Preparing to Buy a Place – 1 Year Out

Gentle Readers,

In April 2016  – I made the decision to get my financial house in order, because it is time for them to become my erstwhile roommates. This is the true reason I started this blog. I know that I work best under “pressure,” which is where putting my financial mess out in public comes in. This is a space for me to learn and grow.

I know a few things. I need great credit so that I can get a favorable rate on my mortgage and I need a down payment.

My Fico Score was 732 when I made this decision. This is essentially what it was before I opened my business two years ago.  It was great, but not excellent. By most reckonings, the bottom end of excellent is 750. I was close. That 18 point difference will make a difference on the APR I’m offered on my mortgage, and thus on the amount of interest I will pay over the life of my loan.

Once I made this decision I began making calculations.  How long to pay off my CC debt.  How long to save up a deposit. How to get my credit score up.

I’m on track to pay off my credit card debt by October or November, barring new expenses. I have an upcoming dentist visit and I think it will be time for adult braces due to some bad changes in my mouth. Expensive. I’ll see if they have a payment plan.

I’m glad to report that my credit score is now 787 as of May. HAPPY DANCE!

I did this by paying off two of my three credit cards. I took out a loan through earnest to do this.  I learned that the right type of credit (the earnest loan) looks more like a mini-mortgage and makes me look more responsible. I also kept the amount of credit utilized on the other card low because I learned that having less than 30% of your available credit utilized makes a difference in your credit score. This is why I did not close those cards, but continue to use them for tiny purchases each month. 

I did all this in April. More than 6 months before I would approach a lender to see what I could get pre-approved for.  It worked. All of this concentrated effort paid off. I’m firmly in the excellent credit category and can keep improving.

I also put more of my expenses on auto-debit so that I won’t accidentally miss them.

I learned that a mortgage should not be more than 2.5 times your annual salary. I had never heard this rule, but it makes sense to me. Helps me to plan. Thanks to Freedom is Groovy for linking here to Fritz Gilbert’s Retirement Manifesto, which is available here.

I do not consider the place I live to be an investment since I need to live somewhere. I do not want to tie up too much of my capital in my mortgage and other housing costs. That means I’m looking to pay little. I don’t want to live in a dump, but I don’t want something incredibly nice.

Things I need to learn:

  • What the heck is a basis point?
  • Will I even be able to get a mortgage without a cosigner since I have years of contingency work?
  • FHA loan rules.
  • HOA rules.
  • The differences between condos and coops.
  • If I want a coop, learn about the coop mortgage rules.
  • How much of an emergency fund will make me feel secure?

Things I need to do:

  • Pay off the rest of my credit card debt.
  • Get into no more credit card debt
  • Save a down payment.
  • Save enough money to actually move.
  • Prepare my financial documents so I’m ready to talk to a lender.
  • Find a realtor I respect
  • Decide what I want versus what I need in a home.
  • Monitor the local market.
  • Buy a home.
  • Take advantage of my access to a garage to paint and/or build the furniture I want for the new space.
  • Move.
  • Unpack.
  • Not share my shower with people I’m not in love with.

How did you prepare when you wanted to buy a home? Am I missing anything?

 

 

 

Author: ZJ Thorne

Lesbian on the path to Financial Freedom

  • Pia @ Mama Hustle

    “Not share my shower with people I’m not in love with.” lololol

    Ain’t that the truth. I don’t even want to share a shower with the person I AM in love with.

    We bought our house in April, and my prep work looked like this:
    – Pay down debt for 2-3 months to get the credit score needed.
    – Look for errors on my credit report.
    – Figure out EXACTLY how much we wanted to spend. We chose a level that we can afford on my salary alone – and the mortgage is less than 2.5x my salary.
    – Get ALL the papers together. OMG. All of them. All the W-2s, bank statements, asset statements, etc.
    – Get a pre-approval.
    – Go look at two different types of houses: further away from work, but bigger, or smaller and closer. It took seeing both to definitively make up our minds: smaller and closer is where it’s at. (We also looked at condos, townhouses, and standalones, and I’m pretty firmly in the low-HOA fee club. We ended up in a townhouse with a $40/mo HOA fee, which includes maintenance of our tiny yard. I love it!)
    – Make an offer.
    – Get the final qualification.
    – Negotiate after your inspection findings. We got a new roof thrown in, because the roof was ancient.
    – Move in and be happy 😀

    Happy to talk through any of that in more depth. You know where to find me 😉

    • Sharing with my girlfriend is very easy. Thank goodness.

      Will I need statements from IRA and Brokerage? Two months like bank statements?

      I will definitely hit you up with more questions. Thanks.

  • Mrs. Groovy

    Great job on the credit score!

    Thanks for the shout-out. The post you refer to was one Mr. G republished, written by Fritz Gilbert of Retirement Manifesto. Here’s the link to his original article:
    http://www.theretirementmanifesto.com/the-ten-commandments-of-personal-finance/

    I can’t vouch for it — but Dave Ramsey recommends Churchill Mortgage. He mentions them in the context of working with people who have no credit score. But I’m wondering if they’re flexible in such a way to work with people who don’t have a 9-5/w-2 job. I don’t know much about it but I believe it all has to do with the underwriting. I would google “qualifying for a mortgage with a freelance job”. There might be ways to position yourself, especially during times that you have a lot of work.

