Buying That First Home Round Two - Part 4

So now you have a sense of things.  The next thing to know seems obvious, but many people make a critical mistake when going hunting for a home:

Get Your Funding In Order.

Buying That First Home Round Two - Part 3

Now, let's talk about a somewhat controversial topic: short sales, and the #1 thing to know about them:

Banks Don't Really Like Short Sales.

Buying That First Home Round Two - Part 2

Hopefully you read the first article.  If not, you should.  There's a lot of good information there:

Do Your Own Research BEFORE Contacting a REALTOR

Assuming you've gotten this far, it's important you understand what you're up against in terms of what's out there.  Depending on your buying power, you may find lots of inventory or very little.  It really does depend on the metro, and in this current economy, a lot of homes are being taken by Chinese investors who are dropping 100% cash to buy the homes as an investment (and in some cases, to hide their income in another country).  What's left over is going to fit into a number of categories, and you should understand the differences.

Buying That First Home Round Two - Part 1

Many may recall years ago (around 2008) I attempted to purchase a home in Oceanside, CA.  That home was a quant device that seemed as though it just was mistreated by the previous owners.  I didn't understand the process, and I trusted way too much.  I learned a lot of lessons about what not to do and swore never to make those same mistakes the next time I was "ready".

Since coming to Washington State I've realized that, though I'm working harder than I ever have before, the opportunity and net cost of living are dramatically different.  This year, as a New Years Resolution, I resolved to do two things: (A) graduate college and (B) buy a home.  Both are in progress (I told you about Western Governors University), but let me talk about (B), and let's see if I can help you.

Buying That First Home: The Finish Line

So my agent followed up with the selling bank regarding the proposed deal. He called me back to inform me that the bank accepted the arrangement! So it's only a matter of time now; closing is scheduled for August 28th. For the record, here's what my deal entails:

• Original asking price was $227,000. I initially offered $230,000 with a $1,000 earnest money deposit and a $12,000 concession, for a net asking of $228,000.
• The bank counter offered at a $235,000 asking price with a $2,350 earnest money deposit and a $8,000 concession, for a net asking of $229,350.
• We accepted the counter offer and I put the earnest money into escrow.
• My broker got conditional approval on financing, contingent upon all of my credit cards being paid of (~$3,000 owed).
• My agent submitted an amendment asking for an additional $3,000 in closing (no offer price increase, which made me a little nervous)
• The bank had to follow up with the investor (don't understand that piece) for the response - approved!

So when I close, my credit cards (which are the bulk of my separate accounts) will be paid off, leaving only my car and mortgage to pay, and I'll own my first house.

Before folks start cheering, I still have to get the appraisal results. The property might have depreciated so severely as to not make it worth while, or there might be bums during the walkthrough or anything else imaginable. I'll have to sit on my hands and wait and see.

Buying That First Home: The 'Dream Team'

NOTE: This is a migrated entry.

For the record I'm working with a REALTOR and a broker to get this home taken care of. I met the broker by way of the REALTOR. I have to admit...once we found a house and got a contract signed, my agent kicked it to the extreme; calling early or late as needed to give me status updates about the progress of the purchase. The broker is not only working to get the financing done, he's working to get the best rate possible.

I was told recently that the two of them are working to not only get the lowest rate, but to also get more money on the loan and pay off all of my various credit cards. My credit is clean, but I do have a couple of credit cards carrying balances at present. When it's all said and done, I won't have to bring any money to the closing table, I'll have the house and all of my credit cards will be paid in full. That will only leave my car payment - which will get paid off by the time tax day comes around in 2009.

Don't get it twisted...the broker has quite the attitude problem, and doesn't like to talk to you the customer, only to your agent...but the two of them together are quite effective as a team. It's too bad all of my friends are broke, or I would absolutely recommend the two of them for anyone trying to buy a home.

Buying That First Home: Bank Drama

NOTE: This is a migrated entry.

So I got a call from my agent, who got a call from my broker. It seems my financing has been approved!...with a contingency. Ugh.

Before I go into the contingency it's important you get a little background. My credit report is pristine. I have no negative accounts. I did file Chapter 13 BK back in 2004, was discharged this month. I really did it because at the time, my income far exceeded my debts - even though I wasn't really delinquent on anything, I just needed a reprieve. By the time the BK was near discharge, my income had tripled, so it was significantly easier to deal with the debt, plus the biggest loan I had on there was a private loan from Sallie Mae - but the school closed before I finished. California's Student Tuition Recovery Fund made that go away and gave me all of my money back. Also, I had managed to open some credit card accounts to get some positive account history going on. I have three credit cards that I've had for over two years.

