Buying a first home

[shmokes]

I know absolutely nothing about this subject.  My wife and I are moving to Miami soon, and we know we will be there for at least three years.  Up to this point, we've always rented an apartment, but we're toying with the idea of buying instead of renting so we can start building up some equity, etc.  But I have no idea how this works.  Is it even reasonable for me to hope to buy a new house in a new city when I currently have no equity so there can't be some huge down payment?  Why would a lender even consider giving us a mortgage?  Our current jobs would be practically irrelevant, I would think, since we're obviously not going to commute from Miami to Cedar City, UT for work.  They may give some idea of the type of salaries they can expect us to be able to pull in, I suppose (I hope not since either of us would be making far more money doing the same thing in any large city compared to the rural city we currently live in).

Do lenders consider things like, "Okay . . . this guy is a law student, which makes him a pretty safe borrower since he'll make good money when he finishes law school."

It seems like if we bought a really inexpensive home that our mortgage wouldn't be too much more than rent would be, and we wouldn't just be throwing all the equity in the toilet.  What are your thoughts?  Is it even worth trying?  Am I better off waiting until we are established in a city with good jobs, etc., before trying to buy a first home?  Am I better off from an investment standpoint to wait until I can go a little bigger, since first-time homeowners get various incentives like tax breaks or something (from what I understand).  Are there signs of an impending housing bubble bursting soon that say I should wait?

FWIW, my wife is currently applying for jobs and will hopefully have a job before we ever move out there.  The rest of our income, at least for the first year, but likely for the second and third as well, will come from student loans.  We're hoping that she can get paid enough that my student loans will only have to cover tuition, but depending on how much she makes we may have to take care of some living expenses with loans as well.  Not the most exciting thing to look forward to, but . . .

Thoughts?

[shardian]

First off, Miami+cheap house=

Secondly, if you will only be there for 3 years, do not buy a house. You will not build equity in three years.

Thirdly, I would personally love to be at the mortgage office when you ask if going to law school qualifies you for a loan. Comedy gold right there.

Can't help but pick on ya dude, you know its all in fun.
If you seriously want to look into buying, get "Home Buying for Dummies". I Read that one cover to cover before going to the mortgage place. Also go ahead and get a credit check now to see where you stand.

[ChadTower]

You don't get credit from a lender for what you might be someday.  You get credit for what you have actually done over the last 5 or so years... or more often you get penalized for it.

I'd advise against buying anything until you know you want to stay there.  If you don't want to stay, don't buy, it's just not worth it.

[Chris G]

I'm a strong proponent of buying (pride of ownership, equity, tax benefit), but I also happen to live in an area with a strong housing market.  For only a 3-year commitment, I doubt the appreciation would make it a good financial choice.  If you plan to sell (versus keeping it as a rental, etc) there are commonly some significant selling expenses which reduce your overall return (I know you're a law guy, so perhaps you could sell it yourself and save some cash).  You also have to factor in the property taxes and repair & maintenance costs you incur as a home-owner that drag down your return.

[AtomSmasher]

Well, your first step would be to contact a mortgage broker and let them figure out what kind of loan you can get and how much you can spend on the house.  100% loans were pretty common for a while, but with the increasing number of forclosures, it might be difficult to get now.  If you are able to put 5% down, then you would get a much better interest rate.  It doesn't cost you anything to let a broker run the numbers for you, so theres no reason not to check and see.

As for the housing market in Miami....I have no idea.  I keep a close watch on the housing market in southern California, but that doesn't help you much.

While shardian is correct that you probably won't make much equity in three years, at least every penny of the loan interest you pay (which is most of your mortgage payments for the first several years) is tax deductible, which means your not just throwing the money away anymore.  I pay my taxes in one lump sum at the end of the year and buying a house last year dropped my tax payment literally in half.

In my experience, the best way to get quick equity in a house is to find a new housing project that is either in a very early phase of building, they sell each later phase at higher prices, so the earlier you get in, the more equity you will build up.  If you can't do that, then start checking with the new homes sales offices and see if anyone dropped out of buying a home at the last minute.  They can't have any standing inventory, so they sell them at unbelievable deals.  Thats how I got my house, I got it for $25,000 under market price and they paid $10000 to the mortgage company to buy down my interest rate.

