First Time Home Buyer, Need some Mustachian Guidance!

[doublezer6]

My wife and I are looking to buy our first home and looking for some MMM community advice. First though, a little background to our situation:

• We are currently renting in the Houston area, lease is up June 2017. We like our neighborhood as it is exactly half way between our two jobs (I have a 15 min commute, my wife has a 10 min commute), great neighborhood, low crime, great schools, etc. so we would like to stay in this area.
• Rent is currently $1500/mth, no bills included.
• We are starting a family and want to have some space to grow, so we are looking to purchase a 2-3 bed/2 bath home min. From some preliminary research, of the housing market in our area, there are plenty of homes in the $135k-$185k range that fit our criteria. I am shooting for a mortgage of no more than $150k, but willing if needed to go up to the $200k level.
• We are still in debt, but have been Mustachian in our efforts to pay off that debt and are being vigilant with our pay-off efforts. This house purchase is another step in that direction. Currently we are paying rent of $1500/mth, but I believe we can get a mortgage with a monthly payment well below that rate (depending on the interest rate and total mortgage loan amount, I estimate between $750/mth as a best case scenario and $1100/mth as a worst case), allowing us to pay off our higher interest debts much faster.
• We will not be putting any money down on the loan. I know this is not ideal, but I don't see any way to make it happen if we are wanting to purchase by next June to avoid these high rental costs.
• She has perfect credit and mine is pretty good and should be even better by next spring (some bad items are scheduled to be erased (FINALLY!) from my credit report in November and February.[\li]
  

So, where do I go from here? This is completely foreign territory for us so need some help in the right direction!

[englishteacheralex]

No down payment? What about your cash reserve? Still have debt--is your total net worth in the black?

If you have no down payment, no cash reserve, and are still in debt, you are not in a position to buy a house. Owning a house with a mortgage represents risk. The monthly mortgage payment is not the whole picture when it comes to how much the property will cost you. It is wise to budget an additional few hundred dollars or so/month for a maintenance sinking fund (money you keep in reserve to replace appliances and do repairs/maintenance).

It is also wise to keep in mind that house prices do not always go up, life changes, and a house can be a horrible albatross if you don't have any wiggle room in the form of equity.

I would keep renting until your financial position is more stable.

[waltworks]

Yeah, no DP = bad idea. Good on you for killing debts off, but if you don't have any money, you shouldn't buy a house.

Keep saving.

-W

[MicheleCooper90]

Keeping in mind the above replies, You should discuss your situation with mortgage associate or realtor for the prequalification of your mortgage to make sure you can qualify for financing. Regarding the DP issue you can always research for down payment assistance programs. Found some amazing blogs which discusses different down payment aid programs.

http://www.dhcd.virginia.gov/index.php/housing-programs-and-assistance/68-down-payment-assistance-dpa.html
http://www.hsh.com/finance/mortgage/down-payment-assistance-programs-for-all-homebuyers.html

[former player]

How much does your income exceed your expenditure by?  How much will having kids reduce that by (loss of income and extra expense)?

How much are you overpaying on your current debts, and what are their interest rates?  How soon will they be paid off if you put all your excess income into paying them off?  If you put your excess income into accumulating a deposit instead of paying off debts, how much extra will you be paying in interest on the debts?

You sound as though you are in a bit of a hurry to do everything at once - pay off debt, buy a house, have kids.   Setting up home and having a family is usually the financially most stretched part of most people's lives, and in contrast to other impecunious times such as being a student it comes with a lot of responsibility to other people which makes finessing any problems that arise even more difficult.  Your hang-over of debt will make it even more difficult for you than for others.

I'm not quite as fundamentalist as some other mustachians here.  So I wouldn't say a final "don't do it".  But you have a lot of work to do on crunching the numbers, having your expenses completely locked down, and having serious discussions with your SO about how the next five years or so are going to pan out work-wise and financially.  You need to see a way through those five years and out the other side before you start making commitments such as house-buying, and if you can't make the cash-flow work then you need to postpone some or all parts of the plan until it does.

[redbirdfan]

Hi OP,

Thank you for the courage to post.  It can be daunting.  I don't think it's a bad idea to not put any money down if the monthly payment for the property is well within your comfort zone with 100% financing.  Check your local credit unions for 100% financing and 3% down options.  You can usually get options with more flexible terms from credit unions and smaller, local banks.  I would stay away from FHA loans now that the PMI is permanent.  Keep in mind that low/no down payment loans usually have steeper closing costs.  Property taxes in Texas tend to be on the high side and you will have to fully fund your escrow account since you will not be putting 20% down.  Make sure you are prepared for the upfront cash outlay between closing costs, funding escrow, window treatments, furniture, appliances, decor and the trade off between just throwing anything in a rental and wanting nicer/higher quality items for your home.  You should also have anywhere from $1000 to 2% of the purchase price on hand at all times for random repairs.  You may get lucky in the beginning but sooner or later something will need to be fixed.

The Fed plans to raise interest rates up to 3 times next year.  Give yourself some wiggle room by using mortgage interest rates that are .5% higher than the rates quoted today to determine whether you are within the 28% front end (monthly mortgage payment to monthly income) and 36% back end (total monthly debt to monthly income) ratios.  Track home prices that meet your criteria to keep an accurate estimate of what your payments will be.  Don't force yourself to buy if you will be better served by staying in your rental an extra year or two.  Even if you decide to start a family, you would still have two years before you really need a spare bedroom.     

Use the time between now and June to tour Open Houses and get familiar with the housing market.  You and your wife will be real estate pros by June.  You'll know if a home is listed for too much, if it's a good deal, etc.  Figure out what the two of you are willing to compromise about (if anything)- yard, nice kitchen, garage, etc.  Track how long it takes homes to go pending.  Do they sell for less than list price/list price/or more than list price.  Above everything else, make the process as fun as possible.     

[Maverick1]

This thread makes me jealous. I live in a city of 200,000 in Canada. $185k gets you either a run down shack in the hood or a 1 bedroom apartment style condo. It's $350k here for a house in a decent neighbourhood (ie 1,000 square feet and 30 years old).

Interestingly our rents aren't much different than yours. People buying property for investment here are crazy in my opinion.

From where I sit it's difficult not to recommend buying a house in your situation.