So now you know the history. The contingency is...the lender wants all of my credit cards paid off. That's no easy task, at least not in the short timeline they want it done. I can pay off my credit cards in roughly a month, give or take...unfortunately this has to be completed by July 29th. Not happening. It's not a lot being asked...it's the timing of it all.

So, my guys are going to work with the list agent and bank to see if they will do one of the following:

1. Accept a loan price increased by $3000, offer a $3000 credit at closing, and set a requirement that the credit be applied to pay off all credit card balances, with an agreement from the lender that we're doing that; or
2. Excuse the earnest money deposit (which is just shy of $3,000) so I can put that towards the credit cards instead, and close with no money out of pocket.

I actually prefer the first option, because the bank will still get the earnest deposit, which they should get. The second option is dangerous, both to me and the bank, because the bank doesn't benefit at all except they get the house off their books.

So...I continue to wait while I play this juggling act between banks. Fun.

Buying That First Home: Moving Out

So I need to get prepared to move out of my apartment. Even if the house does not go through, I gave notice and my lease is set to expire on August 2nd, with a walkthrough scheduled for no earlier than July 27th. That means I've got a little under a week to get everything situated. Because of the small snag in financing I delayed doing any sort of packing or anything, as I didn't know for certain whether I'm going into the house or if I'm going to another apartment for one month while the process resolves itself. Believe it or not I'm still not certain.

However, that does not mean I can't do at least some initial packing, knowing good and well that I will be moving somewhere in the near future. So, starting today, I'm going to box up anything I haven't touched since I moved here, including a lot of my kitchen utilities and media. I've only been here a year and haven't accumulated much, so it's doubtful I'll have too much to throw away - and I couldn't in any case, seeing as the rest of the tenants see fit to fill up the garbage bin every day, preventing me from properly discarding what I've got. You wouldn't believe how many Amazon.com boxes I've got sitting in the middle of my living room waiting for their turn.

The bedroom is going to be the hardest to move, I can already tell. With the new bed I just bought, that makes two mattresses and a boxspring, plus the frame, two side tables, a utility cart, my ironing board, filing cabinet, flat panel, game system, and the contents of my master closet...a nightmare, to be sure. Then there's always the concern about moving to a house - no security this time. Everything is entirely up to me. The house has been vacant for months - what's to stop someone from trying to break in and take my things when I'm away at work? I've got quite a few valuables...and I can always do homeowner's insurance, but I'd rather not even have to worry about such things. In an apartment at least there is some measure of security: I'm on the second floor, we have a security patrol, neighbor watch, etc...not to mention there are people here with much nicer things who actually leave their blinds open for the world to see.

Oh well. Time to get on with it.

Buying That First Home: Anticipation

NOTE: This is a migrated entry.

"Right down to the wire"

That's exactly what it seems like. Everything is down to the wire. Do you know why that is? It's because the backend of our economy is inherently broken at its core. Little things where consumers have no control over what's happening result in a major downfall.

A home purchase is likely the largest consumer-centric investment you will ever make. In some ways it's not only life altering, it also is extremely risky. There are numerous factors that can affect you the moment you close on a house. You could lose your job (either via layoff or straight firing, or the closure of the company). Your income could decrease (I think some states have laws against that unless the job merits it). You could even experience a further decrease in the value of your home during these times. It's always a risk, always a gamble.

Therein comes anticipation.

I started my home search in April. That's right, April. I'm just now at a point of nearing closure, and even now it's still not a guaranteed deal, because everything substantive is happening on the weekends when the banks are closed. I'm forced to cross my fingers and hope that things stay exactly the way they are right now, until tomorrow so my broker can get a snapshot of the true way things stand with me. For the record, here is my checklist:

