To buy a house, or not to buy a house

[Klubbie]

I'm currently debating whether or not to buy a house in the current housing market. A little about my situation:

From what I can calculate on some mortgage calculators a mortgage payments with taxes and PMI would likely be around 200-300 more than I am paying now for rent. However, the houses I am looking at are short sales. One would need a little work (paint and carpeting in the house), the other would not unless the inspection turned something up.

I am trying to determine if buying a house that is sold as a short sale is a wise investment. My biggest problem with a short sale is the fact that I would be limited to a minimal down payment with an FHA loan. That bothers me, but when I look at the situation - getting instant equity by purchasing a short sale, it may be worth it.

From a financial standpoint, I've run some numbers and would probably be paying 200-300 a month more than I am paying for rent right now if I were to buy a house. My credit score is very good, so I think I would be able to secure a good interest rate. I have no debt outside of student loans ($700 a month however). And by purchasing a short sale I believe I would have instant equity in the house.

Based on my take home pay, the numbers I've run indicate I should be able to comfortably afford the monthly expenses of a mortgage, taxes, and PMI (as well as my other monthly expenses) without changing my 401K contribution at all. I won't be able to contribute to my Roth the same way I would have before, but should still be able to contribute some.

I feel torn because a big part of me would rather rent a few more years and pay less in rent, and use the difference to save and make a bigger down payment. But I also don't expect interest rates and housing prices to stay as low as they are a few years down the road when I'd have more put aside for a down payment.

So I am interested to hear some perspectives on this. I would be a first time homebuyer, so any and all input is welcome.

[FIRE'd@51]

Quote:

Originally Posted by Klubbie From a financial standpoint, I've run some numbers and would probably be paying 200-300 a month more than I am paying for rent right now if I were to buy a house.

Is this $200-$300 more a month before you figure the tax savings from the deduction of your mortgage interest and real estate taxes. If so, you want to figure in that savings. Also, in Ohio, I believe you have both state and local income taxes, so you should get some tax savings there as well.

[Klubbie]

It does not factor into my analysis. I guess that is one thing I am not clear about regarding purchasing a home - the interest deductions.

But from my calculations, the extra money I'd be paying towards a house instead of renting would strictly be based on a month over month basis without factoring in any sort of tax deductions.

[MooreBonds]

Quote:

Originally Posted by Klubbie From what I can calculate on some mortgage calculators a mortgage payments with taxes and PMI would likely be around 200-300 more than I am paying now for rent. However, the houses I am looking at are short sales. One would need a little work (paint and carpeting in the house), the other would not unless the inspection turned something up.

Welcome to the world of homebuying! I purchased my first home in July 2009. Just realize that no matter how much preparation/investigation you do, there will be something that comes up ("oh, why didn't I look at _____", "I should have realized that the comparable sale house was considerably different", etc.) that you can only learn the hard way on and simply save it for future knowledge. You can't always learn everything beforehand.

Also, don't underestimate the repair costs for any house (shortsale or not) - I recarpeted just my family room (rest of the house is hardwood floors I refinished myself). Cost for one room, about 20'x15': $1,400. And this was for unluxurious, $3.99/sq ft (on sale) carpet with free pad, free installation, free removal of old carpet. (they charge you based on the rolls of carpet they have to cut to fit your room, not the exact total square footage of the room)

Definitely go in with an idea of exactly how much cash you need to fix things for ANY house. And, do a good job of looking up on the public real estate records to see what comparable houses in the area have actually sold for, so you can see just how much of a 'bargain' a short sale may or may not be.

Quote:

Originally Posted by Klubbie I am trying to determine if buying a house that is sold as a short sale is a wise investment. My biggest problem with a short sale is the fact that I would be limited to a minimal down payment with an FHA loan. That bothers me, but when I look at the situation - getting instant equity by purchasing a short sale, it may be worth it.

If you have the choice of:
A) Buying a short-sale now at a depressed price with a relatively good mortgage rate
or
B) buying at the market 3 years from now after prices are mostly stabilized with likely higher interest rates

I'd definitely go for option A - provided that the short sales you are looking at are not trashed!

One other thing - realize that the deductions you get for mortgage interest and property taxes do add up, so your net after-tax premium of owning (with PMI, property tax, insurance) vs renting won't be as much as you first calculate.

However, there will likely be some increased costs (like buying appliances & furniture, higher utility costs, repair/maintenance) that you may not envision.

Do yourself a favor and look to get preapproved for a mortgage first, just so you can see what the current underwriters might be looking for and how easily you might (or might not) qualify for the loan you would need.

I know Pen Fed has some decent mortgage offerings, but do shop around for a mortgage, rather than using just one name that a realtor gave you.

[Klubbie]

A few of my co-worker's recently bought houses so I've got some names for lenders from them as well. I am talking with a few lenders to get a feel for who the best one may be for pre-approval.

The houses aren't in bad shape, and I am factoring the costs of the repairs. I've got some comps as well and feel comfortable with the fact that they are at least somewhat of a deal.

One other question I have for anyone who has bought a short sale is how is LTV calculated on your mortgage? In theory if a house is really valued at 175K (for example) but sells for 150K, shouldn't the LTV on your mortgage be based on the 175K? I wonder about this because it would potentially affect PMI.