[shmokes]

My credit is excellent.  But I don't want to buy just for the sake of buying.  If it doesn't make me better off financially, or allow us to live in a nicer, larger place for the cost of a smaller place, I'm not interested.  I'll have to pick up that book, but frankly I'm busy enough as it is dealing with my last semester at school, while simultaneously taking care of getting into law school, getting my wife a job, doing my own job, etc.  If it's obvious that I should not be trying to buy a house right now I'll just put off reading that book for the next few years.

It's probably worth noting that we currently do not plan to stay in Miami beyond law school.  That could change, I suppose, if we end up really loving it there or something to that effect, but I expect that we will leave immediately after graduation.

Lastly, and I know I should probably not be responding to this as it was just a bit of needling, but I don't think that going to law school qualifies me for a loan.  We would obviously have to be able to pay our mortgage payments.  But I would imagine that banks, who want to give as many loans out as possible because they are profitable, would want to consider every relevant factor.  It seems reasonable that future earning capacity would not be entirely irrelevant.   

[ChadTower]

Excellent credit is only one part of it... you also have to have sufficient income.  IMO, any equity gained would be swallowed by property tax in only a three year period, and transactional costs would make it quite unprofitable.

Lenders do not consider future earning capacity.  You could drop out tomorrow and never finish.  Your plans aren't their concern.

[shmokes]

Hmm . . . I'll have to point my wife to this thread.  It sounds like buying is maybe a bad idea. 

Not really relevant to whether I'll try to buy, but it seems kinda dumb that they wouldn't consider the future earning thing, if just for customer retention.  Kinda like banks lose money on the vast majority of checking accounts because most people never have any significant amount of money in them, but they use services (tellers, ATMs, Online administration services, telephone-based automated services, etc.), and they're almost always free.  But they end up being kind of a loss leader and people generally end up getting loans from whatever bank they normally use.  I would think they would be at least a little interested in it from the standpoint of, "Okay, this guy wants to buy a $250,000 house, which isn't much in Miami, but in ten years he's going to be in the market for a $1.5 million dollar home, and we want to be in on that.  We treat him right today, and he'll want to come back tomorrow."  Of course, I suppose the risk simply outweighs any consideration like that, but . . .

[shardian]

To tell you the truth, you going to Law School would be more of a liability than an asset for one reason: school loan debt.
You will be worse off than most people when it comes to loans for the first few years after you graduate until you show a record of paying those large student loans down.

[ChadTower]

To tell you the truth, you going to Law School would be more of a liability than an asset for one reason: school loan debt.

There is that plus you haven't even started yet.  They will give you credit for it when you are a senior entering your last semester.  You will get zip credit for it until then and they may hold it against you because of the tuition burden you will be carrying for 4 years.

[shmokes]

Three years. 

[Chris G]

From my experience, it really seems that banks could not possibly care less about retaining mortgage customers or whether they earn their future business.  Part of it is that many banks regularly bundle and sell their loans in bulk to other banks.  Another part is that the whole mortgage thing is more complicated than say a credit card where you can just call in and simply ask for a lower interest rate.  And finally, they know that no one cares what bank they get their loan from - it's all about the rate.

[ChadTower]

How many people really get 3+ mortgages anyway?  Not many.

shmokes, 3 years if all goes perfectly as planned.  You have a kid now.  Life interrupts plans.

[CCM]

Miami is not a cheap place to buy a house.  It will probably not be worth it of you are only planning on living there for 3 years.  According to the link below, the median price for a house as of the 4th qtr of 2004 was $297,200.  That was over 2 years ago and housing prices don't usually go down.

http://content.monster.com/articles/3471/16706/1/default.aspx

Also, you really need to get it out of your head that a bank is going to care what you think you may be making in the future, that's just crazy.  Maybe you'll be a rich fancy french-speaking lawyer someday, but for now the bank isn't going to give you a loan so you can default on it.

