that doesn't need any major upgrades soon. Property taxes on a house like that will come out to 1300 or so for the year.

Based on all this info (and I can certainly provide more) does it make sense to just get the mortgage under my name? The problem is that my income CAN vary (it's not likely too unless my company really really cracks down on OT but nothing to suggest that will happen). Thanks for the help in advance!

Edit: sorry put this in the wrong forum. Can someone move this? Thanks

[rutgers07]

Also, should we have our down payment ready before we even start looking to get prequalified?

[pflyers85]

Whatever decision you make you should err on the side of being more conservative and low ball what your income is going to be.

Do you have an emergency savings fund in place? I like a lot of what Ramsey has to say but I'm not nearly as hardcore as he is. Yes it is more financially advantageous to buy a home completely debt free but I think if you have the safeguard of an emergency fund in place and not an astronomical amount of debt versus income its feasible to buy a home.

If I was in your shoes I would only proceed if I had 3-6 months of my take home pay in an emergency savings fund in place and have at least 15-20% down payment. If you the affordability is based on the assumption of your OT pay I would say its a no go for now.

[rutgers07]

Whatever decision you make you should err on the side of being more conservative and low ball what your income is going to be.

Do you have an emergency savings fund in place? I like a lot of what Ramsey has to say but I'm not nearly as hardcore as he is. Yes it is more financially advantageous to buy a home completely debt free but I think if you have the safeguard of an emergency fund in place and not an astronomical amount of debt versus income its feasible to buy a home.

If I was in your shoes I would only proceed if I had 3-6 months of my take home pay in an emergency savings fund in place and that I could qualify and be able to afford a home based on my take home pay without OT. If you cannot afford it without the OT then I would say its a no go.

Being conservative was helpful to hear. Conservatively, without OT, I can safely say I alone would have just shy of 50k gross and with her combined, gross would be just shy of 90k. We don't quite have the EF secured, but we are relatively close with maybe another month to go. Our debts are not astronomically high but certainly not near zero. My DTI ratio, even without OT is really good at about 9% (not factoring in any living costs, just solely debts) and with her, it raises up to 20-23% depending on how much student loan payment is for the month

[Jluke]

140k home
20% is $28000 down
Loan is $112,000** (Note I didn't include closing costs so slightly higher; unless you pay cash for that portion too)
30-year at 4% is $535/month
Escrow is $108/month
House Insurance is xx/month

Probably looking at a $800/month payment.

Will you need to buy items to furnish the house?
Moving costs?

So being conservative, when you have close to 40k saved, then you can look for a house. that would leave about 12k in EF.

In reality though, you need to figure out what mortgage amount you can afford, then factor in cash downpayment to find out how much home you can afford (be sure to avoid PMI with 20% down). The banks will tell you that you can afford a lot more than you should be thinking about b/c they want to make money off of you.

hope the above helped

[snafu]

As a 1st time homebuyer I suggest focusing on 'How much house can we afford.' The rule of thumb is 2.5 times annual income. What does past 3-5 years income average? 2nd, GDSR [Gross Debt Service Ratio] which includes mortgage payment, taxes, HOA if applicable], heating, electric, insurance, PMI/FPMI [if applicable] should not exceed 30% gross income. [I'd include cable, internet, cell phones]

Buying a house is total capitalism, the seller can ask whatever sum they wish while a buyer is free to offer any sum they feel the property is worth or they can afford. A buyer can reject an offer, they sometimes seek bids higher than asking price. Sometimes they reject an offer because of dates, conditions or requests. The buyer can likewise change their offer, ask for extras, different closing dates, professional inspection closing costs and more. I know everyone believes the seller pays the commission for both realtors [agents], fact is the money comes from the buyer! Your agent's fee is negotiable.

I suggest that you examine several choices for financing from a variety of lenders. The price you pay for your home + fees, the interest rate and insurance costs will be critical for a very long time. It's a good plan to be settled in employment and career goals because it's very costly to buy and sell homes with anything less than a 5 year window. There are so many unanticipated costs in home ownership, it's helps to set aside 1% of value each year.

[JulieAlbright]

It's been a long time since I've gone through the Pre-Qualification process but when we did, it didn't take long at all. I think they wanted to see bank account balances, our pay stubs, and the prior year tax return and then they ran a credit report.

Personally I think Dave Ramsey has some good things to say, but I'm not one to insist that every bit of debt has to be zeroed out before buying a house. This is especially true if your wife's student loans are at some of those ultra low rates of 1 to 2% and rents in your area are skyrocketing.

The things I would advise

1. Learn the housing market in your area. If houses are still taking years to sell, think carefully if you are willing and able to commit to owning that house for a very long time. What if you need to relocate for a job change or whatever, is that house going to be an albatross and you'll be wishing you were in a short-term rent solution.

