Balling on a Budget: The challenges of buying your first home

House Yesterday, I ran into two very cool twenty-somethings, legal employees who are looking to buy their first homes in my neighborhood. We spent over an hour talking about the home-buying process, the rewards of home ownership, and the unique challenges of home ownership that most renters may not be prepared for.

I spent a blog post explaining why twenty-somethings should buy homes now, but there are a few challenges that you must take care of during the process:

You need to understand the home buying process. Purchasing your first home can be a confusing, intimidating process. Before getting started, make sure you understand the real estate process, lest you fall prey to rogue real estate agents, predatory lenders, and botched deals.

Although there are many helpful vendors out there, don’t depend completely on the people who are selling you a product to give you objective information. I know several people who lost thousands because they didn’t fully understand the process.

There’s plenty of information out there to give you a good overview of the process and some tips. Check out HUD, About.com, Kiplinger, and Smart Money to get started.

You need good credit. Each twenty-something should check his or her credit report three times each year using the free credit reporting systems online. You get one free report per year from the three reporting bureaus, and your credit score — aka FICO score — is the key to getting a good interest rate. Not only will you have a better picture of your financial health, but you will also catch identity theft.

If you have credit problems — such as late payments, credit limits to the max, or even lack of credit — you can talk to credit counselors and loan officers to get input on strategies that will improve your credit score and make you more attractive to lenders. Having a few problems on your credit doesn’t automatically disqualify you, though. I was a little irresponsible with a department store credit card I got when I was a freshman in college, but using strategies from credit counselors made everything even out.

You need savings. I encourage everyone to look for those home ownership programs that will help you with a down payment and closing costs. I got over $40,000 from state and federal sources that are often overlooked.

However, there is a significant investment required. I put a little over $1000 down to qualify for the home ownership programs, and as part of your initial offer to purchase a home, you need to put some money down as “earnest money.” Also, I had to purchase a refrigerator, washer, dryer, kitchen items, and furniture, which are important but should not be the source of more credit card debt. I saved and saved beforehand until I could pay cash for most of these items.

You need to continue saving. If there’s a problem at your house, it’s your responsibility to fix it. Pipes burst? You call the plumber. AC or heat not working? You call the technician. I think you get the idea: there’s no more landlord to call in order to take care of household repairs.

If you purchase a home, you need to save at least 1% of the home’s value each year and devote it solely to a home maintenance fund for emergencies. Purchase a home warranty that will cover repairs during your first year or more — my contractor has fixed small things for me at no charge because of my warranty.

And if you have a homeowners association (HOA), figure out what repairs they cover. My HOA costs a pretty penny (over $100 each month), but they take complete care of my lawn and garden area, exterior water and sewage problems, and exterior painting.

You need to stay on top of things. The home buying process takes a lot of paperwork and people management. Make multiple copies of your tax returns, pay stubs, and loan applications, and keep them in a safe place. Turn in applications and forms in person, if possible. Follow up with all of the people you meet in the process and make sure your real estate agent, loan officer, and attorney keep their promises.

Finally, you need patience. Finding the right home, real estate agent, and loan package can be an arduous journey. Doing it right means conducting careful research, talking with many people, taking time from work, filling out countless forms, and waiting on things to be approved. In fact, it took me a few weeks shy of a year from thinking “Hey, I want to buy a house!” to my closing date. Many people give up because of the time involved, but patience will definitely pay off.

Again, I recommend that twenty-somethings purchase homes if they’re planning on staying put for the next 3-5 years. The time is now to take advantage of the nation’s housing situation. Home ownership is deeply rewarding, but be ready for the challenges that lie ahead.

May 15, 2008 | Filed Under Balling on a Budget, Blog

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Balling on a Budget: Five reasons twenty-somethings should buy a home now

I’ll be starting a new category today called “Balling on a Budget,” which will present ways we twenty-somethings can maximize our money and save for the future while still living our fabulous lifestyles.

It’s time for a celebration! I am about six weeks away from my first anniversary as a homeowner. At the same time, my best friend Josh, who is 23, is preparing to close on his first home down in South Carolina. I encourage twenty-somethings in small to medium cities to take a hard look at buying a home. Here are some things that might convince you to buy:

Buying a home saves you money long-term. As I mentioned in an earlier post, I had no parental support during or after college, so I’ve had to earn and save every dime to my name. Before I bought my townhome, I was splitting $1500 each month in rent with two college friends, which is pretty fair for our area.

My monthly payment including mortgage, taxes, insurance, and homeowners association dues ends up being half of my old rent. It’s a phenomenal savings, and I know that every payment I make adds to home equity. Instead of losing money each month to magically poof into the pockets of a developer, I’m paying myself. It’ll definitely pay off when I’m ready to sell.

There’s free money out there. National and state initiatives provide down-payment assistance to first-time home buyers who make less than the median income in their areas, which applies to most young non-profit professionals. The best part is that the process is pretty objective — if you qualify, you get the money — and few people take advantage of the programs.

Through programs with the City of Durham and the North Carolina Housing Finance Agency, I got about $45,000 in down payment help and my closing costs covered by public sources. I only had to put $750 down and attend classes for first-time home owners.

And the income requirement is based upon your income at the time of your loan application. If you get a raise or a better job after you’re in the house, nothing changes.

Check out the HUD website to find information on first-time homebuyer programs in your state. The site will lead you to the free money and tell you about free programs to counsel you out of bad credit or to walk you through the entire home-buying process.

The time is right (if you have a few years). It’s a buyer’s market, and we should take advantage of the housing bust’s falling interest rates and prices. There are opportunities for us to get great real estate at phenomenal prices. It will take a time investment, though, but not a long-term one.

Of course “long-term” is subjective, but many people erroneously think buying a house during the housing crisis locks you into a 30-year commitment. Don’t plan on buying a house and flipping it next year or the year after, but if you think you’ll be in an area for 3-5 years, it could be worth it to buy. Some folks disagree, but I definitely think the time is right.

Roommates can pad your budget and help you save. If you buy a house with multiple bedrooms, renting them out to other twenty-somethings or college students could give your budget just enough of a boost to save tremendously. Instead of paying a real estate developer for rent, you’re now the landlord.

And finally, buying a home gives you the opportunity to express yourself. I hated the fact that I couldn’t paint in apartment and dorm living. I mean, I could have, but I would have been forced to paint it back to the sterile white color or lose my security deposits. In my house, I’ve been able to paint almost every room and invest in art that reflects my personality and gives me pride.

But of course, buying a home isn’t right for everyone, and a first-time buyer should be prepared for some serious work ahead. Stay tuned for a post that discusses challenges twenty-somethings will have to face if they want to buy a home.

April 28, 2008 | Filed Under Balling on a Budget, Blog

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