[hypernova]

From what I've heard/read, housing costs in the state of Florida have kept going up, AS WELL AS insurance rates (flood/hurricane.)  They've done stories on the 6:30 evening news about how many are having to leave Florida because of insurance rates alone.  Where in Miami is it?  In/near the city, or on the outskirts in a suburb, or furthur out?

I'm with some others here.  I don't think buying a house is a good choice in this case, especially when you're planning on selling in three years.  Unless you can find a REALLY good deal that you simply cannot pass.  With all this stuff you have going on, how much time will you have to take care of the house itself?  Will you be able to appreciate the value with improvements in the time you live there?  Or will you just be hoping that the housing market doesn't go kaput before leaving?  And consider the what if.  Just what if your roof needs replaced because of storm damage, or some other large expense comes along.  Will you be able to handle it financially?

[Chris G]

the bank isn't going to give you a loan so you can default on it.

I disagree.  Banks will loan just about anyone money, especially for a home.  It's just a matter of how crappy the rate would be.

[BobA]

It is all dependant on the market.  The bank can always get its money back in a hot market but in a slow market they do not want to risk mortgages as freely.   Where I live there has been 30 to 50 percent increases in selling prices over the last year.   Those who held back lost out because the prices increased 50% in a single year for single family homes.  The banks were very free because they could not loose and it was cheaper than rent.  It is all due to oil boom and the fact that homes here were very low priced until the boom.   

Now the prices will probably level out due to the fact that the total debt load is becoming too great.   If I can recall the Miami market went thru the boom and there are now alot of developers and speculators who want to walk away from inflated investments.   In that market it may not pay to buy if the buy in price is too high. Your choice should be made with a very good understanding of the current market.   Books and advice should be weighed agains the current market conditions.

[Wade]

Not really relevant to whether I'll try to buy, but it seems kinda dumb that they wouldn't consider the future earning thing, if just for customer retention.  ....

Now here's what that doesn't work.  Who's to say that your future earning potential is more than any joe blow off the street?  Joe Blow could open a company tomorrow, and be a millionaire 6 months from now.  Because someone doesn't have a degree certainly doesn't mean he isn't capable of making money.  You on the other hand, will have debt already, and there's even the chance you don't finish school or become employed.  Factoring what you "might" earn one day would just be silly on the bank's part.

The short answer is you should forget about buying a house for now.  I have no doubts that you could find someone to give you the loan, but you wouldn't make any money in 3 years.  Buying a home is fundamentally better the longer you can stay in the house.  Buy when you see yourself staying in the same house for 10+ years, and do your best to make that happen.

Banks used to only loan 2-3 times current income minus current liabilities or about 35% of take-home pay minus liabilities.  Nowadays, banks will loan MANY times current income, they'll even do it on a balloon payment or a reversed mortgage (where each month, you pay only part of the interest, and the rest of the interested gets rolled into the principal - scary!)  Basically, you're betting that your property value will increase faster than your black hole of debt!  This is why there is a huge housing market bubble and why it's starting to pop, and lots of people are going bankrupt.

Wade

[hypernova]

These sub-prime loans (loans for poor people/people with bad credit) ain't helping people out either...

[shmokes]

I think I won't buy unless we fall in love with Miami and maybe six months or a year in decide that we should stay long-term, which I really don't see happening.  For one thing, I want to live in Paris for at least 2 years, and I want this to happen when Maddy is in the preschool/very early elementary years because I want her to be able to get good at the language very quickly, but I don't want it to affect her ability to perform in school too much and I'd imagine that would become an issue the older she got.  So, this further decreases the probability that we will decide to stay in Miami.

I still think it stands to reason that banks look at future earning potential.  The way they know that my future earning potential is more than any joe blow off the street is simple:  statistics.  It's the same way they make all their decisions.  When insurance companies set rates higher for teenage boys than teenage girls, it's not because they know that any given teenage boy is going to get in an accident, while his sister will not.  What they know is that there's a higher probability of an accident with the boy.  Same goes for me.  I may end up deciding that lawyers are corrupt drains on society and, in spite of my degree, I want nothing to do with them.  Maybe I'll get a job flipping burgers.  But this is statistically unlikely to happen, just as it's statistically unlikely that joe blow will start a business and be a millionaire in six months.  Statistically, law students would be a much safer investement than joe blow off the street, and banks know this.  Hell, even if they end up dropping out of law school they still have at least a bachelor's degree which significantly increases their earning potential.

