1st time home ownership... Thoughts?

Goat rocker funny that you said that. Hopefully in a few months I'll be going from house to trailer in order to afford living on a river.  Now to decide trinity vs. Klamath hmmm.

I don't know why everyone raves about the VA loan.

I didn't even use my VA loan. Seems way over rated to me.

I believe you can still drop PMI with an FHA loan if you do it within the first 2 years or something.

I'd do it as soon as you can. Screw the down payment. I was really worried about that for a while and was gonna chuck 20% down. Realized how little that chunk of money was going to save me a month and decided it would be better kept for emergencies, fixing it up etc. Can always use it to pay principal only too..

 Worry about your monthly payment and what you can budget. You have a girlfriend so it's a different situation but.... So glad I bought mine. I too hated throwing money away every month in rent. Now I have a room mate and only pay $600 a month out of pocket to be a home owner. And I still have 2 rooms I could rent out and make money.


It does suck when something goes wrong though. Better keep some money tucked away, no landlord to fix things anymore.

Actually, FHA loan rules changed a year or so ago, so now PMI can no longer be removed under any circumstances.  You'd have to refinance to get out from them.

As for the mortgage interest deduction and the real estate taxes deduction, those don't help folks in lower income brackets as much as they do in higher brackets. That's why they've floated the idea before of limiting those deductions for higher income folks, as the advantage for them is much larger. 

Mortgage interest comes off as an itemized deduction, and would only apply if the total itemized deductions are larger than your standard deduction.  With the cost range of the house you're talking about, you'd be comfortably over the standard deduction, but the fact that you and your GF aren't married means that you'll need to figure out who takes the interest for their tax return.  Obviously the person with the higher income does.

The mortgage credit certificate program on the other hand is a gigantic benefit if you qualify. It essentially gives you 15% of your mortgage interest back to you as a dollar for dollar reduction in your taxes, and the remaining 85% of your mortgage interest is deductible on your schedule A like normal.

1. 10% should be your target down payment, that's where a lot of conventional loans start.  In addition to that, an underwriter will want to see 6 months of reserves available to you, usually 401K accounts can be used towards the reserves.

2. Try to stay away from FHA loans. In my opinion, they're not worth the cost.  If you're stretching that far then you probably can't afford it.  It's hard to get out of them unless your home value increases a ton and you can refinance.

3. Without knowing your income, I can't speak towards the affordability aspect, but the general rule is to purchase a home that is 3-4x your income.  You might be able to afford more, but being house poor is worse than renting. 

4. As a first time homebuyer (also If your GF is a teacher), there are a few additional programs out there that might help you as a first time homebuyer, subordinated loans that can be used towards a down payment with low interest rates. 
http://www.calhfa.ca.gov/homebuyer/programs/ectp.htm
http://www.calhfa.ca.gov/homebuyer/programs/index.htm
CalPath home loans - google it
There are also programs for Mortgage Credit Certificates in Alameda county:
http://www.acgov.org/cda/hcd/homeownership/mccprogram/index.htm

5. One thing to think about is if you are in a fixed rate loan and need to pay PMI, make sure you understand the terms on how to cancel PMI at a later date.  Generally, PMI will require you to pay your house down to 78% of the original appraised value to remove, or 80% of a new appraised value.  One of the negatives with the FHA loans is the PMI is forever, and its 0.85%, so that's no fun. 

6. Depending on the city you decide to purchase in, you might be able to get some sort of first time homebuyer assistance as well.  Look up the city government website and poke around.

7.  If you find that the math doesn't really work and that you need a larger down payment, consider downgrading on your rental property to save up more cash for a future down payment.  On the surface, $50K in rent doesn't appear to be too bad, depending on how many years that covers.  For example, I paid over $20K in property taxes and interest alone just last year on my mortgage, which wouldn't be much different than yours if you're purchasing at the top end of your range.  That doesn't include other costs such as garbage, sewer, maintenance.

8. Buying a home should not be a solely financial decision.  Generally speaking the increase in home value over time don't outpace the costs related to purchasing and maintaining a house for yourself, and the rent vs buy calculations still generally trend towards the renting.  That may be false during certain time periods (like the last two years and during the first boom), but will generally hold up during other times.  You need to have a good reason for wanting to purchase a house, and dodging your landlord's rules shouldn't be the only one.

