Other Things I Like

Achieving a Life Goal: Buying My First Home

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Growing up, my Barbie owned a home (see example pic above), an RV, a Corvette, a company, and more fancy outfits, shoes, and jewelry than Imelda Marcos (she also had a hot boyfriend named Ken).  She was also a master chef, a lead singer in Barbie and the Rockers, and a beauty queen (but I digress).  I know that in this day and age, Barbie seems somewhat controversial but back in the day, she was the epitome of showing girls they could be anything they wanted to be.

In more realistic life, my parents always encouraged complete independence – that we could be (and do) anything we wanted to.  They wanted my sisters and I to always have enough means to not depend on someone else, teaching us the meaning of working hard and saving what we could, so that we were always okay..  Each of us had bumps in the road with that but those lessons she taught us, stuck, creating “overly self-suffiencent and independent” women (writer’s note: My mom also blames herself for doing so well in this department that she has no grandchildren).

I’ve definitely had my share of bumps in this, moving across the country and back again not once, but twice; choosing luxury cars and vacations over purchasing a home; and general reckless spending to go out and have a good time.  I regret none of these decisions but at the same time, it’s also pushed out my “adulting” timelines by eight more years than it should.

In the middle of 2016, I wrote a post about giving into wanderlust and if it was irresponsible.  At the time, I was hell-bent on traveling more and saving less.  I felt that seeing the world would bring greater joy than being a home owner. This was a week after I renewed my lease, believing that renting was all I could ever afford.  About two months later, something smacked me upside the head – what if I could do both?

I always believed that buying a home was something pretty unachievable for one person to handle – the down payment, closing costs, insurance, titling fees, inspection fees, any renovations, decorating, etc.  But as it turns out, I also missed out on tax breaks, as well as saving myself from increasing rent prices and moving costs.  This lead me to realize I hate having to determine if I’m going to spend another year re-negotiating my lease on a small space with little storage; or if I will have to move again to keep rent prices down.  Plus, the appeal of being able to paint walls, change out lighting fixtures, etc. to make a house a home, were all huge to me because most rental properties strongly advise against it (plus, I’m not one for paying to have something changed back before I move).

So, I started online “window” shopping.  This quickly turned into an onslaught of questions to my sister (who is a real estate agent), which turned into a couple of conversations with her recommended Mortgage Broker.  The gist of this is that I should have bought a home years ago for the tax breaks alone BUT now that I’ve taken the first step in acknowledging that it’s time to purchase one, I had some things to do to get to step 2: Actually shopping.

For those who are contemplating buying a home for the first time, I’d encourage you to do a lot of homework: Talk to live people – friends who have been through the process, a trusted mortgage broker, real estate agent you know, etc., to get as educated as possible.  I’ve learned that trying to educate yourself online will lead you down a lot of false paths, spammy phone calls and emails, and a ton of stress and headaches.

Below is the process I’ve completed so far.  I hope this can help one or two of you in starting your own path to home ownership!

Budgeting Questions to Ask Yourself

  1. Take a look at your current rent and any other fees attached to it.  Are you comfortable paying that or a few hundred more?
  2. Take a look at your overall debt-to-income ratio- would you be able to sacrifice going out to eat/drink a little bit to pay down your debt a bit, or at least not amass more debt?
  3. Take a look at your savings – These days, a conventional loan requires a minimum of 3% down and an FHA (should the home be under $500K) requires a minimum of 3.5%.  Would you be able to afford that?

In my case, the answer was “yes” to all of them but it took some work, soul-searching, and “adulting” to make it happen – this included getting rid of my expensive car lease, saving me money on a car payment, gas, and insurance.  (Being car-free has its challenges but overall, I’ve been able to breathe a lot easier.)

Differences in Loans – Doing My Homework

There are SO MANY different kinds of loans out there and with every article I read and every professional I talked to, my head seemed to swirl a little bit more.  In my case, I’m focused on two:

  1. FHA Loan – Simply put, you’re paying mortgage insurance to the Federal government to protect the lender against bankruptcy.  This is actually a great option for first-time home buyers who don’t need to borrow above $500K.  It requires a 3.5% down payment (unless your credit score is less than 550 and then in that case, it will require a 10% downpayment).  So if you were going for a $500K home, you would need $17,500 to put down.  In addition, if you need to make improvements on the home, you can apply for a 203K, which can give you up to $35,000 for the improvements, which is absorbed into your loan. The drawbacks with this loan:
    1. The list of bank lenders becomes a lot smaller
    2. You are paying two mortgage insurance premiums – one is up front ($1,750 for each $100K you are borrowing) and one is annual (about .85% of the loan).
    3. If the home price is more than the actual worth, FHA will reject the request to purchase the home.  The home price must fall on-par with or under the assessment price.
  2. Conventional Loan – A conventional loan can be many things.  The main difference is that it is not backed by a government agency and instead, purely by a bank or other lender.  It requires a minimum down payment of 3% (with a great credit score), and can include a fixed APR (also dependent on credit score). The drawbacks of this loan:
    1. You are paying Private Mortgage Insurance (PMI) for down payments of less than 20%.  With good credit however, it can sometimes cost less than FHA.
    2. The max of the loan will be less than FHA – it’s typically $417K for most areas and $540K for those in more expensive areas.
    3. Your credit score is the driving factor – the lower your score, the more you pay

Getting the Pre-Approval Letter

As of today, my application was submitted to my Mortgage Broker and I was pre-approved!  Taking all the necessary budgeting steps, helped tremendously in getting me there.  Now that I know my max spending number, I’m ready to start house shopping!  Stay tuned for the fun part 🙂

 

 

 

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