[Wade]

Apparently banks care more about what a person has done, than what he might do.  Versus insurance companies, they are relatively fair.

Your points are valid, but the truth is that a guy who has held a steady job for several years and paid his bills is a much lower risk than a student with no income and debt, regardless of the degree.  Banks probably don't view degrees as the guarantee that you do, either.  The income level isn't the primary factor on whether a person keeps good credit.  High earners can be the worst offenders -  plenty of doctors go bankrupt.  Some people just don't know where to stop, and lenders will give you enough rope to hang yourself.

Wade

[jbox]

[rant]
I've had a lot of my friends go through this whole "should I or shouldn't I buy" debacle and I've never understood what's so hard about it. The maths really isn't that hard. You only need to work out one number to decide if there is any point whatsoever in spending the next six months of your life getting stressed over the paper each weekend:

buy ratio = rent cost / (loan interest + non-trivial property costs)

Especially if they have no principal (or worse) then they are almost universally better off renting for 2-5 years and saving the difference. Then, as they build principal the expected interest repayments will go down over the years until they reach the point where they will actually be doing this "building equity" crap that parents cannot ---smurfing--- shut up about instead of the reality where they are really just giving the bank 99% of that money purely as interest repayments. Plus the council rates, the stamp duty, the 'because we can' federal taxes and all the other stuff that people seem somehow incapable of understanding go on top of that big house price to make you bleed even harder. 

If I had to guess why people feel the need to give the bank 50% of all their income for the next five years of their life is if they:
(a) have a cunning plan for bumping off one of the other insuree's to get a 'free' house
(b) have cancer and a cunning plan for bumping off themselves so their family can get a 'free' house
(c) are trades-people and really can increase a house's value in a few years (I do know a very small number of people do actually make a living out of this)
(d) are tax accountants and know how to cook the books to make money off the house loan/family trust/baby board members/dead pets/etc... in a few years
(e) are psychologically incapable of actually budgeting their income and thus can never save up for a deposit since there is no nasty red letter for having *excess* money in your account
(f) are psychologically imprinted on a particular house, or living in a house, or have a phobia of gypsy-ism or a husband/wife/kids that nag them for "stability" (possibly the most common reason)
(g) they don't understand the maths of principals vs interest, but still think they're smart and everyone else is dumb

Plus, you have a relatively set time to buy, a relatively set time to leave, and what is a small gap (property wise) in between. Economics 101 says that you are in the worst possible position to play the market since you have the least range of choices available to you. 
[/rant]

Now, if you still want a house because you are like Drew and fredster and think National Service, home cooking and owning your own home are just dog-gone-it the way man is meant to live that's perfectly fine because capitalism says you can spend your money in any way you think will make you happy. But as a business proposition you couldn't possibly propose a worse scenario especially if (say, god forbid, fingers crossed, please don't be offended) your wife were to get seriously ill or any other number of life's ways of screwing you over? 

[AtomSmasher]

If I had to guess why people feel the need to give the bank 50% of all their income for the next five years of their life is if they:

So you feel its better to give 50% of your income to whoever your renting from?  At least when your paying loan interest, you get to write off that amount from your taxes.  When I figured out my taxes this year, I found out I'll be paying around $6000 less then I would if I did not buy a house this year.  Add to that the fact that I could sell the house today for $20000 more then I paid for it and my mortgage payment is only $100/mo. more then I was paying for rent.  Buying a house was a very good thing for me.  With the tax breaks, it will actually saves me money each year.

[ChadTower]

Add property taxes and property upkeep costs.  Most people dramatically underestimate the cost of upkeep on a house/property.  A cost they did not have renting.  When you add property taxes and upkeep costs then the tax break usually washes out about even.