9. Don't forget that rising interest rates could also hurt home price growth in the future.

Let me know if you have any additional questions from the financial aspect of it, I'm pretty well versed on this stuff.

Hell yeah, man. Thanks for taking he time to write this up.

A little more background... I'm 31, partner is 34. We aren't veterans, and neither of us have a vet in the fam. Me licensed environmental engineer, partner bridge-K teacher with a UC Davis degree and teaching credential. Combined income is around $100k and climbing, not including her extra nannying work.  Maybe some day this country will decide to pay well educated and credentialed teachers what they're worth; that's a whole other topic...

And a few replies:

1. 10% should be your target down payment, that's where a lot of conventional loans start.  In addition to that, an underwriter will want to see 6 months of reserves available to you, usually 401K accounts can be used towards the reserves.

- When I say we're at nearly 10%, I mean dropping 10% would pretty much tap out our reserves (not including 401k, which isn't yet as fat as it probably should be).

2. Try to stay away from FHA loans. In my opinion, they're not worth the cost.  If you're stretching that far then you probably can't afford it.  It's hard to get out of them unless your home value increases a ton and you can refinance.

- I've done some reading about FHA loans, and came to the same conclusion. They do offer teachers some good deals on houses in "up and coming" (ghetto) neighborhoods, but it's definitely slim pickings here in the Bay Area.

3. Without knowing your income, I can't speak towards the affordability aspect, but the general rule is to purchase a home that is 3-4x your income.  You might be able to afford more, but being house poor is worse than renting. 

- Combined income is about $100k, so the $300-$400k range seems within reach.

4. As a first time homebuyer (also If your GF is a teacher), there are a few additional programs out there that might help you as a first time homebuyer, subordinated loans that can be used towards a down payment with low interest rates. 
http://www.calhfa.ca.gov/homebuyer/programs/ectp.htm
http://www.calhfa.ca.gov/homebuyer/programs/index.htm
CalPath home loans - google it
There are also programs for Mortgage Credit Certificates in Alameda county:
http://www.acgov.org/cda/hcd/homeownership/mccprogram/index.htm

I will definitely look into this. Thank you for the links.

5. One thing to think about is if you are in a fixed rate loan and need to pay PMI, make sure you understand the terms on how to cancel PMI at a later date.  Generally, PMI will require you to pay your house down to 78% of the original appraised value to remove, or 80% of a new appraised value.  One of the negatives with the FHA loans is the PMI is forever, and its 0.85%, so that's no fun. 

- I've looked into this a bit. In our price range, it would take about 5-6 years of regular payments (no extra) to reach the 80% mark. I understand that you can accelerate this by either paying extra or making improvements to the house and having it reappraised. The latter option is appealing. My dad and I have done quite a bit of remodeling, repairing, etc. The house I grew up in between age 4 and 18 only has one original wall at this point. The rest has been redone, largely by us.

My parents recently helped my sister refresh and rebuild a junker foreclosed home in Santa Rosa. We aren't afraid to get our hands dirty and make improvements.

I also understand that it can be tough to get financing for fixer homes.

6. Depending on the city you decide to purchase in, you might be able to get some sort of first time homebuyer assistance as well.  Look up the city government website and poke around.

- I'll definitely look into this as well.

7.  If you find that the math doesn't really work and that you need a larger down payment, consider downgrading on your rental property to save up more cash for a future down payment.  On the surface, $50K in rent doesn't appear to be too bad, depending on how many years that covers.  For example, I paid over $20K in property taxes and interest alone just last year on my mortgage, which wouldn't be much different than yours if you're purchasing at the top end of your range.  That doesn't include other costs such as garbage, sewer, maintenance.

- I don't think we can downgrade much from the rent we're paying now. 3-BR 2-bath in Albany for $2,100/month. We had been renting out one room to a friend for $700/month. Funny part is, she didn't even spend a single night here in the last 8 months (living with her BF). She finally decided to "officially" move in with the BF, so we're back to paying $2,100 unless we want to move or seek out a random new room mate.

Also, this house is literally dying from the inside out. Mold, dry rot, basement flooding, etc, etc, etc.. We will be very surprised if the landlord doesn't raise rent soon to start covering some of the repairs that this house badly needs. We've been here over 3 years and the rent hasn't gone up (knock on wood).

We're both tired of renting (have been for years), and feel like this new situation might be the catalyst to get the ball rolling toward home ownership.

