Short answer: it helps. If you are buying an investment property, it might be imperative. I haven’t heard of too many investors getting zero down loans. As far as owner occupied homes are concerned, we are beginning to see some of the more traditional forms of home buying now that the Age of the Option ARMs is gone. And it helps to have 20% - 25% down. There are better rates available with 25% down.
But before you groan, I must add that if you have good credit there are various options out there for you with no or very little money down. If your credit score is above 700, there is a very good chance that you might be able to buy a home with very little out of pocket expenses. Most banks and sellers will give you up to 3% back for closing costs without throwing too much of a fuss thus helping you buy a home with almost no money down. And your private mortgage insurance might be tax deductible. Check with your tax planner.
Lenders are also very open to “gift funds” that are contributed by family as part of the down payment or closing costs. See, you might have more than you think!
Most mortgage brokers will have software that they can plug in your income numbers and outstanding loans (as in loans you owe, not fantastic loans) and come up with a pretty good idea of what you can afford - in terms of home price and monthly payments.
However, it is always a good idea to take those numbers home and sleep on them so you know exactly how much you will be paying and if you can afford it month after month for about 30 years.
You can refer to this earlier post with mortgage calculators to get a better idea and calculate for yourself.
With the plethora of mortgage options out there, your mortgage broker will probably guide you through at least a handful, depending on what monthly payment you are comfortable with. But there is only one right answer to the question “what mortgage should I get?”
Get one you can understand and afford.
The “understand” part is important. Because we have gotten into the mortgage mess we’re in right now because too many people got into mortgages they didn’t quite understand. There probably aren’t that many crazy mortgages out there right now but if you do run into the occasional mortgage company that pushes the low payment that seems way off from all the others (try about three companies) and refuses to talk about things like interest rates, closing costs and so on, move on. You’ll be glad you did.
1. Calculate how much you are paying for rent. Then take a good look at your monthly budget and figure out if you can afford taxes, insurance and home repairs. Right now, there are probably homes in your neighborhood you could buy for not much more than the rent you are paying.
2. Most financial experts top off the money you should pay on your mortgage to be a third of your gross income. Calculate the price of your home in reverse that way.
3. Find a mortgage broker who will give you a range of value your home can fall in and also your monthly payments.
4. Use this handy calculator at Bankrate.com
5. Ask Ginnie Mae!
Good luck!
Personally, I would never hand over my business to any institution unless I have a relationship with one accountable person in it. So, the obvious answer to the above question - should I just head to the bank and get a mortgage loan is no.
A better answer is to find a good mortgage broker you can trust and work with. This mortgage broker will research all the loans available, including the ones your bank offers and get you the cheapest loan you can get. The only thing you must watch for are the closing costs associated with mortgage brokers, especially the online ones.
That being said, if you are shopping around, starting at your bank is not a bad idea. As long as you are willing to shop and compare rates, payments and closing costs, starting with your bank might not be all bad. Just remember to shop!
Most people don’t think about their credit until they consider buying a house. While you don’t need to start shopping for a mortgage a year before you buy a home, you should definitely start checking your credit and monitoring it about a year before.
Ideally, you would start shopping for a mortgage about a month to two weeks before going out shopping for a home. Most Realtors will require that you be preapproved for a mortgage before you go out looking for a home. It will also give you an idea of what size of a home you are looking for and will better assist you in narrowing your choices.
However, with today’s mortgage guidelines changing every few days, it would be a good idea to check with your mortgage broker every week to ensure that you still qualify, especially if your credit is not in the very good range.
Somewhere along the process of getting ready to shop for a home, you are going to need to shop for a mortgage. Most Realtors would insist that you be pre-approved for a home loan, or at least pre-qualified before you head out looking for a home.
So the questions arises: where do you find this mortgage before you find a home?
One way to do this is to think back to the last good transaction you had related to your mortgage - refinancing, for example. If you had an especially smooth transaction with almost no hiccups and the broker engendered a sense of trust in you (very important!) call him or her to get a mortgage.
If you’re one of the lucky few to have waited for this market dip and are a first-time buyer, I would recommend speaking to your Realtor first. Most Realtors have good working relationships with mortgage brokers they have done business with in the past and trust. They can usually put you in touch with them. The good part of this kind of relationship is that there is accountability on both sides of the equation. But don’t feel pressured into using any one broker. Gut feel is most important when picking the right person.
Good luck!
If you are considering buying a home and have bad credit, that’s where you should start. Most people don’t really know what their score is. The first step to homeownership is looking at your credit report. You can either go to a mortgage broker and get a free copy if you intend to get preapproved or you can order one online. Just be sure to get one that gives you the three scores and three reports by all three credit reporting bureaus.
The next step is to go over every line in your report. If there are any mistakes, you should contact the credit bureaus and have them fixed. If there are late payments, there’s little to be done about them, but if there are unpaid items, I would suggest paying them before looking into homeownership.
Ideally, it would take you about a year to two years after paying all outstanding debts and continuing to pay all your bills on time to qualify for a home purchase. But the road is worth it!