[AtomSmasher]

Add property taxes and property upkeep costs.  Most people dramatically underestimate the cost of upkeep on a house/property.  A cost they did not have renting.  When you add property taxes and upkeep costs then the tax break usually washes out about even.

property taxes are aronnd $2000 and the house is under warranty so upkeep costs are negligible.  Still, since I saved around $6000 on taxes, it would have to be $4000 in upkeep costs a year, which is quite a bit more then it actually will be anytime soon, especially with a brand new house.

[shardian]

Add property taxes and property upkeep costs.  Most people dramatically underestimate the cost of upkeep on a house/property.  A cost they did not have renting.  When you add property taxes and upkeep costs then the tax break usually washes out about even.

property taxes are aronnd $2000 and the house is under warranty so upkeep costs are negligible.  Still, since I saved around $6000 on taxes, it would have to be $4000 in upkeep costs a year, which is quite a bit more then it actually will be anytime soon, especially with a brand new house.

A $6000 deduction is not the same as saving $6000 in taxes.

[jbox]

and my mortgage payment is only $100/mo. more then I was paying for rent

And *whoooossshhhhhh* there goes the topic again with someone who doesn't know how to read. I'm guessing that you didn't bother actually thinking about what I wrote in the first part and just skipped to feeling all warm inside 'cause unlike me you don't need any fancy math because you know instinctively that, how does it go, "Rent Money Is Dead Money!(tm)"

buy ratio = rent cost / (loan interest + non-trivial property costs)

WELL LOOK AT THAT! It doesn't say "mortgage repayment", it says "loan interest"! AMAZING! It's almost like, wait for it:

(g) they don't understand the maths of principals vs interest, but still think they're smart and everyone else is dumb

Now, is it my turn to say something super clever like, oh say, "If you're renting a penthouse maybe you should try buying a shack to save money and Build Equity(tm)!" 

[shardian]

and my mortgage payment is only $100/mo. more then I was paying for rent

And *whoooossshhhhhh* there goes the topic again with someone who doesn't know how to read. I'm guessing that you didn't bother actually thinking about what I wrote in the first part and just skipped to feeling all warm inside 'cause unlike me you don't need any fancy math because you know instinctively that, how does it go, "Rent Money Is Dead Money!(tm)"

buy ratio = rent cost / (loan interest + non-trivial property costs)

WELL LOOK AT THAT! It doesn't say "mortgage repayment", it says "loan interest"! AMAZING! It's almost like, wait for it:

(g) they don't understand the maths of principals vs interest, but still think they're smart and everyone else is dumb

Now, is it my turn to say something super clever like, oh say, "If you're renting a penthouse maybe you should try buying a shack to save money and Build Equity(tm)!" 

Believe it or not, you can make a point without being a complete ---sufferer of cranial-rectal-inversion---.

[AtomSmasher]

A $6000 deduction is not the same as saving $6000 in taxes.

I didn't say $6000 deduction, I said $6000 less I will be paying on taxes.  The deduction is quite a bit more then $6000.

buy ratio = rent cost / (loan interest + non-trivial property costs)

WELL LOOK AT THAT! It doesn't say "mortgage repayment", it says "loan interest"! AMAZING! It's almost like, wait for it:

(g) they don't understand the maths of principals vs interest, but still think they're smart and everyone else is dumb

Now, is it my turn to say something super clever like, oh say, "If you're renting a penthouse maybe you should try buying a shack to save money and Build Equity(tm)!" 

Apparently I don't understand your variables because it seems to me that since your initial mortgage payments are 99% interest, they are the loan interest variable in your equation.  The non-trivial property costs would then be the property taxes, and then you need to subtract the amount you save from taxes, which you didn't include in your genious formula.  So that brings me right to what I was saying before.  Maybe you're not very good at word problems and i should of put it into formula form like you had it.

On top of that, I already have $20000 in equity from buying below market value, and since the market is currently at the bottom of its cycle in my area, it will soon start increasing in value.  Definately a stupid investment on my part.

[shardian]

I don't see how you can save $6000 in actual taxes just from the house. That is just crazy.

[ChadTower]

Not if he's paying enough in interest to save that much.  Some areas do.  I paid more than $10,000 in mortgage interest in 2006 and my house is small.

