Getting a mortgage is confusing. I can’t imagine what it was like before the collapse of 2008, but with all the extra rules and deterrents attached to home loans now, there is a lot to keep track of. Recently the husband and I have been looking at homes, and it had reached the point where we needed to contact a lender to see where we stood. His parents gave us a gift from his grandmother’s estate that we could use to help with our down payment, and so we called the lender that worked with the local homebuilder that we wanted to get a floorplan with, and let them run our numbers.
*insert insane, slightly sad laughter here*
There are three loans that the husband and I could take advantage of based on where the home we want is located. There is a USDA loan, which is a federal loan which would fund the home at 100%, no down payment required, and both the mortgage insurance and the loan interest rate are fixed and not based on your credit – this loan encourages home ownership in rural areas.
An FHA loan also doesn’t base the mortgage insurance or loan interest rate on your credit score, and is the federal loan program to simply encourage home ownership at a lower down payment – most require 3% down to participate.
Finally there is a conventional loan which tends to require a minimum of a 5% down payment and bases its interest rate and mortgage insurance on the borrower’s credit standing.
A word about mortgage insurance – it is policy after the 2008 collapse that all borrowers that provide less than a 20% down payment pay for mortgage insurance, which covers the mortgage should they become incapable of making payments. So while it’s nice to not have to put so much money down to get a house, you’ll pay more monthly for the home. Unless we were able to save up about $50,000 for a down payment, we would need to plan on this extra payment on top of the actual mortgage payment, taxes, HOA and CDD fees, home insurance, and any extra warranties.
If CDD fees look unfamiliar to you, they are a community development bond that developers take out with the local government. The government funds their community services like pools and playgrounds and that money pays for their upkeep. The bond payments are spread across all homeowners in the community and are paid in addition to any HOA fees, which go to a variety of services including deciding what you can and can’t do to the exterior of your home.
Are we all on the same page now? OK.
I have been working on bringing up our credit scores since March, but we knew that they probably wouldn’t be where they needed to be for a conventional loan, meaning we would be looking at either the USDA or FHA loan. So when the lender called us back we were expecting to hear about what we would need to pay to start, at closing, and monthly on either of those plans.
In addition to our credit, lenders look at how much we have in debt payments monthly. We have a few credit cards and several student loan payments. Since all the student loans except for the two private loans I have are on income-based repayment plans, we figured we were okay on that score.
For federal home loan programs, lenders are required to use 1% of the full federal student loan showing on the credit report as the “monthly payment” when calculating a potential borrower’s monthly debt payment burden. So for a debt burden of say, $100,000, a borrower might be actually paying $175 on a payment plan, but a lender would have to use $1,000 as the payment for the debt burden calculation.
I know. And the fact that both the husband and I are on the Public Service Loan Forgiveness Program doesn’t make a lick of difference either. It’s just the rule.
So between the husband and I we had too many student loans to qualify for either the USDA or FHA loans because of this policy. It made our monthly debt burden look too high. This meant that our only remaining option was the conventional loan, because they are only interested in the actual payments being made. However, our credit scores put the interest rate and mortgage insurance so high that while we would have enough money for the down payment and closing, we would never be able to afford the monthly payment.
This was the point at which both the lender and the realtor we have been working with started talking about “starter homes” and how, if we were willing to spend a little less money now on a smaller house, we could build up equity and then move into a bigger house later.
Now look. I was born in the late morning but it wasn’t this morning. I’m not going to give up renting a house that has most of the things I want to move into a smaller house with only some of the things I want PLUS I have to take on the financial responsibility of fixing whatever might be wrong with it either at purchase or that will happen along the way, only to sell it years later to get the actual house that I want. Our financial situation is barely stable enough to buy the house we actually want. Thinking that we would be able to save and avoid disaster buying something we don’t really want is laughable. It’s a recipe for disaster. I appreciate these ladies doing their job, but I know what we’re capable of and rushing into a HUGE financial obligation just for the sake of owning a home to say we own a home ain’t it.
We’re going to have to hold off on buying a home for now. The husband’s parents told us to use the money for paying off credit cards and adding to savings instead, and so I paid off 3 full balances this week with a 4th soon to follow. We’re going to continue renting, probably where we are now to avoid the hassle of moving. I think we’ll give it two or three more years and then reassess where we are and where the local real estate market is.
The lesson I will continue to shout to the rooftops is that renting is not throwing your money away. It is stability. You are paying for a place to live. You are paying for someone else to fix the things for you. If you don’t like your neighbors you can move. There are plenty of benefits to renting instead of buying, especially renting houses, so don’t let anyone, especially GenXers or Baby Boomers, bully you into buying a house when you are not ready. You are smart, you have a wealth of information available to you, and only you know whether you are financially ready to handle a responsibility as large as owning a home. Don’t get pressured. Do what’s right for you.
Postscript: Let this blog post stand as a response to all the “WHY AREN’T MILLENNIALS BUYING HOMES” think pieces. I have lived in the same home for the last 4 years, I have 14 years of experience in my career. My husband and I make enough money to, theoretically, be able to do this. You want me to buy a home right fucking now? DEMAND STUDENT LOAN RELIEF OR FORGIVENESS NOW.
Have a great weekend!