What would you do? (Real Estate Question)

[JSD]

Typical rule of thumb is you can afford a mortgage that is equal to 1 week's take home pay. If what you are saying is true, Jsaad, you can probably afford a mortgage of about $120-$140 thousand on a one family house. And that's with your wife working.

Here's the reality of the situation that you really aren't going to want to hear, you can't afford a one family home in the range you are looking and will probably be selling it, probably at a loss, and/or declaring bankruptcy within 3-4 years, easy. You will need closer to $30,000 down payment. You will need your wife to get and hold a job for at least a year. You will need her to build up credit. You will need to have zero, and I mean zero, other outstanding debt if your salary doesn't increase significantly.

Sorry, but you are young and have a long way to go before house ownership might be a reality. I would look at multi-family homes to begin with once you have more money saved and your wife is working. That way you will have the income of the other apartment(s) to offset your mortgage payment and be able to write off half of everything you are purchasing for the house because you are upgrading a commercial property(per se).

Sucks I know but I was in a similar circumstance when I was your age. I ended up relocating to Rhode Island at the age of 30 where I purchased a one family home for $120,000 that if it was in a similar suburban setting in Massachusetts would have cost 3 times the amount at the time. I will say I hated Rhode Island but it did allow me to build some great business relationships, gave me a push towards my eventual business opening and I made a bunch of money when I sold that house just before the housing crash 5 years ago which allowed me to move back to Massachusetts doing very well.

That's what I own a condo for right now. The idea is to improve my situation. If I can find a 2 unit house I already have the 2nd unit rented out for $900-$1000

A $300,000 two unit mortgage + monthly taxes = Roughly $2000/ month - 900 = $1100/monthly payment

Which is only $200 more a week than my condo cost me. It's definitely doable I just need to find a solid duplex and get pre-approved (for that price range anyway).

You're going to get a $300,000 mortgage with PMI, home owner's insurance and real estate taxes paid off for $2000 per month with only $45,000 of reportable income and 3% down!!!!?

Please let me know where that bank is when I need to pull a line of credit for expansion, I'm going there!! Please, Jsaad, I'm not trying to be difficult here but I think your severely underestimating what your costs will be. Given what you have described I find it difficult to believe any bank is going to give you that loan but let's say your wife gets a job and someone takes a shot at giving you that loan. Do not for a second think you are getting it at less than 6.75%. The risk you are presenting is too great, especially if you are still making car payments.

A number more in the $2500 or more range per month is much more likely and and if you are renting at $1000 per month(which by the way the lending institution will not take into effect, they assume that apartment stays vacant for their purposes in determining risk.) that's more like $1500 a month. Is your future earnings of $4000 take home per month really going to be enough to carry all the rest of what you will need to live?

Don't rush into this Jsaad. And beware lenders that will be putting you into something that you really can't afford. A lot or most predatory lenders were put out of business when the market crashed but there are still some out there. Talk to a trustworthy financial adviser/planner and make sure you have a lawyer available to look over any proposals a lending institution gives you.

You're a good guy. I'ld hate to see you get screwed due to impatience.

That's my issue, no one will give me that loan.

Nick, you brought up another point that emphasizes my urgency:

Private Mortgage Insurance (PMI) only applies to those who don't own at least 20% of their home. So if I buy a house for $300,000 that is bank appraised for $375 - $400 (these deals are actually out there) I can refinance after a year of getting that initial mortgage that includes PMI and completely eliminate it. Another reason why acting now is so important.

[nickagneta]

If you're assuming your wife will get a new job soon, why not wait?  What difference will a few months make?  Plus, it'll insure that you wont end up paying  a mortgage on only your income should she have difficulty finding something new that suits her (added bonus: she wont feel pressured to take something she isn't thrilled about).

When considering financial commitments that project beyond a year, best to get your ducks in a row first.  Just one man's opinion...

Why  I don't want to wait: The market is at the bottom right now.

I don't think this is true. I'm personally expecting tougher times into the next few years. I don't think the bottoming process is fully under way yet.

Depends on the part of the country.

I'm going to be purchasing a home in the Tampa, Florida area soon but the prices there are still dropping like a rock so I'm waiting and waiting. I figure by late next spring I should be able to purchase and still save another 15% or so from if I buy right away.

[nickagneta]

Typical rule of thumb is you can afford a mortgage that is equal to 1 week's take home pay. If what you are saying is true, Jsaad, you can probably afford a mortgage of about $120-$140 thousand on a one family house. And that's with your wife working.