2. Use this time to get your credit score in tip top shape.

3. Yes, you will need to accumulate cash for a down payment as well as closing and moving costs. Easy access to Cash gives you options once you enter the house buying process seriously.

[bjl584]

Being conservative was helpful to hear. Conservatively, without OT, I can safely say I alone would have just shy of 50k gross and with her combined, gross would be just shy of 90k. We don't quite have the EF secured, but we are relatively close with maybe another month to go. Our debts are not astronomically high but certainly not near zero. My DTI ratio, even without OT is really good at about 9% (not factoring in any living costs, just solely debts) and with her, it raises up to 20-23% depending on how much student loan payment is for the month

You made no mention of how much cash you have saved up. You'll want 20% for a down payment plus a 6 month emergency fund in place. Also, you'll need cash for things like minor repairs, furniture, etc.

[rutgers07]

140k home
20% is $28000 down
Loan is $112,000** (Note I didn't include closing costs so slightly higher; unless you pay cash for that portion too)
30-year at 4% is $535/month
Escrow is $108/month
House Insurance is xx/month

Probably looking at a $800/month payment.

Will you need to buy items to furnish the house?
Moving costs?

So being conservative, when you have close to 40k saved, then you can look for a house. that would leave about 12k in EF.

In reality though, you need to figure out what mortgage amount you can afford, then factor in cash downpayment to find out how much home you can afford (be sure to avoid PMI with 20% down). The banks will tell you that you can afford a lot more than you should be thinking about b/c they want to make money off of you.

hope the above helped

12k is excessive for us right now. Our current monthly bills add up 2700 but that can be cut significantly since there are extra things on there that are not "needs." We both have very stable jobs and we're both comfortable with 3 months emergency going into buying a house with continuing to slowly grow that and reach the 6 month mark eventually. I currently have about 7k saved so I'll be comfortable at about 8k for an EF. Our monthly gross without OT or the 2nd job factored in, hovering near 5600. But I have a tendency to do this since I've been pretty lucky in life so maybe i'm just underestimating how things can be and how important an EF is.

The down payment is where I am entirely unsure. I know it's very common to hear 20% is the absolute bare minimum, but is it necessary? Ideally we would love to have 20% but if we have 15% and found a house we absolutely love, I have a hard time thinking I would be able to turn it down for 5% and a few months of PMI insurance.

[rutgers07]

We're pretty good on the furnishings department save for a fridge. Otherwise, bed, couch, etc. are things we can bring from our current apt/we have family and friends that are willing to give us things on the cheap.

[sblatner]

How much is your rent now?

[snafu]

I don't think you understand how a mortgage amotorization schedule works. Perhaps you'd find it helpful to run proposed numbers through a mortgage amotorization program of choice. Your monthly payment 1st covers PMI [mortgage insurance], municipal taxes, front loaded mortgage interest and a few bucks of principal. Exactly how much will you pay in PMI each year, every five year segment? It takes a great many years before even half your payment is split evenly between principal and interest less taxes. Read documents carefully as some mortgagers demand LPMI mortgage insurance continue until the debt is paid out.

[Jluke]

The down payment is where I am entirely unsure. I know it's very common to hear 20% is the absolute bare minimum, but is it necessary? Ideally we would love to have 20% but if we have 15% and found a house we absolutely love, I have a hard time thinking I would be able to turn it down for 5% and a few months of PMI insurance.

10% down on 140k with terms noted above, would take 69 months to get to 20%.

15% down on 140k with terms noted above, would take 39 months to get to 20%.

[rutgers07]

Thank you everyone. No, I really did not understand how mortgage amortization works but the more I read up on it, the scarier it seems to go into a house with a small down payment. It seems like I also want to look for a mortgage that allows me to pay extra in principal each month but I don't know if those are easy to find and what the downside would be. Any thoughts?

To answer the rent question, we currently pay $800/month (rent is very high in this area) with another $100 for utilities. High rent and living in a pretty dangerous (high drug and crime rate) area is making it all the more important we get ourselves out of here as soon as financially responsible. We've had sketchy things going on around us and it's starting to wear thin on us.

Thank you again everyone.

[Jluke]

I think you got some good information out of this thread and you are headed in the right direction with a good mindset.

Most mortgages will tell you if there is a pre-payment penalty. My credit union stated no pre-payment penalty in the loan terms.

You did mention that you had some expenses that weren't necessary. Maybe now is a good time to look them over, develop/modify your budget and see how quickly you can get a down payment saved up.

You'll have to strike a balance towards reducing debt and building the down payment. Or just focus on one; most likely the down payment given the living situation you described.

Reminder that your house payment will be $800 or more so no relief vs. renting from a monthly payment stance.