Single Recent Grad Considering Home Ownership

[Anonymous]

My lease ends at the end of August, and my renewal notice should be coming in soon. I love where I live (1bdrm ~750sq ft apt), but I really am someone who loves "my space." I feel like it would be a disservice to myself to at least not explore homeownership before I decide to live here another ~year and am locked in (without paying exhorbitant fees to break lease). I also think my rent is going to go up at least another $100/mo.

I should also note the Atlanta market is hot, and I believe homeownership is a wonderful investment at the time.

Some quick stats:

-Graduated from college 10 months ago. Been at my job almost the same amount of time. Job is related to my degree.

-Salary is a little over 60K

-Current DTI - 34%

-Front-End Ratio - 26%

-Only debt is my student loan debt of $28K (~$325/mo payment)

-Savings ~$9K

-Stocks - $1K

-Fico Mortgage Scores (3 months old... I'll get a new 3B on 6/17): EQ FICO5 703, EX FICO2 728, TU FICO4 720

-I applied for 2 new cards on Apr 1... this may be a deal-breaker? 

-I have never had mortgage or auto loans before

-No derogs

Potential Home Wants:

-Cobb County, GA

-Single family home (prefer new construction)

Home Price:

I -think- I can afford up to/around $250K, but I have not done any prequals.

Down payment:

I'd really rather not make one (it's my understanding that at least NFCU has a 100% financing option). Up to 3% would be the most I would be comfortable with. That would wipe out most of my savings, and I don't know how much closing costs are.

I haven't discussed with my parents, but I doubt they would gift any extra for down payment.

Questions:

-Am I even eligible for a mortgage? Or, phrased better, am I eligible for a mortgage with decent/good rates?

-Which banks/CUs offer the best rates? I am eligible for Penfed, NFCU, and USAA. I only have a relationship with USAA right now.

-Should I wait longer, and/or next year when my next lease ends, before considering homeownership?

-Any other advice? (Is there a better site/forum for my questions?)

Thanks!! 

[dragontears]

About your DTI numbers, are you calculating them correctly? Front end is just your new mortgage + insurance + taxes (and pmi if applicable).
If you are calculating them correctly 34% +26% = 60% and that is too high, no one goes to 60 DTI

[Anonymous]

Sorry for any confusion! I was doing the FER and DTI/BER with my current rent as a basis. Only debt/monthly payments currently would be roughly $400. Rent is 1340, so ~$1740. That's where I got my numbers.

[iced]

It sounds like you're approaching the through process from the right perspective, but (I think) you're omitting several costs and plans from your decision. After all, if you're worried about being locked in to a one-year lease, wait till you're locked in on a 30-year mortgage. We always think we can leave at any time by selling, but it's not always that simple and even in hot markets the total time from putting on the market to closing can take a few months at best and potentially years in a cooler market.

Here's a few tidbits to consider in your planning:

1. You're paying $1340 for rent right now. That cost includes any HOA and similar fees that the landlord is covering. You won't have that coverage with a mortgage. Check your area to understand what's covered in your rent that you would have to pick up yourself with a mortgage. Think things like water, sewer, etc.

2. You don't do repairs as a renter. You will as a homeowner, so make sure you're leaving enough room in your budget for home maintenance and repairs. It's tough to guess, but conservatively you'll probably want around 2-3% of your home's value per year for maintenance, so on a $250k home that's $5000-7500 per year. This covers things like broken appliances, painting/repointing, and so on.

3. Property taxes. Figure out what they are in your area and pad that in to your numbers. If you are thinking you can afford $250k because you used an online mortgage calculator and saw that payments on $250k were about what you're making now, stop. To put it in comparison, about 20% of my current mortgage payment goes toward property and city taxes. This varies from location to location, but what you think costs $1200 may in fact cost $1400 or more.

4. Do you have other expenses or do you expect other expenses in the next 5 years? You don't need to plan the whole 30 years out now, but think at least 5 years ahead. Do you make car payments today? If not, do you anticipate needing to make car payments in the next 5 years? Planning on having children? Have you thought about care costs there? Is your budget flexible enough to accomodate these changes without affecting your ability to meet your obligations?

5. This is where I put in my obligatory "DO NOT SACRAFICE 401K/403B/RETIREMENT SAVINGS FOR A MORTGAGE" blurb. Make **bleep** sure you can put at least 10% away (I would recommend going all-in and push for 30%). I don't care if you live in Atlanta, San Francisco, or the moon, the ROI on home ownership over 30 years will not outperform the ROI on equity investments over 30 years.

The good news is your salary will almost certainly go up as you get older, so you'll slowly get more funds. If you're in a good place, those increases can get funneled right into more savings, and eventually, improving quality of life. The worst thing you want to do is get locked into a 30-year mortgage that you struggle to pay each month and then have some emergency come up (car repair or hospital) that makes you turn to credit cards or loans to cover. That's a death spiral.

The last tidbit I'll leave, which is subjective but still worth noting, is I think your projection for how much house you can afford is high. My wife and I combined make about $250k/year and we can only afford about $250k worth of house, though we do budget on the conservative side. A more typical rule of thumb I've heard is 2x gross income. When I bought my first house, I made around what you did and I went a little higher than 2x to $150k. Things were a little tighter than I'd like but interest rates were higher then too.