• Financing: secured, but then changed, the rates changed, the first lender could not offer the buying power I needed, DTI issues, etc. Think I finally sorted it out, but it will take time to get to a point of confidence.
• Finding the home: This was the bulk of the time spent. At first I was looking in surrounding areas like Temecula and Murrieta, but the inordinate increase in gas prices has made those areas not as feasible, even though they are visually superior in quality. I had to also wait for home prices to decrease even more in select areas, and even then the area I desired the most refuses to depreciate fast enough (Rancho Bernardo). I'll have to sacrifice my 15 minute morning commute for a much more stressful 35-minute commute, but whatever...I've got SIRIUS.
• Placing offers on homes: Short sale process is broken. Period. Banks should be required to reply to every short sale offer from buyers within 15 calendar days. There's a house on short sale out on the MLS, I put an offer on back in May. The banks ignored my offer and went with another guy and has been sitting at Backup Offer ever since. Placing offers on foreclosures is a bit more sane, but out of control, as investors are essentially falsifying the nature of the purchase in order to scoop up cheap properties to flip when everything rebounds. There needs to be more regulation of these types of situations. If they already own a home, they should be put lower on the priority list than those that do not.
• Consumer credit: This is the worst of them all. Your credit report can be literally pristine yet your credit score remains in the 600's because you don't have any tradelines that exceed 2-3 years. What's worse, any creditor, even if they know it's false, can report negative information to your credit file any time they please, and you can do nothing about it except try to work it out or dispute with the bureau...of course the dispute taking over 30 days makes that not a viable option when you're buying a home. That's what happened to me - pristine record, then right when I place an offer, some invalid collection account shows up and I have to fight tooth and nail to get it removed. Fortunately for me, I was able to call in a few favors to expedite the dispute process, but not everyone has such contacts.
• Cash on hand: When you're living in a state that does not ream you on taxes and fees and everything else, it's quite easy to save money. But when you're living in a place that takes your money any way they can, it's just not that easy to save, and even if you do save to like a 401k, you're going to get nailed for taking it out. Your money. Just because you earned it.

So, I sit in anticipation of what tomorrow will bring. Of course, it's July 20th, my lease expires August 2nd, and I have to do the walkthrough July 27th. Mind you, financing must be secured by July 24th. So I've got until Thursday to get financed one way or another. As of today it's a clean road to that goal, but who knows what lecherous creditor will try to hit me with next.

Buying That First Home: Low Cash

NOTE: This is a migrated entry.
For the record, my job pays quite well and has for the past few years. The economy has affected my company quite severely, as we laid off nearly 90% of the workforce in the span of a year and a half. I was kept because (1) I'm one of the few people who knows almost every aspect of the business and (2) I administer one of the core business systems (that's soon to change).

However, California is a quicksand pit: you can have a great salary and yet still be cash poor. "Cash poor" is a term that literally means you have no cash to speak of. You have reserves, you have assets, you have extended credit available, you have 'things' to show for your work, but no cash to blow. The primary reason I don't have cash? I rent.

You wouldn't think that simple statement would explain it all, but it really does. My rent payment exceeds every luxury I have. My rent payment is greater than the sum of all of my other bills combined. TV, internet, phone, cell phone, car, credit cards, water, electric, drinking water...combined make up about $900 per month expenses, give or take. My rent payment is almost $1800. By the time I pay those, I have just enough to keep my car and stomach filled, with the occasional book, game or DVD purchase. It's not easy saving.

However, I do have a 401k account that gets automatically filled. "How come you can do that and not set money aside yourself?" Easy. The 401k is immune from taxation. It also comes out before I ever see it, and I can't touch it without penalty. If I had the option of setting money aside from my paycheck into an IRA or a CD, tax exempt, I'd do it in a heartbeat. The problem is that I know the money's already been taxed and each check I get is cut by at least $600 before I see it, and that bothers me. So does the government's lame attempt at "economic stimulus" - don't send me a check for money that is just going to go towards tax liability...create a way for people to save money and avoid taxation. Encourage savings and you stimulate spending by proxy: if I could save enough money, I'd buy a house twice the size of the one I'm buying now and pay the same price.

Speaking of taxes, some people in other states really don't understand what goes into our tax system. So just for them, I'll break this down, then go further into the low cash system.