This is a tough one. Along with no credit, I find some people have a combination of the two: a little bad credit and then no credit at all. If you’re one of those, refer to the post before this about bad credit and this one.
The best thing you can do about bad credit is to pay off what’s outstanding. The best thing you can do about no credit is to go out and get some!
Most banks will give you a credit card if you can back it up with some cash. For example, deposit $1000 and they will give you a card for $1000 associated with your social security number. Use the card to build your credit. Once you have established basic credit that way, stores will give you credit cards and gas stations will as well.
Just make sure you pay your bills on time every month because interest rates on these cards can be very high and especially at this time when you’re building credit you don’t want to add to the negative side of your profile.
While it’s hard to say how long it will take to establish credit this way, it is a foolproof method to ensure that you build a strong history that gets better the longer it stays in your name and paid on time. Just be sure to then monitor your credit to ensure no one steals your identity!
When buying a home, you will be borrowing money from a bank or other lending institution. This kind of loan is called a “secured loan” because it is secured by something else, in this case - a house - an asset with a value attached to it. It is unlike a credit card which is an unsecured loan and hence has higher interest rates.
Unless your relative is lending you the money (in which case, lucky you!) the bank has no way to know whether you will pay the money back and make your mortgage payments on time without checking your financial profile. Along with your income verification and other assets, your credit score is a major factor in assessing the amount of risk you would be to a lender.
Read how scores work at Bankrate.com
You can. But it’s usually cheaper to buy a home that’s already in place. A few years ago, friends of mine decided to buy a piece of land and put a manufactured home on it. They were sick of living in a city and wanted to move to an area with some trees, maybe a few acres - away from neighbors that were too close.
So they decided to look into it. They decided that buying a manufactured home was easy enough! It didn’t take much money and they could have it taken wherever they wanted. What’s more, a lot of these homes were spacious, had about 2000 square feet and excellent floor plans.
Well, what was the problem?
It wasn’t the land, either. There were huge lots available in beautiful woodsy areas, acreage like they wanted and breathtaking views. However, it was putting the two together that was the problem.
You see, my friends had no idea how to test land to see if a house could be put on it. They had no idea what permits cost, didn’t know how to clear the area of trees. An even bigger problem was how to bring water and electricity to the area. They decided it was easier to just look in a woodsy area for a home.
They are now happily settled, have their views and their trees. They believe it cost them less and created less stress in their lives.
Sometime along the process of buying a house (or anything else that requires a loan commitment) you will come across the phrase “credit score.” It’s a three digit number that you are assigned by credit monitoring companies based on your credit risk. The higher your score, the lower the risk associated with lending you money, therefore the higher your score, the lower your interest rate.
Credit scores range between 300 and 850, although most fall between 500 and 700. 620 is usually the minimum score you will require to be able to qualify for a mortgage. Of course, employment and other factors like a down payment are other qualifying factors.
It is important to get prequalified before you start looking for a home. This usually involves getting your credit score and profile. If you’re considering buying a home, call us and get prequalified to know exactly how much home you can afford.
Okay, I’m going to play devil’s advocate here for a minute and tell you 3 of the biggest instances when renting might just be better for you than buying a home. Ready? Here goes!
1. When you cannot afford to buy a home - If you can only afford a home by paying the minimum on an interest only Adjustable Rate Mortgage or any other weird hybrid, you cannot afford the home. That’s a good time to rent.
2. When you intend living in the house for less than 2 years and the market is unsteady - If the real estate market seems shaky and you know you would only live in the home (or in the area) for less than 2 years, it’s probably a bad idea. Even the IRS gives you a tax break on capital gains on personal residences only if you live there for 2 out of the last 5 years. My recommended time for living in a home is usually 5 - 7 years, but 2 years is the absolute limit, especially in a volatile market.
3. When the purchase is purely speculative and you can’t afford to hold on to it for at least 7 years if things go wrong - We saw this with the flippers in Sacramento who could not afford to hold on to their homes when the market went south just as they were finishing up their flips.
Well, there you go. I’m sure there are other instances when renting might just be the better option. See? And you thought I couldn’t see the other side!
I know I’m going to raise a lot of eyebrows with this one. So let’s just add one more to the rent versus buy debate column. No. In my eyes, renting is not cheaper than buying, even if on the face of it, it seems that way.
Sacramento has enjoyed some of the lowest rents in California. But that has changed recently. With more foreclosures on the way (and a lot of these happen to be investment properties) and loss of interest in the case of landlords, there are lesser homes on the rental market, which has driven rents up this last year. I believe they will continue to rise in 2008.
Compare that fact to the mortgage amount - fixed for 30 years. Inflation pretty much ensures that the $1500 or so in payments will be remain the same (which will SEEM like less money in the future) while your rent will keep up with inflation.
Also, at the end of 30 years, that mortgage amount will vanish and in its stead will be an owned asset worth a certain amount, which if you want to sell and downsize, you can do so!