[shardian]

I guess I'll just never understand you New Englanders and West Coasters.

I make half as much as you guys, live in a house twice as big as yours, and pay a fraction of the mortage/taxes/interest/extras that you guys do.

[AtomSmasher]

I don't see how you can save $6000 in actual taxes just from the house. That is just crazy.

I paid close to $18000 in mortgage interest and property taxes last year, which includes the amount paid to buy down the interest rate (I get to write that off too ).   But this year it will be closer to $25,000 since I didn't own the house for most of last year.  I also have a home office which makes the tax break even bigger.  If your wondering, my mortagage payment is a little over $1800/mo.  and my last apartment which was around 600 sqft. smaller then my house and was inferior to my house in every way except location had a payment of around $1700/mo.

[shardian]

My house was 1750 sq. ft when I bought it, but will soon be over 2000 once I close up the garage into my game room. Anyways, my mortgage including tax & insurance escrow is $460 a month.
I keep telling my wife that there was a reason I passed up big money jobs in big cities to stay here. I should have her talk to you guys about bills, taxes and such so she can appreciate how good she has in not having to work and having a nice house.

[ChadTower]

It all depends on what you do for a living.  Not all professions exist in all places.

[Chris G]

I guess I'll just never understand you New Englanders and West Coasters.

I make half as much as you guys, live in a house twice as big as yours, and pay a fraction of the mortage/taxes/interest/extras that you guys do.

Ya, but...

At least you all in big cities have a chance on CL. My CL  in WV is a big joke!

 

[jbox]

Believe it or not, you can make a point without being a complete ---sufferer of cranial-rectal-inversion---.

Yeah, but that's not as much fun for me though! I mean, this isn't global warming, terrorism, religion or a dozen other topics people can actually debate because it's hard to know who is right. This is just math, and people who are *proudly* wilfully ignorant about maths make me want to rethink my entire philosophy against late term abortions (like 90 trimesters late for example). 

[Wade]

I don't see how you can save $6000 in actual taxes just from the house. That is just crazy.

I paid close to $18000 in mortgage interest and property taxes last year, which includes the amount paid to buy down the interest rate (I get to write that off too ).   But this year it will be closer to $25,000 since I didn't own the house for most of last year.  I also have a home office which makes the tax break even bigger.  If your wondering, my mortagage payment is a little over $1800/mo.  and my last apartment which was around 600 sqft. smaller then my house and was inferior to my house in every way except location had a payment of around $1700/mo.

So, you're happy to pay $25k in interest/tax each year?  How much goes towards your principal, a thousand or two?  Is it an AR or a balloon payment?

Wade

[AtomSmasher]

So, you're happy to pay $25k in interest/tax each year?  How much goes towards your principal, a thousand or two?  Is it an AR or a balloon payment?

Wade

Its better then paying $25k in rent each year.  And no, its not an AR or balloon payment.  Every time you have a long term loan, you pay very little of the loan off in the first few years, its almost all interest.  As time goes on and you're slowly paying off the principle, so each month you pay more of the principal off and less interest (since the principle is less, the interest is less, but your payments are the same).

Believe it or not, you can make a point without being a complete ---sufferer of cranial-rectal-inversion---.

Yeah, but that's not as much fun for me though! I mean, this isn't global warming, terrorism, religion or a dozen other topics people can actually debate because it's hard to know who is right. This is just math, and people who are *proudly* wilfully ignorant about maths make me want to rethink my entire philosophy against late term abortions (like 90 trimesters late for example). 

So your saying you might want to kill yourself?  Because it seems that it was your math that was wrong, not mine.  I just didn't show you my work so you assumed I cheated 

[shmokes]

Math is difficult.  Some people are really good at painting.  Others are good at analytical reasoning.  Others are good at music.  Others spacial reasoning.  I'm pretty decent with math, though I don't enjoy it and tend to avoid it.  It sounds like information I'd be really interested in, but I don't entirely understand the formula.  What is a buy ratio?  Do you come up with a number like 65/100 that you should by a house, or the probability that you should buy versus rent is .65?  You can't expect a French and Poli Sci major to be especially brilliant in economics and finance.