[aaronc879]

Quote:

Originally Posted by MooreBonds One other thing - realize that the deductions you get for mortgage interest and property taxes do add up, so your net after-tax premium of owning (with PMI, property tax, insurance) vs renting won't be as much as you first calculate.

Not everyone gets a deduction for mortgage interest. You only get a deduction if the interest exceeds the standard deduction. Even then you only get the benefit of the amount that exceeds the standard deduction not the full interest amount. Being that the OP is a first time home buyer from Ohio there's a good chance the house won't be worth enough to be able to itemize. Very few people I know benefit at all from interest deductions. These are people in the midwest who own homes under $80K. My 1st home was under $45K and I wasn't even close to being able to itemize.

[MooreBonds]

Quote:

Originally Posted by Klubbie One other question I have for anyone who has bought a short sale is how is LTV calculated on your mortgage? In theory if a house is really valued at 175K (for example) but sells for 150K, shouldn't the LTV on your mortgage be based on the 175K? I wonder about this because it would potentially affect PMI.

From information I have gathered over time, I seem to recall a rule-of-thumb that most lenders require a minimum of 2 years after buying the house before they'd consider hiring an appraisal (likely at your expense) to determine current market value to see if you've exceeded 20% equity. But realize that each lender is different, and you must read your documentation to see what applies.

At any rate, be prepared that for a vast majority of situations, a lender will only use the equity of whatever cash you put down as the 'equity number', rather than the 'market value'. If you want to refinance and draw cash out of your home based on the equity you gain, I believe you need to live there for at least 1 year (based on what Pen Fed told me).

I don't have experience with short sales, but perhaps there is a chance of negotiating with the bank selling the property to have them underwrite a new mortgage for the property their selling? I know you can do this more easily with commercial property, but it might be more complicated with residential.

[Rich]

Klubbie:

It really comes down to the question as to what is your ultimate goal? I suggest that owning a home's end result should be that at some point in your life you'll be able to live in a residence wholly owned by you. It might not be the home you buy initially, but eventually, if your decisions are prudent ones (and you don't run into any "housing bubbles" right when you wish to sell/move up) you will not have to pay someone rent money or a mortgage.

So, if you're planning on staying in the area you are now looking in for an extended number of years (I won't even guess as to how many you'd have to live in a newly purchased home before you start to build equity in it. This market is screwy.) then a home purchase might (I say "might") be a wise thing to do. If you plan on moving on due to career changes or other life variables then it might be best to rent.

Tough decisions.

Rich

[Nords]

As some have mentioned, when you're building that rent vs buy spreadsheet you want to also consider:
- Were you able to itemize your tax deductions last year, or was the standard deduction a better deal, for both federal & state taxes?
- Regular monthly repairs/maintenance (at least $100/month).
- Who's going to do your repairs-- you or a paid professional? (Better take another look at that $100/month estimate.)
- A new roof (not always on your schedule), new heating/cooling system, new appliances (at least you can do the last category on Craigslist).
- Who cares how long you're planning to stay in your house. What's your employer's plan for how long you're staying in your house?
- What's the trend on property taxes and insurance? Would you be able to handle this inflation?
- Worst case, if you had to rent it out would you be able to handle the mortgage payments (and other expenses)?
- If this is your first home purchase you may be able to withdraw a portion of your Roth IRA (read IRS Pub 590). Ohio may also have home ownership programs or savings accounts.

Banks are notorious for moving very slowly on short sales-- months between offers and responses.

[Buckeye]

Why do you assume you will have instant equity because you are purchasing a short sale? The short sale price is below the current owner's mortgage but that doesn't necessarily mean it's significantly below market value, does it?

Be sure you really like the house and the location because my guess is it's going to be hard to re-sell it for the next few years.

[donheff]

Don't buy it unless you really like the house and the location and expect to stay in the area for many years. Student loans? You sound young. Think how things might change with kids, for example. Is the house in a good school district? Owning your own home can be a good thing (I have two) but it can also be an albatross.

[sheehs1]

My 23 year old daughter is buying a condo. Closing is Feb 21st. Her principle and interest payment is about $250 dollars less than her current rent ($1,158). She is putting 20% down. Rents have been on the way up for a while now and will probably continue to go up since more seem to be renting than buying. BUT with condo fee, property taxes and homeowners she will be paying a bit more. Don't know how tax deductions will factor in yet. I would prefer she wait....maintaining some freedom and flexibility but...no amount of talking to her has persuaded her. I ran an amortization schedule to show her just how much equity she would build each year.It is barely $2,000. I also showed her that she is paying over $4 to $5K (condo fee, property taxes, HO6 policy) for the privilege of building that $2K equity. Most goes to the mortgage lender in interest. She won't build significant equity until after 12 years or so. All of that said, she is one who wants a stable environment and wants to know where she is going to be year after year ...and wants something to call her own. It's her money....so....

