First Time Buyers, Pt 1

I often hear a sentence which starts with “We cannot buy a house now because…”

1. We do not make enough money
2. We do not have a down payment

However, the real reason typically is: “We have no idea how much we need for a down payment or how much our monthly cost will be. We assume we cannot buy now.”

The great news is that this is a factual, real world, math-based problem, with exact answers that can be found through research and consulting with experts.

Let’s look at a possible situation. Over the past 10 years, I have taught or mentored about 200 students at KSU.  An average alumni might be someone like this:

• 27 years old, married, both are working, very little debt, $200 a month in debt payments.
• Living in a townhouse near KSU paying $1900 a month in rent. It was $1500 but it just went up, again.
• They have 700 credit score and a combined household income of $70,000. They have $2000 in the bank.

Today, there are about 15 single family homes or townhomes near the KSU campus for sale from $250,000 to 300,000. These are starter homes: not dream homes, not your final home. Places that you can paint the walls, and fix up with new carpet and flooring, start a family, and live in for the next 5 to 7 years (and the monthly mortgage payments will not go up). As your agent, we go looking for a home and get an offer accepted for $280,000 to purchase one of these houses. What does this mean for my new buyers?

If they wanted to put down 20%, save on Private Mortgage Insurance (PMI), and get the best rate, they would need $54,000. This is not going to be possible.

They will instead get a Federal Housing Association (FHA) Loan or a Conventional Loan. An FHA loan can be for 96.5% of the purchase price. They will need $9800 to purchase the house. (Plus closing cost which we will cover next). And their monthly loan payment (at 6.25% interest rate), will be $1766 including a mortgage insurance premium.

The total monthly payment, once property taxes ($2200 a year) and homeowner’s insurance ($900 a year) is added in is $2025; about the same as their current rent. They can afford this!

But what about the $9800 they need to come up with plus other cost of closing which will be about $4000 for a total cash need of $13,800? They only have $2000 saved.

There are a number of ways to solve this shortfall. We will look at these in First Time Buyers, Part 2.