Are you interested in being a first time home buyer? Interest rates are very good and home prices have “rolled back” to about 2003 levels in many parts of Silicon Valley. So if you’re earning a living and want to purchase a home, it’s time to work up a game plan.
Where do you begin? The foundation of home buying is good credit and a downpayment. Do you know what your credit scores are? If not, there are many online sites where you can run this info at no cost or very low cost. Here’s one: AnnualCreditReport.com. There are three credit scoring bodies: Equifax, TransUnion and Experian. Some of the “free” sites aren’t really free – so check the small print.
Often there are small errors on your credit report (such as an old bill which you did eventually pay but is showing as due or delinquent), but you can write to the agency with whatever is amiss and provide documentation to clear it up. This can take time, though, so you want to start this process when you are not in a hurry.
If your credit is not stellar, do some research before deciding how to fix it. Some people mistakenly think that they should close all of their credit cards, and in fact this might not help, but rather hurt, your credit. Inactivity on some of yourcards may also be counterproductive to your scores. And, of course, if you are over your limits, you definitely want to pay those bills down both to get a lower interest rate and to improve your credit scores.
While the media is full of hype about first time home buyers purchasing with FHA loans and very small downpayments (5%), in actuality it is extremely difficult to purchase a home in Santa Clara County with such a tiny downpayment. Most sellers and their agents view “small downs” as risky – that is, that there’s a higher probability that these transactions won’t close. Most of the time, if you have a small downpayment and are bidding in a multiple offer situation, you will lose. The only way to “win” in those circumstances is to overpay for the property. I would not call that winning!
Ideally, you will have saved 20% down plus closing costs (about 2%) plus “reserves” – so perhaps 23-24% is what you really need in the bank to get the good deal when buying a home. Yes, that IS a lot of money, but if you want to buy a home and get a great deal, cash is king. Twenty percent down is a normal loan. A next best option is 10-15% down with a conventional (not FHA) loan.
All that saving – if you can only get into the new home, then you can “relax” and go back to spending, right? No, not right. Real estate takes money to maintain, and even if you’re in a condominium or town house in the San Jose area, you need to have money in case something breaks or in case your dues are raised or there’s a special assessment by your HOA. To be a homeowner who’s not going to get into financial trouble, you really need to have new habits. You need to love to save, save, save rather than spend, spend, spend.
Many Americans tend to live off of 105% ore more of their annual income – they cut it too close and then when they hit a problem (for which they did not reserve any money), they go into the red. Credit card bills begin to mount. They take out a line of credit on their home and use it all up. Even before the current financial crisis, every couple of years I was helping home owners to sell when they had taken out all the credit they could and no longer were able to stay in their home. They were living off credit cards and it was a nightmare. Now we see this on a big scale with all the foreclosures.
But that doesn’t have to be your story. You can plan to live on less and sock away the rest for a rainy day, for retirement, for future plans, whether someone’s college education, purchasing income producing property or world travels.
All of this is to say: if you cannot save more than 5% for a downpayment, perhaps the first thing to do is to focus on saving money and living on less. Make this a way of life. First you will accomplish your goal of having the downpayment, but if you can keep that habit in place, you will be building for a more solid future for yourself.