First time home buyer

[crunchyTaco24]

Which situation is better and improves a person's odds of being approved for a first time home loan.

Situation A
-Put down $30,000 for a home that costs ~$260,000.
-Person has student loan of $14,000 at 3.5% interest rate.
-Person has monthly income of ~$4,000.
-Person has credit rating at ~800.

Situation B
-Put down $16,000 for a home that costs ~$260,000.
-Person has no outstanding loans.
-Person has monthly income of ~$4,000.
-Person has credit rating at ~800.

[disneysteve]

Neither!

A person earning $4,000/month can't possibly afford a $260,000 house. That's almost 5.5 times your annual income. You shouldn't spend more than 3 times income and preferably 2.5 times.

You also should have a 20% down payment which would be $52,000.

Find a cheaper house or keep on saving.

[crunchyTaco24]

Neither!

A person earning $4,000/month can't possibly afford a $260,000 house. That's almost 5.5 times your annual income. You shouldn't spend more than 3 times income and preferably 2.5 times.

You also should have a 20% down payment which would be $52,000.

Find a cheaper house or keep on saving.

Annual salary is ~75,000, however I put 4,000 a month because that is the realistic income after taxes deductions and other frivolous expenditures.

20% down is the ideal situation in-order to avoid PMI however that is not very realistic in my opinion.

To make a long story short I would rather spend the extra money on PMI then have to continue paying rent and watch my dollars get thrown away.

[Petunia 100]

I think you should ask your lender.

Are you working with a lender? If not, consider it. At the very least, you need to be pre-qualified before you go house hunting. Pre-approved is even better.

[siggy_freud]

Which situation is better and improves a person's odds of being approved for a first time home loan.

Situation A
-Put down $30,000 for a home that costs ~$260,000.
-Person has student loan of $14,000 at 3.5% interest rate.
-Person has monthly income of ~$4,000.
-Person has credit rating at ~800.

Situation B
-Put down $16,000 for a home that costs ~$260,000.
-Person has no outstanding loans.
-Person has monthly income of ~$4,000.
-Person has credit rating at ~800.

Option A will give you a better shot at being approved. Having more liquid cash and a larger up front investment will lower the PMI you have to pay each month. Either way I imagine you'd get approved, but option A will cost you less over the long run. Besides, even with interest rates as low as they are, your 3.5% student loan will still be a lower interest rate than your home, assuming you're looking at 30-year fixed.

That said, option B may give you more financial comfort, as I imagine it would actually save you more each month overall than option A.

While 20% down payments are ideal, they're not always realistic, especially in today's market where home prices, even depressed, are no where near where they were 20 years ago.

I'm with you on buying over renting whenever possible.

[lindsay06]

Yeah I have to agree that you should maybe looking for a more affordable home. However, I would always pay more down on your mortgage first than the loan.

[siggy_freud]

Yeah I have to agree that you should maybe looking for a more affordable home. However, I would always pay more down on your mortgage first than the loan.

A lot depends on where he lives too. In the Portland, OR area, $250k buys a pretty reasonable, modest home. In places like Atlanta or Florida, you can get 3000 sq.ft for that same price. I'm actually buying a home in the $250k range in the sub 2000 sq.ft area. Would have been in the 230k range if not for upgrades and a garage extension.

[disneysteve]

Annual salary is ~75,000

So that puts you at a recommended max of $225,000 which a preferred max of about $188,000 so I'll stand by my original opinion that $260,000 is out of your price range.

I would rather spend the extra money on PMI then have to continue paying rent and watch my dollars get thrown away.

So it is better to throw money away on PMI than to throw it away on rent. Yes, I realize you'd be building equity but what does "building equity" mean exactly? It means repaying borrowed money. Is that really the better option?

[~bs]

Which situation is better and improves a person's odds of being approved for a first time home loan.

Situation A
-Put down $30,000 for a home that costs ~$260,000.
-Person has student loan of $14,000 at 3.5% interest rate.
-Person has monthly income of ~$4,000.
-Person has credit rating at ~800.

Situation B
-Put down $16,000 for a home that costs ~$260,000.
-Person has no outstanding loans.
-Person has monthly income of ~$4,000.
-Person has credit rating at ~800.

um, nowadays the banks are A LOT more strict regarding home loans. You will want 20% as the downpayment, as chances are the bank will deny your loan. You do know that buying a home involves substantial closing costs right? Look to pay around $8k for that. Then you factor in the cost of upkeep, as you WILL find something wrong with it after it closes. Then you need to furnish the place. Unless you have a substantial amount of savings you're not telling us about, you're not in a financially secure position to pay for that mortgage. For that purchase price, look to have at least 80k in cash assets with no debt. I'd take another year to build up cash, but that's just me. I do realize that interest rates are on the rise, and will likely continue to rise, but you can refinance a high interest rate down. you have no room to refinance on a 3.5% rate.