Here’s a good calculator for rent vs. buy you should look at and decide: is renting really cheaper than buying?
Now, I could give you a cheesy answer like, if you have the ability and the willingness to buy a home, any time is a good time.
But I won’t. Here are the Big Three the experts I have read and those that have mentored me look for:
1. Days on market - A very good indicator of the real estate market’s overall health is how long homes stay on the market before they get sold. In the hot market we had about three years ago, houses were on the market about a week at the longest before they sold. Today, the average days on market per listing is about 65. Remember most listings are only 90 days long and homes get listed multiple times, so that number can be higher. Usually, the longer houses stay on the market, the better a bargain you will get as a buyer.
2. Number of months of inventory - Currently, Sacramento county has about 11 months supply of inventory. This means that if no more houses came on the market, it would take about 11 months for every house to sell if the pace of sales continue to be as it is today. Again, the more inventory there is, the higher the possibility of a buyer’s market.
3. Number of REOs - If there is a large inventory of bank-owned homes, it always pushes prices down. Banks are considered wholesale real estate sellers as opposed to the retail sales of real estate by individual sellers. Consider more “real estate owned” homes on the market a sign of a buyer’s market.
Personally, I also look at HUD owned homes just for fun. In a hot market, HUD will only sell homes to owner-occupied buyers, but in times like today, the homes are also available for sale to investors - a strong indicator of a buyer’s market.
There are a few of you out there who don’t like succumbing to the old notion of buy a home, wait for it to appreciate, pull the equity out and buy a bigger home while making the first one a rental and want to jump into homeownership and investment at the same time. Well, I have only three words for you.
Good for you!
A lot of us don’t think about investing in real estate until we have a solid grasp on our own home. Some others live in an apartment all their lives but buy homes to rent out - yes, these people really do exist. I didn’t believe it either, but they do! 
However, buying a duplex as a first home/investment is a wise move if you know what you will be in for. For one thing, you must learn to be a homeowner and landlord all in one shot and the learning curve on that can be a bit hard. So make sure not to cut your margin for error too close. Make sure to have more money put aside than you think you will need for repairs and mortgage payments and don’t plan on having the other side of the duplex rented 100% of the time. Even the best landlords don’t get that right and you will still be learning.
The great advantage to buying a duplex over a single family residence is obvious: you get a double residence for one mortgage, so you can rent out the other side and pick up a tax deduction for your side. You subsidize your own mortgage payment and hopefully build enough equity to buy yourself a home (if you so wish) later down the road and still own two rentals.
The flip side however is that you have to live with your tenants next door and share a wall with them! While this might ensure the rent is paid on time every month, it might mean too much information about your tenants as well.
However, I have met people that have made this work. And in today’s market, this might just be your big chance!
Should you buy a house or a condo? Which one gives you “more bang for your buck?” You should consider a few things with both. As with everything, there are pros and cons for owning a home as well as a condo, short for condominium.
For one thing, there’s the difference of what you actually end up owning when you buy either. When you buy a house, or a single family residence, you own the land underneath, the air above it, and the structure itself. When you own a condo, you only have an ownership interest in the air contained within the walls of your unit and a common interest in the common areas like the clubhouse and what have you. That has always bothered me about condo ownership.
However, there are perks. Because you don’t technically “own” the lawn and the common areas, only an interest in them, they are maintained by the condo association, as are all issues regarding the exterior - like termite damage, flood repair, wear and tear and so on. So if you like the idea of ownership without the headaches, or plan to travel a lot, a condo might be perfect for you.
The condo association will require a certain fee be paid each month for these services, however and you should check around to find out what the fees are. Some fees can be as high as $260 a month or as low as $50 a month.
Some of the drawbacks of condos seem to be that you are required to maintain a certain color on your door, or a certain kind of window covering for example, which drives some people pretty crazy. If you’re one of them, a house might be right for you. In terms of resale, there seem to be more condos on the market at any given moment than houses, which often causes prices on condos to fall faster. There are however exceptions - do your research before you buy.
We’d be happy to help!
One of the most irritating things about real estate is that everyone has an opinion about it! I noticed that the minute we bought our rental property and moved out of our house. And irritating as that might be, it’s usually a good idea to pay attention to the things you hear around you.
As long as you do your own research. And don’t heed them (the comments of people around you) too much.
As anecdotal evidence, when my husband bought a HUD owned home in late 2000, his friends thought he was nuts. But the math worked - he actually paid less in mortgage costs than he did where he was renting. It was a complete no-brainer.
And here we are, sitting on a nice 2 bedroom rental that will continue to build equity over the next 30 years.
I have had various clients make decisions (toward buying or selling) because “someone told me to do so.” I would say, for one thing, check your sources. If the person telling you to buy is one that always chases a “hot tip” and then doesn’t get anywhere, you should not listen to the person. If on the other hand, he happens to be your mentor and successful, by all means, take his advice.
But claim complete responsibility for your decision. After all, it’s your name on the dotted line.
