How She Bought a House - The Money Side
I don’t have a lot of money. I don’t know “what I want to do with my life.” I have debt. I’m not making 6-figures. So how did I buy a house?
I always thought my best bet would be to one day own a condo. Right? They’re smaller than a house. I knew more single ladies owned condos. I thought that’s the direction I’d have to go.
In the end, owning a house is actually cheaper than a condo. Go figure.
MYTH #1: Your Bank is Your Best Bet
I thought I’d get the best rates through my bank. It’s a local credit union and they do tend to have some great rates on a lot of loans. But whenever I dared to apply for a home loan, the best loan they could offer me was for a loan that was only worth, quite literally, a leaky shack. (And odds are I couldn’t buy the leaky shack anyway because it wouldn’t pass inspection).
For several years, whenever I got fed up with the rising rent costs, I’d jump onto my bank’s home loan calculator and see if NOW I’d qualify for something a step up from a leaky shack. But no. Even with a decent job, their calculator still showed I had too much debt to warrant a loan for the price of a livable home.
Until a real estate friend asked why I’d never applied for a loan through a mortgage company.
Why? Because banks will give me the best interest rate, right? Not necessarily.
Now to ignore the years I maybe could’ve already bought a house if I’d only gone to a mortgage company first. Moving along!
How do you get the best mortgage? Shop around!
Did you know you don’t have to use your own bank? You can apply for a loan through another bank. One you’ve never banked with! If they have outstanding rates and you qualify, go with them.
I didn’t know that!
MYTH #2: You Need a Big Down Payment
This is half true, but it depends on your financial situation. Most people will qualify for some sort of smaller percentage down, possibly 0% or 3%. Your mortgage lender will crunch the numbers. When I was going back and forth with my lender about what was financially feasible, she ran a bunch of different scenarios until we got to the numbers that worked.
Tell them things like, I only have $10k to put down, maximum. If you have wiggle room, tell them that too. Let them know what will feel comfortable so they can get you priced at the loan amount you could actually live with.
How do you get a down payment?
Savings. The tried and true “nest egg” is always fantastic if you have it. Your house will likely (hopefully) increase in value with time so your investing your money into a home.
401K. If you have one of these accounts you’ll have to weigh your cost and benefits from withdrawing. Your best bet to do a withdrawal though, to avoid the most penalties, is to rollover into an IRA (Individual Retirement Account). Just know that this can take up to 2 weeks for the rollover to complete.
IRA. You can withdraw a down payment (up to $10k) as a first-time home buyer without having to pay taxes on it at tax time. At least, that’s what I’m told. We’ll see what happens when April comes around.
Roth IRA. If you had money in this account for more than 5 years, you can withdraw money from it for a down payment (up to $10k) and not get hit with any penalties.
I went the 401K-to-IRA route because there’s no time limit on how long money transferred from your 401K has to be in your IRA before you withdraw it, and it came with the least amount of penalties.
MYTH #3: You Have to Pay Your Closing Costs
If you can afford to pay your own closing costs, do it. It lowers your overall loan. But it’s not a requirement by any means, and depending on the market, this is something you can use to negotiate with potential sellers.
I couldn’t afford to pay my own closing costs, so that’s something I told my lender from the start. It would need to be rolled into my loan.
How much are closing costs?
Expect to pay anywhere from 2% to 5% of your home purchase price. Bank of America has a pretty spot-on closing costs calculator.
MYTH #4: You Need to be Debt-Free
This is obviously beneficial at any stage of life, but it’s not a requirement. Your lender will help you crunch the numbers to see if you qualify for a mortgage loan that will be comfortable at your current rate of debt, or if you’ll need to pay off a certain amount of debt first.
This is actually what threw my applications at my bank. Their algorithm weighs any amount of debt extremely high against your assets. Hence only qualifying for a leaky shack even though I don’t have a shocking amount of debt and my credit history is high.
I did still have to pay down some credit card debt before qualifying for the loan. And no, I didn’t just have that money laying around. My family was gracious enough to help me.
Had that not been the case, I was on track to continue renting and paying down debt over the next couple years, and then buy a house.
Should you pay down debt or buy a house?
My thought was, housing is only going to keep climbing, so if I can, why not jump in now before the housing market is just a runaway train? Maybe it won’t be and housing prices will tank, but it seems unlikely.
While having to pay monthly credit card fees on top of a new mortgage and housing bills doesn’t feel great right now, and I’d rather keep that money in my pocket instead of flying out the door, it won’t be forever.
If you have debt, and I’m talking about credit card (“unsecured” debt), keep paying it down. Work with a lender to see what you can qualify for and how much you should pay down to live comfortably in a new home, even with those debts. You’ll at least have a goal to aim for.
You might be a home-owner in disguise
I thought buying a home wasn’t something I’d qualify for until I was in my 50s. I thought I need to pay off all my debt, then start saving for a down payment. It seemed fairly hopeless. Then, with a little more research and advice from friends who either already own or sell homes, I was signing papers within a year.
My best advice is:
Shop around for the best rates out there on a mortgage. Look up other banks. Check out some lending companies. A friend of mine said he wound up finding a great mortgage rate from a little bank on the other side of the country. It’s your money. Get the best value.
Calculate your budget. Work out your true budget in your current living situation. How much you pay for rent, utilities, food, gas, etc. How much is left over? How comfortable is your situation right now on your current budget? Then put in the numbers as a home owner. Do you still have enough to put into savings? Also, your utility bills get a nice facelift of nearly doubling, if not tripling.
Work with a lender that respects your budget. It’s great to qualify for a $300,000 home or higher, but you still have to pay for it. Know where that edge is where you’ll feel comfortable and let your lender know. If they keep pushing you to go higher, find someone else.
I’m by no means an expert in buying a house and tax laws are obviously changing, so do your homework. You might be closer than you thought to owning your own home!