8. Buying a home should not be a solely financial decision.  Generally speaking the increase in home value over time don't outpace the costs related to purchasing and maintaining a house for yourself, and the rent vs buy calculations still generally trend towards the renting.  That may be false during certain time periods (like the last two years and during the first boom), but will generally hold up during other times.  You need to have a good reason for wanting to purchase a house, and dodging your landlord's rules shouldn't be the only one.

- Very true. This isn't just financial. We want a home. Our own home, that we can build up how we want and take pride in.

9. Don't forget that rising interest rates could also hurt home price growth in the future.

- Good point.

Let me know if you have any additional questions from the financial aspect of it, I'm pretty well versed on this stuff.

- Thanks again for all the tips, everyone. This has been very helpful.

Cheers,

~Alex

If you've done house renovation before, it helps tremendously.  A lot of financing options out there for rehab loans actually. 

IMHO
No HOA
No PMI
These things just limit your buying power and increase the Monthly
VA is good if one served. Save any extra cash for fixing it up

Look at older neighborhoods. Are the yards well kept= Neighborhood pride. A neighborhood with no bars on windows and no rep for gang banging and you should be OK . 2bd /1ba or 3bd/1bath are less desirable to some and you'll get a better buy. Older neighborhoods also have bigger lots so you have plenty of room to ad an extra bath or bed when you can afford it

What about a triplex or fourplex? Have others make or help with expenses and have equity and income later in life to buy your dream home.

Another tip. If you make 1 extra payment towards principle  each year you will cut 7 years off of your 30year loan. I personally took my payment divided by 12 and add that towards principle each month then add an extra payment to principle with tax returns if i can. Addig 2 extra per year really helps you jump out of the high intrest brackets youre paying at the begining of a loan.

Also american home shield is a life save on big appliances. Have had them repair the ac twice and dish washed twice in The first year.

FHA 203 K fixer loan is  great if you have a fixer. Once you fix it up  refi to 
a conventional loan to drop Monthly Mortgage Insurance. Also Note that FHA will do  up to 2- 4 plex owner occupied with 5 % down and rental income helps you qualify. Check with a Lender  for your county loan limits. If I was in my 20's again I would buy a  4 plex in best neighborhood I could afford  use FHA and I would be retired by now!

  A lot of people think real estate is a commodity, but forgot about financing is also a commodity. At under 4 percent interest, just about anything you purchase is a great opportunity. My suggestion is take a 30 year mortgage, and plan to pay it off one of these days.  Being it is your first home, you don't have to die there. You can always rent it out if for some reason you and your gf don't go right.
  keep in mind also that home owners have a 42 time higher net worth then being a tenant all their lives.
   I do agree HOAs are bad idea. Most of them do not allow a boat, or a motorhome in the driveway. Most of us enjoy leaving the garage door open with the radio playing the ball game, and triggin out our kayaks.

  Some more statistics for you. We in the US need about almost a million new homes  per year. Since the financial crisis, hardly any homes have been built. So all of that pressure is still there. it takes about 2 years from when land is acquire to the houses being ready to be sold. It's going to take a long time before the supply starts catching up with built up demand.
  I would tend to stay away from Oakland because of the rent control laws. Rent control laws are so bad these days, you can not even get a roommate without being it affecting you.
  If you want to try Daly City, I am showing a house on McDonald Avenue for 500k. 3 bedroom 2 bath 1 car garage at 1pm.I think you can hang four kayaks in the detached garage. Call me at 415.203.2086.            Herb

Down payment size doesn't matter. Its all about monthly cost. FHA is a great opportunity you should consider. My recommendation is to do a 15 year loan if possible. They are typically only about a hundred bucks more a month but you build equity much faster. You would see that PMI disappear in no time. You can also write an over asking price offer and ask for cash back at closing to make the down payment work. If it still makes sense on the monthly payment you can use that option.

I think the PMI can be dropped after one year of ownership. You just have to pay for an appraisal Report to proof there is an 80% loan to value ratio (due to appreciation), and follow the lender's requirements in doing the proper documentation. Don't be afraid to get into the house with PMI. The only PMI that cannot be dropped are the government insured loans.  FHA, or VA guarantee premiums.

All PMI can be dropped. Typically loan to value need to be at least 80% 75% in some cases. In other cases value doesn't matter. You have to have paid off 20-25% of your loan