[snafu]

Crunchy T, you've asked for opinions and while you haven't got the answer you desire, you've had well thought out and explained answers. The stats show that just now rent is less expensive than mortgage costs. If you feel your rent is too high, you can easily give notice and seek other digs. It's cheaper to share an apartment, choose a smaller/studio type apt or live in a less desirable area.

PMI is ridiculously expensive, we're all trying to guide you away from housing you can't afford at present and tried to save you financial pain.

[crunchyTaco24]

Thanks a lot for the solid advice all!

To make a long story short I live in California and I basically have until December to find a house or start renting from somewhere else.

Although I understand $30k down for a ~$250k house isn't substantial it is realistic.

I don't have any debt other than the aforementioned student loan, nor do I have any kids or car payments. That being said I believe ~$250k home to be reasonable. After messing around with some mortgage calculators I found that many of them suggested a home in the $350k range with my salary haha....

After approximating insurance, PMI, property tax, and mortgage the monthly payments come to about $1,500 which isn't bad in my opinion.

Is this really that far fetched? Rent in my area is about $700 for anything half-way decent...

Worst case scenario I could rent out one of the rooms in my house for around $500 a month.

PMI is ridiculously expensive, we're all trying to guide you away from housing you can't afford at present and tried to save you financial pain.

PMI would be approximately 1150 a year which is minuscule compared to the average cost of renting (650X12=7800).


P.S. I really do appreciate the information and am taking into consideration the closing costs mentioned as well as postponing the purchase a few months if it would help me avoid PMI.

[siggy_freud]

I do realize that interest rates are on the rise, and will likely continue to rise, but you can refinance a high interest rate down. you have no room to refinance on a 3.5% rate.

There really isn't anything magical about refinancing. You can't refinance lower than whatever current interest rates are at. You have no room to refinance at 3.5%, as that is about the lowest they ever got on the 30-year. If rates are 5% when he buys, and stay there or continue to rise, it's not like refinancing will suddenly allow him to get below that.

[MonkeyMama]

Option A will give you a better shot at being approved. Having more liquid cash and a larger up front investment will lower the PMI you have to pay each month. Either way I imagine you'd get approved, but option A will cost you less over the long run. Besides, even with interest rates as low as they are, your 3.5% student loan will still be a lower interest rate than your home, assuming you're looking at 30-year fixed.

That said, option B may give you more financial comfort, as I imagine it would actually save you more each month overall than option A.

Agreed with this part.

You will have absolutely not problem getting bank approval. The government is handing out 0%-down through 3.5%-down loans like candy.

[MonkeyMama]

I live in California as well. I agree with the more conservative advice. Don't buy without 20% down. The end. All it takes is a little patience.

I am a stickler on this because if you can't save the down payment, then you probably can't afford the mortgage. I have watched several people buy 5%-down or less and not have the means for their mortgage payments over the long haul (er, after the first 5 years - not really the LONG haul). My overall conclusion is that is you can't save the down payment, you can't afford the financial commitment. Homes are a far huger financial commitment than rent (repairs, maintenance, etc.). & I think this is especially true as home prices rise - because they are such a huge commitment in higher cost areas. {I don't think, "I put $10k down on my $100k house and paid it off in 5 years" is relevant or useful when talking about higher cost regions}.

It also sounds like you are maybe not in a very expensive area if you can find decent rent for $700 or a HOUSE for $260k. Do you mean house or condo? If you are talking about a house, definitely definitely definitely slow down and save up to be in a better financial position. I understand the motivation a little better in the highest cost regions of the state (not that I would change my answer if you lived in San Francisco; it's just I don't understand the rush if you are in an area of more affordable housing).

If I had a $75k income and could find rent for under $1,000 per month (sounds like you can afford the luxury to live alone), I'd hold my horses and save up to be in a better financial position. WE personally rushed a bit into buying once married because our affordable renting options really dried up when it came to shared housing with a spouse. (After saving 20% down). So, take advantage of being single and save save save.

[~bs]

There really isn't anything magical about refinancing. You can't refinance lower than whatever current interest rates are at. You have no room to refinance at 3.5%, as that is about the lowest they ever got on the 30-year. If rates are 5% when he buys, and stay there or continue to rise, it's not like refinancing will suddenly allow him to get below that.

obviously not, but 30 years is a long time, and he potentially might be able to do so in the future.