T Nation

Renting vs. Buying


#1

First off, happy new year all!

Next, I have a confession to make:
I'm poor. Like real poor. And it sucks. I know, big surprise right? My tax forms will say that I grossed a little over $30k this year, which isn't much. Then there's the 25% of that off the top that goes straight to the gubmint, just to make sure I don't get anything to save.

Honestly, I've done ok on my meager salary in the past, but that all changed when I got married and my first child was born. Now I'm borderline destitute, because my wife is going to school instead of working, and I'm driving 50 miles to and from work daily.

We're renting an apartment right now for about $500/month, which is pretty reasonable, and I'm making a car payment of less than $300. Our bills are not extravagant, but we're still just barely scraping by.

In the next couple of months, I need to decide what to do about our living arrangements. My apartment lease is up and I have to figure out the best way to achieve my long-term goal of getting my family into a home of our own.

I don't want to keep renting my whole life, but at this point my credit score is too low to keep me from getting a home loan, and honestly I probably couldn't afford the payments on a house for a few years anyway. It's not like houses are super expensive out here anyway, we could get something just right for around $120k. Our problem being lack of down payment and of course horrendous credit (which I'm learning is the ultimate measure of my worth as a person).

I'm new to the whole "family financial planning" thing, so I'm hoping to get some input from those more experienced on the site about the best way to proceed. If I move, I can almost guarantee that my rent will go up, especially if I try to rent a house instead of another apartment.

It looks like my best bet is to find the cheapest place that will hold us all, and rent it until we're both working full time so we can repair our credit and save up for a reasonable down payment, or some land on which I could build a house a few years down the road.

So in short (too late I know) I'm broke, with bad credit, and I'm looking for the best strategy to get my family a home of our own. I appreciate any advice from those with experience.

Thanks!


#2

Why is your credit low? Is it because you've never really bought anything on credit or that you made some mistakes? If it's the former, get a credit card and pay for daily things with that, and then pay off the bill immediately. If you've made mistakes, focus on paying off any debts first, including the car, before even thinking of buying.

Your idea of finding a cheap place to hold you over until your wife can work is a good one. Do not let a loan officer convince you that you can afford a house right now. It only sets you up for financial problems that are worse than what you're dealing with now.

Good luck and keep us posted.


#3

There is no easy way out. You'll need to make some very tough decisions. Do not lose hope. You sound like a prime candidate for this book

The Total Money Makeover: A Proven Plan for Financial Fitness
By: Dave Ramsey (it also comes in audio format) I learned a lot from it.


#4

You can find good financial advice on www.daveramsey.com

Application is the hardest part. Sacrifice seems to be the common theme.

Good Luck.


#5

A few thoughts...

Renting vs. buying- buying isn't all it's cracked up to be. You spend more per month in interest than you were paying in rent before. Yes you may have a bigger place, and it's yours, but the cost/benefit ratio is lower, at least at first. It gets better the longer you are there. The whole idea of a "starter home" is ridiculous IMO.

If you do decide to buy- do not let any mortgage provider talk you into buying points. It's a waste of money. If they can't get you a decent rate without points, then go somewhere else.

As for your lease- how long is it and how much does it cost to break it? If you've lived there long enough and have a good relationship with the landlord- ask about shorter term leases or ask that the broken lease clause be decreased. That way you are effectively buying time to make a decision.

What about your job- do you like it? Are you qualified for anything else that may pay more? Might be worth looking into.

Do you like where you live but just want more space? Surely there are other apartments, even some closer to where you work. Not sure why you picked to live 50 miles away from work, so there may be other factors involved. If you are ok where you live it may be smarter just to stay there until you can afford to move.

As for down payments- it really isn't necessary to have that big of a down payment. You can go HUD and you only need maybe 3%, 0% for some loan officers.

Also, and this is slightly risky but I've seen it done, some loan companies allow you to get a first mortgage for 80% of the house cost and then a second mortgage for the other 20% (effectively a down payment) right away. This method helps those with poorer credit get a loan as you are only asking to borrow 80% of the costs and it's easier to get a second mortgage with bad credit.

You may pay a slightly higher rate, but once you have the loan for a couple years and start to repair your credit you can refinance it all into one loan with a lower rate.

Good luck and don't worry about not having much money. Just make educated decisions with your child's best interests in mind and you'll do just fine.

By the way- what is your wife going to school for?


#6

Good book- I've read it. It's ok, but possibly not in this guys case. He doesn't have a huge house right now to sell off. He doesn't have an overpiced car to get rid of.