    A big difference between a condo and a coop is that with a condo you own the property and with a coop you own shares. Property taxes are covered in your monthly charges with a coop but not with a condo. A huge item to investigate on both is the building’s fund. You want to be sure they’ve got a good reserve.There are other differences as well and IMO owning a condo is much more favorable than a coop. Email me anytime (mrsgroovy@freedomisgroovy.com) and I’ll tell you what I know.

    • That’s a lot of useful information. Thank you. I do usually average 48 weeks of 40 hour w2 work a year. I definitely want to secure a mortgage before working for myself full time. Unfortunately, most of the buildings in my city are coops instead of condos. I’ll keep learning.

    • And I will update the post from my computer tonight. Thanks for the heads up.

  • I’d add: Decide *your* budget for a home, rather than letting your realtor or lender tell you what you *should* or *can afford to* spend. Make sure it’s a number you’re comfortable with and can pay off on your own timeline, not the bank’s. 2.5 years of salary might be a good benchmark, or you might want to go lower. (Our forever home was less than 1 year of our combined salary, and we’re thankful every day that we didn’t spend more! Our FI timeline would be a lot longer if we had!)

    • Perfect advice! If I was ready now, there’s a perfectly underpriced place in a neighborhood I’m ok with. Been on the market for a year. Sadly, once I’m ready, I’ll have to find something a few 10K higher.

      I want to make it so that my mortgage/pmi/taxes etc payment is less than or equal to current rent. That seems reasonable to me. Am I off-base?

  • Great job on raising your credit score to 787. I’m currently at 760ish and want to increase it further! I use <4% of it every month and pay it off every month. Have to increase credit score to lower mortgage rate. I think it's a fantastic time to buy a house because of the low interest rates. I don't know how heated the market is at your geographical location or in general but I'm sure you will make the right decision. Good luck!

    • I think you can get there. Just takes a little time. My market is heated, but I hope that my desires can align with something cheaper.

  • John at LTTO

    Something I recommend is looking up what your property tax rates are in the area of interest. It’s all public information so you should be able to look up any property.

    Also, you might want to think about how much you’d like to put down. The standard 20% might be good but you might also consider less and the trade offs that come with that. For example, going from 20% to 10% may not make much of a difference on your monthly payment but it’ll sure pad your emergency fund and give you flexibility.

    • I hadn’t thought to look up the property taxes. Thanks. I don’t think I’ll be able to do a 20% down payment.

  • Emily Nance Jividen

    If you’re a member of a credit union, consider talking to them about the mortgage now even though you are some time away from needing one. (You could do it with a bank, but they’re more profit driven.I find credit union folks easier to work with.) That way you can get an idea how they’ll view your income sources and what percentage of downpayment and savings above closing they’d expect from you.

    • I love credit unions, but they aren’t really accessible near me without a car. I have an Internet bank. I should ask though. Stop worrying and get the information I’ll need.

  • It’s great that you’re planning ahead and congrats on improving your credit score. One thing I’d suggest if you’re not already doing so is to increase your emergency fund. Once you own the home (no matter what kind), you own the problems too and with appliances and systems, you don’t know when an emergency will pop up. John was smart to mention property taxes. Just keep in mind that over time they’re likely to increase.

    • How big would you suggest? I’m hoping to buy a condo in a building with 20-100 units. I would be responsible for my water heater, oven, and washer/dryer plus the walls etc. $10000?

      • I think for the appliances you’ve mentioned, $3,000-$4,000 is a good cushion. When you mention the walls, that should be covered with your condo homeowner’s insurance policy. It’s important to check what coverage you’ll need with the condo association and your insurance representative. Based on what I know, I don’t think you need to allocate emergency funds for the walls.

        • I’ll definitely check with the condo associations. I appreciate your insight.

  • Sounds like you’ve got a good plan ahead. It’s good to learn everything you can now before you buy for sure.

    2.5X – 3X income for a mortgage is a good rule. Although, w/ interest rates this low, you can probably afford more. That said, the housing market is slowing, so there really is no rush. I’d wait until winter 2017/2018 the earliest. Where are you looking again?

    A condo is nice, but the downside is that if someone decides to foreclose for whatever reason, they bring you down w/ them. Also, you have LESS freedom to do what you want due to the HOA rules.

    Sam

    • I don’t want to tie up too much capital in a place to live, but I’ll keep in mind your thoughts on the multiplier and interest rates.

      I like condos because I’m not truly into homes. They are mainly just spaces I occupy. My girlfriend does the decorating for me, because I have little vision there. I just want a safe space whose roof I don’t have to replace on my own if there is a terrible storm.

      I’m on the East Coast in a high COL market. I may have to wait until 2018 just because of the new FHA guidance and my student debt load.

      Thanks for reading.