Here's the reality of the situation that you really aren't going to want to hear, you can't afford a one family home in the range you are looking and will probably be selling it, probably at a loss, and/or declaring bankruptcy within 3-4 years, easy. You will need closer to $30,000 down payment. You will need your wife to get and hold a job for at least a year. You will need her to build up credit. You will need to have zero, and I mean zero, other outstanding debt if your salary doesn't increase significantly.

Sorry, but you are young and have a long way to go before house ownership might be a reality. I would look at multi-family homes to begin with once you have more money saved and your wife is working. That way you will have the income of the other apartment(s) to offset your mortgage payment and be able to write off half of everything you are purchasing for the house because you are upgrading a commercial property(per se).

Sucks I know but I was in a similar circumstance when I was your age. I ended up relocating to Rhode Island at the age of 30 where I purchased a one family home for $120,000 that if it was in a similar suburban setting in Massachusetts would have cost 3 times the amount at the time. I will say I hated Rhode Island but it did allow me to build some great business relationships, gave me a push towards my eventual business opening and I made a bunch of money when I sold that house just before the housing crash 5 years ago which allowed me to move back to Massachusetts doing very well.

That's what I own a condo for right now. The idea is to improve my situation. If I can find a 2 unit house I already have the 2nd unit rented out for $900-$1000

A $300,000 two unit mortgage + monthly taxes = Roughly $2000/ month - 900 = $1100/monthly payment

Which is only $200 more a week than my condo cost me. It's definitely doable I just need to find a solid duplex and get pre-approved (for that price range anyway).

You're going to get a $300,000 mortgage with PMI, home owner's insurance and real estate taxes paid off for $2000 per month with only $45,000 of reportable income and 3% down!!!!?

Please let me know where that bank is when I need to pull a line of credit for expansion, I'm going there!! Please, Jsaad, I'm not trying to be difficult here but I think your severely underestimating what your costs will be. Given what you have described I find it difficult to believe any bank is going to give you that loan but let's say your wife gets a job and someone takes a shot at giving you that loan. Do not for a second think you are getting it at less than 6.75%. The risk you are presenting is too great, especially if you are still making car payments.

A number more in the $2500 or more range per month is much more likely and and if you are renting at $1000 per month(which by the way the lending institution will not take into effect, they assume that apartment stays vacant for their purposes in determining risk.) that's more like $1500 a month. Is your future earnings of $4000 take home per month really going to be enough to carry all the rest of what you will need to live?

Don't rush into this Jsaad. And beware lenders that will be putting you into something that you really can't afford. A lot or most predatory lenders were put out of business when the market crashed but there are still some out there. Talk to a trustworthy financial adviser/planner and make sure you have a lawyer available to look over any proposals a lending institution gives you.

You're a good guy. I'ld hate to see you get screwed due to impatience.

That's my issue, no one will give me that loan.

Nick, you brought up another point that emphasizes my urgency:

Private Mortgage Insurance (PMI) only applies to those who don't own at least 20% of their home. So if I buy a house for $300,000 that is bank appraised for $375 - $400 (these deals are actually out there) I can refinance after a year of getting that initial mortgage that includes PMI and completely eliminate it. Another reason why acting now is so important.

Have you looked into Haverhill or possibly a New Hampshire border town like Nashua or Plaistow or Salem?

[JSD]

Don't rush into this Jsaad. And beware lenders that will be putting you into something that you really can't afford. A lot or most predatory lenders were put out of business when the market crashed but there are still some out there. Talk to a trustworthy financial adviser/planner and make sure you have a lawyer available to look over any proposals a lending institution gives you.

You're a good guy. I'ld hate to see you get screwed due to impatience.

Your concern means a lot it really does. Fortunately I have trustworthy people in my corner. I rarely base decisions on impulse, I'll definitely crunch the numbers before I go through with anything.

[JSD]

Have you looked into Haverhill or possibly a New Hampshire border town like Nashua or Plaistow or Salem?

I have not. To be honest I like the idea of being close to both Boston and Lowell. Wilmington, Tewksbury, Burlington would be perfect.

[the_Bird]

That's my issue, no one will give me that loan.

Nick, you brought up another point that emphasizes my urgency:

Private Mortgage Insurance (PMI) only applies to those who don't own at least 20% of their home. So if I buy a house for $300,000 that is bank appraised for $375 - $400 (these deals are actually out there) I can refinance after a year of getting that initial mortgage that includes PMI and completely eliminate it. Another reason why acting now is so important.

I'm not an expert here, but I don't think this is right.

From http://www.finweb.com/mortgage-loan-education/pmi-do-you-need-it.html

Private Mortgage Insurance, or PMI, is a type of insurance that helps protect the lender against losses should the buyer default on his or her loan. It is generally required by the lender when the buyer has a down payment less than 20% of the selling price of the property. PMI allows the lender to safely accept lower down payments than would normally be permitted.