There are, of course, a lot of other good principles he could follow, but I think the main premise of the book is to get rid of everything expensive and live way beneath your means until you are out of debt.

This guy never really mentioned he had much debt, just not much income and bad credit.


#7

You can do this. It may not be easy. Dave Ramsey knows more about this stuff than anyone. Listen to what he says.

A couple of ideas. Try to move closer to work.

Is your car economical? No high insurance premium?

Renting is not such a bad idea until you can buy. You don't get involved with maintenance, depreciation ect.

Best of luck. PM me if I can help. I used to be in your situation.


#8

You think your credit score is low?

Find a lender that will offer you a no down payment 80/20 loan. My ex left me with 17,000 in debt and fucked my credit real hard. I found a house I liked and didn't think I had a snowballs chance in hell of qualifying for the loan.

The loan officer I used got me two offers, one was a adjustable rate mortage at 7% for the full amount and the other was a 80/20 with a set interest rate of 7.5%.

I took the 80/20 and even though the interst rate is higher, I can refinance next year and get it closer to 4.5%.

it will take you a little time to repair the credit but if you can afford it, buying a house is the easiest way and it will never depreciate in value, unless it's a trailer house.

Trailer houses are a bad investment. It's similair to living in a car, the value only goes down.

I bought my house two years ago for 180K. Right now the property value is up to 207K. Not too bad of a return so far.

Bullpup


#9

Also, do not fall victim to the adjustable rate mortages, they are a scam.

Note, even with poor credit scores, you are at a greater advantage of getting a home loan than someone with perfect credit, because lenders can charge you a higher interest rate and thats were they make their money from.

They are will to take that risk, it's not like buying a car, you cant say it was stolen and expect the insurance company to pay it off...

Also take into consideration insurance and taxes.

I pay my insurance and property taxes on my own instead of using an escrow account. If not my monthly payment just for taxes and insurance would be almost the equivelant of my mortages.

Unless the area is an absolute dump and you overpay for the property it is hard to loose money buying your home.

Have the realtor do a fair market value on the property before you even decide to look at it, this will give you the oppurtunity to decide whether or not it is overpriced, or if you want to pay for any ugraded features that the seller is trying to capitalize from.

DO NOT UNDER ANY CIRCUMSTANCES CHOOSE TO RENT WITH OPTION TO BUY, OR RENT TO OWN, THIS IS A FUCK JOB WAITING TO HAPPEN,Alot of times there are penalty clauses in the contract where if the note is not paid on a specific date they charge you double payments and put in optional clauses about increased monthly payments, and you don't get the benefit of a tax write off, insuring these properties can be a pain the ass as well.

Bullpup


#10

You don't make enough to worry about buying a house. Rent what you can afford. Once you can afford to buy something in the $200,00-250,000 then think about buying (of course that depends on where you live). Basically, if you can't afford something in an upper-middle class neighborhood, don't buy. Buying a cheap house in a crappy neighborhood will end up costing more. Buying a house is all about location. You also have to think about resale. You will not make money on a crappy/cheap house in a bad location.

Rent until you are comfortable enough to afford a nice house in a good location. Trust me on this.

Make sure you factor in taxes and insurance on a house purchase. This will add several hundred dollars onto the mortage.


#11

ARM's are not scams. Look at it this way. Add 2% to your start rate and if you can still afford that payment then take advantage of the lower rate for however long your fixed period is. Also I would like to know how you will be able to get into a 4.5% in a year or so becuase I'd like to know who that lender is. Right now most Wholesale lenders or retail Lenders won't even let you buy down your rate that far.


#12

Definately make sure you have housing costs in mind when you make your decision. I was in the same place a year ago. I chose to buy a home with some help from my lender (80/20). It gets me in the house and re-finance in 2 years once I can work on my debt to income ratio. Taxes, insurance, and housing costs will add up quick. Not to mention landscaping, etc. My city required me to have sprinkler system and grass in 90 days. The irrigation was about $1000 by itself.All in all I am a homeowner with a high interest rate. I will refinance next year and be much better off. I know that I will not live in this house forever so interst rate doesnt bother me too bad, I'm building equity, but spending more a month than I thought when I was renting, so money is tighter than it was.


#13

You make a very good point here. With his income he won't be able to buy much house at all. Of course a loan officer may be able to put him in a "stated income" loan but if your credit scores aren't high enough they won't qualify anyways. Stated income is a dangerous loan anyways because 99% of the time the borrower truly can't afford the payment which leads to a quick default. This is why many lenders have eliminated the stated income loans especially to those who aren't self employed.


