Monday, February 13, 2012

Lesson Learned: Buying Our First House

What would you have done differently the first time you bought a house?

The first year of my marriage, my wife and I had only casually talked about buying a house. We talked about how nice it would be having our own place, how comfortable we would be moving into a place larger than a 2 bedroom apartment, and how at ease we would feel once we could settle down. We had no intentions to buy a house anytime soon though.

Then one day we heard on the news that the federal first time home-buyer tax credit would be extended several months into 2010. We felt it was just too good to pass up, and we decided to go ahead and take the plunge of homeowner ship. We spent a few weeks looking at houses, but we didn't care for any of them, in particular the floor plans. We eventually decided that we wanted to go with a completely custom house rather than settle for something we didn't really like.

So we went through the design and build process. We had to close by the end of June to guarantee we would get the tax credit, so we were constantly giving feedback and decisions to the builder as quickly as possible so that we would not be the delay in the building process. We managed to scrape up the bare minimum closing payment for an FHA loan and the house was completed in time to sign the contract on June 30th, on the deadline.

A few months later after we started making mortgage payments, I started to realize that we were taking some significant risk with buying the house. The mortgage payment at the time was about 30% of our income, and when considering our student loan payments and furniture payments, about 50% of our income was going towards debt. We managed to pay off our furniture loan prior to when our second daughter was born. Up until then my wife had been working near full time, but then she had to stay home with the newborn at least for a few months, so we lost her income. We were now paying over 55% of our income towards debt. Luckily, we were able to make the payments, but at the same time we were not able to set aside any income for savings or investments. We couldn't afford to look toward the future, like some other people were trying to do around us.

One couple in particular near us were trying to sell their house. We knew that they had taken the first time home buyer tax credit, but because they were moving shortly after they bought the house they would have to repay it. Unfortunately the were trying to move at the same time when houses were still being built around the corner. They eventually had to settle for selling the house at a 19k discount, and they were out nearly 27K. If something had happened that forced us to move, we wouldn't be able to afford it and would of had to put the house up for foreclosure. I imagine that's what happened to one house by us that eventually went into foreclosure after the owners tried to sell the house for over a year with no luck.

Looking back if I'm not sure what we would have done differently, but we did learn some lessons to consider the next time we buy a house:

  • Pay down debt prior to buying a house. Paying a mortgage and other debt at the same time puts unnecessary strain on your budget.
  • Save up a substantial down payment to avoid mortgage insurance. It will also help you avoid going "underwater" on your mortgage loan.
  • Get a conventional loan of possible. FHA loans are loaded with extra closing costs that are better served going towards equity in the house.
  • There are thousands of dollars of expenses when moving into a your first home. Expect to buy furniture, appliances, and other miscellaneous house items.
  • Building a new or custom home comes at a premium. Save some money by buying a house with a previous owner, or better yet, do some homework and buy a foreclosure in a developing neighborhood.

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