[Nords]

Quote:

Originally Posted by sheehs1 ...no amount of talking to her has persuaded her. I ran an amortization schedule to show her just how much equity she would build each year.It is barely $2,000. I also showed her that she is paying over $4 to $5K (condo fee, property taxes, HO6 policy) for the privilege of building that $2K equity. Most goes to the mortgage lender in interest. She won't build significant equity until after 12 years or so. All of that said, she is one who wants a stable environment and wants to know where she is going to be year after year ...and wants something to call her own. It's her money....so....

This is also known as "tuition at the school of experience".

Considering the things she could be blowing her hard-earned money on, she's making some pretty respectable choices.

[Pete]

Quote:

Originally Posted by Klubbie And by purchasing a short sale I believe I would have instant equity in the house.

I'm always curious about a market that would provide short sales with instant equity. If so, why doesn't the bank ask for more or why don't you buy a bunch of them and go into business. Obviously this is tongue in cheek...I would just be cautious about this idea.

[sheehs1]

Nords, I wish I could credit her with spending her hard earned money. This was money she inherited from her grandfather. She taking a $2K penalty hit for cashing in a CD early. She is also spending $2K to break her apartment lease. The money had been in trust. I was the trustee. After handling my mothers trust for 8 years, I decided I could do better by her if the money was not in trust (due to prudent man statutes, taxes...etc.). She promised me that she would not touch it and allow it to grow. I've shown her that if she allowed it to grow for 3 to 4 more years, she would have the down payment for something plus her original principle...etc. That said, she is taking about 25% of the original money to buy this condo....so as you indicate...it is not the worst decision and it's not like it went totally 'poof". But if she left it alone...buying things only with her hard earned money, letting this money grow...35 years from now she wouldn't have to worry so much about her retirement (making a lot of assumptions). Maybe Suzi Orman could help? (LOL!)

[Nords]

Quote:

Originally Posted by sheehs1 The money had been in trust. I was the trustee. After handling my mothers trust for 8 years, I decided I could do better by her if the money was not in trust (due to prudent man statutes, taxes...etc.). She promised me that she would not touch it and allow it to grow.

Ah, I see. Bummer.

I feel your pain. We've been contemplating a similar "here, manage this pile of money" plan, and our daughter hasn't shown that she's ready for it yet.

Looks like we're all paying tuition at the school of experience...

[sheehs1]

Quote:

Originally Posted by Nords Ah, I see. Bummer. I feel your pain. We've been contemplating a similar "here, manage this pile of money" plan, and our daughter hasn't shown that she's ready for it yet. Looks like we're all paying tuition at the school of experience...

Yes...looks like. I should have left it in the trust.

[Aiming_4_55]

It really depends on the property and depends on the person. Can they find a true "deal" and is the bank willing to take a loss? Since fair market value is a tad of a moving target, loss is questionable.

My opinion, deals are out there, but not every listing, however it requires work along with risk. Not everyone wants to be a landlord either.

Personally, if I can find a another duplex, triplex, or quad, at a deal to me, I would do it. Deal to me = 6 - 12+% return on my $. All my rental properties cash flow now and hope to have all paid off within 10-15 years.

I hope to add one or two more properties within 24 months. This will assist my semi-retirement approach. YMMV

Quote:

Originally Posted by Pete I'm always curious about a market that would provide short sales with instant equity. If so, why doesn't the bank ask for more or why don't you buy a bunch of them and go into business. Obviously this is tongue in cheek...I would just be cautious about this idea.

[Lusitan]

I think the answer is highly dependent on a myriad of facts we don't know about your personal situation (family situation, career stability, age, chances of wanting to move in the next 10 years, FIRE goals, savings/investments etc.).

For certain people, buying a house now probably makes sense. I'm thinking about those people who have no less than 20% down payment, a high degree of confidence that they'll want to be living in the same house for at least the next 10 years and that they won't be forced to relocate for job-related reasons, that have a high degree of job security and/or a large emergency fund built up to tide them over years of no income, etc.

For anyone else, now is not the time I would be looking to buy a house. There is still a ton of "shadow inventory" houses out there in various stages of the foreclosure process, and the housing market slump is, IMO, far from over. Take a look at historic "income to home price" ratios and you'll see we are still above normal, and that's not even taking in account the usual "overshoot" on the downside during depressed markets like this. I would much rather wait until the housing market gets back to "normal" ... when you can be reasonably certain that, at a minimum, your house will appreciate more or less along with inflation, than jump the gun and buy something that might continue to sink in value for years to come.

Most of the drawbacks in buying a house aren't really that bad for people who are very financially stable and very certain they'll want to stay in the house for a long time, long enough to ride out any problems. But for everyone else, the last thing I'd want is a ball-and-chain of a house around my neck in the event I want/need to pick up and move to a new location, or if/when lifestyle circumstances (marriage, kids) change my housing needs/wants.

Just my two-cents.

[donheff]

Quote:

Originally Posted by Lusitan For certain people, buying a house now probably makes sense. I'm thinking about those people who have no less than 20% down payment, a high degree of confidence that they'll want to be living in the same house for at least the next 10 years and that they won't be forced to relocate for job-related reasons, that have a high degree of job security and/or a large emergency fund built up to tide them over years of no income, etc.

Sounds like a lot of us FIRE'd folks