As per this, whether you need PMI or not is dependant on the selling price of the house, NOT the appraised value.  Makes sense; what's a better indicator of the house's true value, an appraisal (we know the appraisal industry had plenty of its own fraud recently), or the actual purchase price between two unaffiliated private parties?

EDIT: Eh, I'm seeing some contradictory information out there on this.  I'd confirm, for sure, with someone smarter on these matters than I.

[JSD]

That's my issue, no one will give me that loan.

Nick, you brought up another point that emphasizes my urgency:

Private Mortgage Insurance (PMI) only applies to those who don't own at least 20% of their home. So if I buy a house for $300,000 that is bank appraised for $375 - $400 (these deals are actually out there) I can refinance after a year of getting that initial mortgage that includes PMI and completely eliminate it. Another reason why acting now is so important.

I'm not an expert here, but I don't think this is right.

From http://www.finweb.com/mortgage-loan-education/pmi-do-you-need-it.html

Private Mortgage Insurance, or PMI, is a type of insurance that helps protect the lender against losses should the buyer default on his or her loan. It is generally required by the lender when the buyer has a down payment less than 20% of the selling price of the property. PMI allows the lender to safely accept lower down payments than would normally be permitted.

As per this, whether you need PMI or not is dependant on the selling price of the house, NOT the appraised value.  Makes sense; what's a better indicator of the house's true value, an appraisal (we know the appraisal industry had plenty of its own fraud recently), or the actual purchase price between two unaffiliated private parties?

Right, that's exactly what I said though. Once the loan matures (after roughly a year) one can refinance and eliminate the PMI so long as one owns at least 20% of the house.

Example: If I buy a house worth $100 G's for $60 I'll be paying PMI. But after one year I can refi and show that I own over 20% of that home and eliminate it.

[nickagneta]

That's my issue, no one will give me that loan.

Nick, you brought up another point that emphasizes my urgency:

Private Mortgage Insurance (PMI) only applies to those who don't own at least 20% of their home. So if I buy a house for $300,000 that is bank appraised for $375 - $400 (these deals are actually out there) I can refinance after a year of getting that initial mortgage that includes PMI and completely eliminate it. Another reason why acting now is so important.

I'm not an expert here, but I don't think this is right.

From http://www.finweb.com/mortgage-loan-education/pmi-do-you-need-it.html

Private Mortgage Insurance, or PMI, is a type of insurance that helps protect the lender against losses should the buyer default on his or her loan. It is generally required by the lender when the buyer has a down payment less than 20% of the selling price of the property. PMI allows the lender to safely accept lower down payments than would normally be permitted.

As per this, whether you need PMI or not is dependant on the selling price of the house, NOT the appraised value.  Makes sense; what's a better indicator of the house's true value, an appraisal (we know the appraisal industry had plenty of its own fraud recently), or the actual purchase price between two unaffiliated private parties?

Right, that's exactly what I said though. Once the loan matures (after roughly a year) one can refinance and eliminate the PMI so long as one owns at least 20% of the house.

Example: If I buy a house worth $100 G's for $60 I'll be paying PMI. But after one year I can refi and show that I own over 20% of that home and eliminate it.

Most mortgage lenders will try to lock you into owning the property at least two years before being able to refinance. At least when I bought in 2004 that's the way it was.

[JSD]

Most mortgage lenders will try to lock you into owning the property at least two years before being able to refinance. At least when I bought in 2004 that's the way it was.

Ok, fair enough. I'm sure that's true in a lot of cases but in the grand scheme of things what's 2 years really? And who's to say your going to have that same ability once the market goes up? (i.e. purchasing a house that you'll own 20% of after 2 years.)

[Cman]

Don't rush into this Jsaad. And beware lenders that will be putting you into something that you really can't afford. A lot or most predatory lenders were put out of business when the market crashed but there are still some out there. Talk to a trustworthy financial adviser/planner and make sure you have a lawyer available to look over any proposals a lending institution gives you.

You're a good guy. I'ld hate to see you get screwed due to impatience.

Your concern means a lot it really does. Fortunately I have trustworthy people in my corner. I rarely base decisions on impulse, I'll definitely crunch the numbers before I go through with anything.

Something to think a little bit about (although it sounds like Jsaad has already given this lots of thought, so maybe this is directed more to other readers):

There is an assumption, that is not often questioned, that building equity in a home is a great way to build financial security and wealth.  This is an assumption based on how well real estate has done in this country over the last 50 years or so.  It is important to keep in mind that this is an *assumption* (and a marketing tool used by real estate and mortgage brokers).

