I'm Young. When Do I Get My House?
This just in from the mailbag: "As a 26-year-old with loans from grad school, how am I ever going to be able to round up enough money to buy my own place in a few years?"
Good question, 26-year-old. First, look around and realize you're not alone -- check out Tamara Draut's book Strapped to get a picture of how much student loan debt your generation is shouldering. But you still want your answer, so realize that to buy your own place, you will need three things: a down payment, the ability to get a reasonable loan rate, and the ability to make monthly payments.
Let's look at each one separately:
A DOWN PAYMENT
During the end of the housing boom (or "bubble," if you must) 43% of all first-time buyers put no money down whatsoever. So clearly many people think this is a 'skippable' step.
But I wouldn't advise it. If you are so strapped by current obligations that you can't save any money, don't buy a home. I believe that I am the only Realtor who says this, but: there's no shame in renting.
If you do want to get a down payment, the obvious source is from a generation whose homes have already appreciated -- your dad, or your Aunt Bess, can give you $12,000 tax free every year.
If you're like me, and your mom's answer to "Can I have a down payment?" is "take a hike" -- then try to save a little money into your 401(k) plan. First, this is money that you'll need for retirement, which is arguably a more important personal finance goal than buying a home; but secondly, you could borrow against it to buy your home if you needed to.
If you can save 3% of your salary for five years into your 401(k), when you're 31 (trust me, still a baby) you'll have thousands of dollars you can tap into.
THE ABILITY TO GET A REASONABLE LOAN RATE
Mortgage rates are determined by your credit score, usually using a formula devleoped by Fair, Isaac & Co., so it's often known as your FICO score.
There are entire books written about how to improve your FICO score (and an entire chapter in mine) but the three key steps are these:
1) Pay your bills on time. If you're going to be 30 days late, it will hurt your rep, so pay bills when due. If you're consistently late, you need to get some organization and/or a roommate.
2) Don't have too many sources of debt. You want to get one or two credit cards, maybe a department store card, and you've got your student loans. Manage those debts responsibly, and make those relationships last. Opening ten credit accounts all over town, and then closing them again, will hurt your credit score.
3) Check your credit report. You can't get your FICO score for free, but you can often see an unscored version of your credit report for free, or at least for a nominal charge. Make sure there aren't mistakes on it, because in five years, any confusion between you, John Doe, struggling to establish a good credit record, and John D'Oh with the bad credit record will come and bite you. Try to always use the same form of your name, too: if you use your middle initial, always use your middle initial.
THE ABILITY TO MAKE MONTHLY PAYMENTS
The good news: the amount of money you're making now won't be the amount of money you make in five years. I can almost guarantee it.
The bad news is, I can't tell you what amount of money you will make.
In general, try to work hard in your chosen field, so that with five years' more expertise under your wing, you'll make more money. Meet as many people as possible, because you never know who will end up hiring you in five years. When you get your first raise, try to funnel some of that money into savings, despite the temptation to spend it on new clothes or a couch. And be very nice to your dates, in case one of them turns out to be The One; marriage or partnership will double your housing needs, but it will also double your income.
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The Federal Govt should create a DPA. That's "Down Payment Account". You could save up to seven years and invest the money, like an IRA, and deduct it from you taxes. While you are saving, you would also be able to deduct your rent, just like mortgage interest, from you taxes, so as to gain the benefits the homeowners have. So long as you are saving towards a down payment, you could take advantage of the rent deduction.
Some of the best advice I was given was "BE WILLING TO SAY NO AND WALK AWAY".
Those teaser rates that mortgage companies and auto dealers use to get you in the door. The vast majority of people, 90-95%, don't qualify because of their credit score but they are always willing to "work" with you providing you are willing to pay a much higher interest rate.
Using your FICO score to deny you the best rates is, at least in my opinion, a scam. You have to be realistic about your ability to pay, but if you have a good history, tell the creditor thank you but no unless you offer me the better deal. Then walk away. You'd be surprised how many creditors suddenly find you a good interest rate.
It's just the nature of the game.
It seems like the default thinking is: get married, buy a house, have babies. But there are a lot of other things to consider..
Get your credit clean.
After that take a good look at how the Free Trade is going to impact not only wages but home prices.
Save for that.
If wages drop to match the South American wages then $5,000.00 will buy you a 2 bedroom home.
I would wait for this NAFTA thing to work it;s way thru before I bought a home now. I have a big loan and property prices are dropping.
With all due respect you happen to live in a country where now a days, very few people give a damn if you get a house or not. Thanks to the Neoclowns and Rethugs hard hearted greed and chicanery that thay have made so pervasive in our society. These miscreant bastards beleive in climbing up the latter and then kicking it down so no one else can climb up it.
That's what happens when you try to be nice and fair to the devil and his crowd, they always end up rewarding you with crap! It's just in their blood to be like that, you know the old saying ,"You can't make chicken salad out of chicken s...t! And they sure are chicken s...t!
When do you get your home? When your yuppie parents finally die and leave you their 10,000 square foot starter castle that they have only ever been in 10% of the rooms, provided they don't take out a reverse mortgage so they can travel to Tahiti and Costa Rica.
Perhaps the romance of owning one's home needs to give place to current realities: Disclaimer: I'm a 1958 baby, and I have owned four homes over the past 20 years, so I admit it's not quite the same as if I were starting out.
However, being a 1958 baby married to a 1954 baby (do the math) - we've decided that we'd rather opt out of the home maintenance and upkeep, invest elsewhere, and let someone else (BRE Properties) worry about it - we're planning to move to a new, luxury apartment community into an apartment that is nicer than 95% of the condominiu
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