#14

This is why I spend more time than I probably should on T-Nation: there's a wealth of experience to be taken advantage of for free. Thanks to everyone for the suggestions so far, I feel smarter already.

Some of you have questions, and I've forgotten most of them, but here's what I remember:

I have bad credit because I conducted myself in my youth like the stupid kid I was - I took on too many credit cards, maxed them out and failed to pay up on them. I let a friend use a phone line in my name after I left an apartment, and he ran up a $1000 bill by way of thanks, then skipped town. Moron shit like that.

My car is great mileage-wise. I knew I would need some room to carry the family, so I wanted one of the Hyundai Santa Fe's, but I actually ended up with a brand new Scion xB that cost less than the older SUV I was looking at. I can consistently get over 30mpg when I drive sanely.

We chose this particular town because it is close to her family and mine, and because they have a very good school system. I think that I have her convinced to move closer to where the action is now, the only problem is that as we get closer to the capitol, rent and home prices go up. Stupid economy!

My wife is studying to be a certified Medical Assistant, which I understand to be a glorified secretary/nurse wannabe. Her only other experience is several years as a bank teller.

My qualifications aren't any better. I have only one year of college, and two years studying with the Navy Nuclear Program, but I've spent the nine years since as a laborer/welder/shipping manager for a construction company. So, it doesn't look like I'll be getting a better job anytime soon.

Anyway, thanks again for all the help you guys, I REALLY appreciate it!


#15

How old are you? Have you looked into a lease/purchase option?


#16

Navy Nuke School? That's some heavy stuff. My buddy went through that. You have to have to serious grey-matter to even get into the program.

My recommendation is to forget about an expensive house and use the money you save to get a college degree and a better job. There are plenty of scholarships (and jobs) available. Do you have the GI Bill? If you do, use it.


#17

Right now I have HSBC, and Wells Fargo giving me offers of 4.5%, but I cannot accept it as of yet due to early penalty clauses that will cost me more if I opt out now. Granted they will loan 100% of the fair market value, but the extra money earned will not benefit me in the long run.

Me and my wife have paid on the house for 2 years and pay extra payments everymonth. this was our first house and while trying to repair my credit this was our best option.

And yes ARMs are a scam, why settle for a 7% interest rate with the possibility of the lender jacking up the rate and it effectively increasing your monthly payment.

As someone stated before listen to Dave Ramsey. His comentary on personal finance is priceless.

Bullpup


#18

I agree with almost all of the advice that has been given to you so far. The only exception is to not buy a house unless it is $200k or more. I agree with the idea of not buying a house for the sake of buying a house. However, property values are relative. I live in Central Illinois and my 1700 sq ft bungalow cost me $52k. Granted it was in need of serious updating (I think Mike Brady lived in it before he met Carol and the girls), but it is pretty freakin cheap compared to what you would be able to get 200 miles north in Chicago.

In short, disregard the dollar amount in the post and understand that point that you should focus on buying an undervalued house in a up-and-coming neighborhood. Just because a house is a certain price, does not mean it is a a good investment or will hold its value.

I also think an arm sucks. I know several people who are overleveraged on their mortgages and are now wondering how they are going to make their payments as interest rates are starting to slowly creep up. I would think that only a fool would not lock in a 6-8% 30-year note. Would you expect rates to fall again? If they do, you can always refinance. Regardless of the program that you go with, shop around. Mortgage lending is very competitive. Do not be afraid to negotiate and play lenders against each other.

I wish you the best of luck. Life can be tough and it sounds like you are going through a difficult stretch. The fact that you are seeking advice shows that you have your head on straight.

Keep Safe (and keep paying your bills)-

BVL


#19

Its crazy reading people talk about buying a house for $200k. Where I live that would barely buy a studio. It sucks bad! To get a "house" around here you almost always need a 2nd person i.e. wife. The housing prices are ridiculous.


#20

You will NOT get a FIXED 30 year rate for 4.5% especially from HSBC unless you pay MAJOR points. As a matter of fact I will call a friend of mine today who works for Wells Fargo with their Wholesale division and ask her if they offer a 4.5% on a 30 year fixed right now even though I already know what the answer will be.

ARMS are not scams and the example you gave shows you have no clue as to what you are talking about.

The penalty Clause you speak of is called a Pre-payment Penalty and if you do the math and take their offer of 4.5% on a 30 year Fixed with no Origination or Discount points and pay the prepay then you will come out ahead if your rate is currently at 7% even if your Pre-pay is 6 mths interest or 5%.