It is worth considering other ways of building wealth.  For example: if one has $1500 to spend on a mortgage each month, what about instead spending $1000 on rent and $500 invested in a real estate investment trust (that way your eggs are in multiple baskets, so to speak).

[JSD]

A tax credit of up to $8,000 is available for qualified first-time home buyers purchasing a principal residence on or after January 1, 2009 and before December 1, 2009.

Does anyone know if this could apply to a partnership? For instance, if my partner is a first time home buyer is he eliminated because I am not?

[Fafnir]

A tax credit of up to $8,000 is available for qualified first-time home buyers purchasing a principal residence on or after January 1, 2009 and before December 1, 2009.

Does anyone know if this could apply to a partnership? For instance, if my partner is a first time home buyer is he eliminated because I am not?

Yes you would be, if you're on the mortgage and are not a first time buyer you do not qualify.

[JSD]

A tax credit of up to $8,000 is available for qualified first-time home buyers purchasing a principal residence on or after January 1, 2009 and before December 1, 2009.

Does anyone know if this could apply to a partnership? For instance, if my partner is a first time home buyer is he eliminated because I am not?

Yes you would be, if you're on the mortgage and are not a first time buyer you do not qualify.

How are you so sure? That's such Bull... man... timing is everything.

[Donoghus]

A tax credit of up to $8,000 is available for qualified first-time home buyers purchasing a principal residence on or after January 1, 2009 and before December 1, 2009.

Does anyone know if this could apply to a partnership? For instance, if my partner is a first time home buyer is he eliminated because I am not?

Its my understanding that if you're a first time buyer and your partner is an unmarried joint partner, you can allocate the credit to the partner who qualifies as a first-time homeowner. (Such as a parent co-purchasing a house with a child)

This doesn't apply, however, if the partner is a spouse and has owned a principal residence within the three year period.

[Nut from Nh]

If you're assuming your wife will get a new job soon, why not wait?  What difference will a few months make?  Plus, it'll insure that you wont end up paying  a mortgage on only your income should she have difficulty finding something new that suits her (added bonus: she wont feel pressured to take something she isn't thrilled about).

When considering financial commitments that project beyond a year, best to get your ducks in a row first.  Just one man's opinion...

Why  I don't want to wait: The market is at the bottom right now.

Oh my goodness.   

I mean this with all do respect, but I strongly recommend you think long and hard and research before you act.  What do you base your market analysis on?  I follow the markets real estate and otherwise as closely as the celtics, the nba or other hobies and I can assure you... the market is at bottom right now has been the mantra since the spring of 2006.  My humble opinion is that you are 100% false on your market analysis.  I'm also very conscerned for you and your families future when I read that you are looking into buying a 300k home on a 45k salary.  This is 100% impossible.  Even with your wifes income it is financial suicide, and your wife's income is not reliable, obviously.  I'm not passing judgment, my wife also has undocumented income. She runs a legal in home daycare, but clients come and go, I don't count on that cash for my mortgage. 

Your plan is reckless, and it is not uncommon.  Frankly, this line of thinking and decision making is why we are in this crisis.  Banks may share the blame, depending on your political views.  The bank handed me the rope to hang myself with in the spring of 2007.  I chose to purchase a home for 88k less than what I was approved for.  Like so many reckless Americans I had the cash in hand (figuratively speaking), I had the wife demanding 4 bedrooms, granite counter tops, acres of land, the best school systems money can buy, picket fences etc etc etc. 

I had the discipline to resist the temptation to act irresponsibly.  Now I have a mortgage I can comfortably afford. 

Most importantly though Jsaad, unlike so many other Americans, I still have my home.  What good would that granite counter top and 4th bedroom been if I had no wife and kids to share it with?  It is the mans responsibility to be the captain and guide the ship,  if the ship sinks into financial ruin, you could be the only one left on board brotha. 

I mean this with the utmost respect, I just want you to have some perspective and a healthy dose of caution for the path ahead.

best of luck. 

oh and one more thing, I could write a 30 page thesis on why this market is NOT at the bottom.  Your patience will be rewarded I can assure you!  I have the means to upgrade considerably right now.  I increased my salary a year ago by 45% and I have flawless credit, I remain in my humble home to this day.  There is no rush brotha.

If I'm wrong about the market continuing down i can certainly assure you that it will not spike dramatically anyway.  You won't miss anything.  It will be a u shaped reconvery or a slight annual increase at best. 

but i'm telling you, for a gazzillion reasons this market is not done it's decline.