• Income Tax: This one is the worst of them all. An arbitrary incremental percentage of the money you earn. I happen to be a supporter of FairTax and believe that tax should be assessed based on what you consume, not what you earn. Doing it that way ensures that every level, from the lowest (drug dealers) to the highest (billionaires) are forced to pay their fair share, because everyone has to buy food. Everyone has to buy clothes. Everyone needs gas. There are a lot of things that everyone must buy, and then those billionaires who need a fleet of Hummers will automatically inject major amounts of money into the economy within months. Know what's worse? There are two - Federal and State. Some states don't have state income tax but we do. A huge chunk of our money is gone before we know what hit us. That's two taxes in one!
• FICA/Social Security/Medicare: This is a tax, I don't care who says it's not. It's a tax because the money you pay towards it does not benefit you, but rather the system that shares its name which, by the way, is slated to be dry and no longer of value before my generation turns retirement age. So in essence, everyone paying this has been throwing away millions of dollars a month towards something we won't benefit from. Also, if you make $110grand or more you don't have to pay this tax. That alone makes it severely unbalanced, as well as partially responsible for the fact that the majority of us won't have benefits when we retire. Either apply the tax equitably regardless of income or don't charge it at all.
• State Disability: See Social Security above. Same issue (except the income limit).
• Sales Tax: I actually have no problem with the sales tax. I do have a problem with its application. Sales tax should only apply to physical goods and only those purchased from a retailer in your state of residence, be that an online retailer or brick-and-mortar. What the government wants to do is force you to pay this tax in the form of use tax (I'll get to that one). They could solve their issue by simply enacting the consumption tax - then it wouldn't matter where the product was purchased, and I would support that, if it meant my income was completely left alone and paid fully to me.
• Use tax: Did you know that, if you buy stuff from Amazon.com or some other retailer that does not have a physical premise in your state, that you have to report the tax of those purchases on your return? It's called "use tax" - the government's way of attempting to collect money it thinks it's owed. It's a farce. the money was already taxed at income time; why do you then need to turn around and tax it yet again?
• Property tax: This one is ignorant. I mean at least it's deductible but still. Tax on land? Paid for with money that was already taxed at income time. It's stupid.

As I said, the inordinate level of taxation almost requires you to be making at least $60-70 grand a year just to make it out here. And that salary isn't easy to come by, even with a degree.

So...now that I've spun this into a different topic, I'll get back to the original one...cash reserves. It's not easy to save money out here. Doable? Yes. Not easy. And the system needs to give in one way or another:
(A) Implement a flat, static consumption tax and repeal anything else even referred to as a "tax", paid one time and one time only, or

(B) Implement processes that allow consumers to save their own money tax-exempt without requiring an employer-sponsored pension plan.

Buying That First Home: Home Inspection

NOTE: This is a migrated entry.

So at the behest of my agent, we went ahead and decided to proceed with the home inspection in anticipation of everything getting resolved with the financing and credit issues. Again, this is my first time doing this, however it seems pretty sensible: guy's essentially going to "audit" the house and write up a report of recommended actions, some which might be deal breakers, others not so much. No big deal.

For those in San Diego, I really do recommend San Diego Home Inspection, Mark West. He got it done in a few hours and issued a report right away, complete with pictures ( I was trapped at work and unable to go in person ).

The majority of the issues I had already noticed during the first tour of the home. Almost all of the window screens were bent, torn or falling off; the carpet was ruddy and needed to be replaced; the paint was not even; the attic panel was missing, etc etc. There were some other items though that I had not noticed, all having to do with the garage. First, there was some exposed power outlet cabling leading up to the ceiling in the garage. Not sure how I missed that one, but I can always do some conduit piping to take care of that. Next, there were a couple of holes between the living area and the garage itself. Not only is this just asking to suffocate from carbon monoxide, it's also not in compliance with building code. It really surprised me, considering so many other things had been recently re-done on the house. Lastly, the ventilation system (not the A/C, just general ventilation) appeared to have been neglected, which might cause issues in the garage.

I can imagine myself taking a quick trip down to Home Depot to pick up stuff for fixing the issues. In fact I was going to get some Mighty Putty to patch the holes in the walls and sand/paint over it. Of course, I have to wait until the financing sorts itself out. For the record, closing is tentatively scheduled for July 30th with a final deadline of August 21st (I think). However, my current lease expires August 2nd with an anticipated move out of July 26th or thereabouts. Needless to say, I'm eager to get everything sorted out.

Moral of the Story: If you're buying a home, get a home inspection. It's enlightening. It's empowering. It's good to have someone else do the work figuring out what's wrong with your home. Also, if something is screwed up that wasn't reported, you have leave to sue the inspector if they should have reasonably identified the issue at the time of inspection - slab damage, for example. Too many people are going without inspections because they're star struck on the home, or they have uncle Joe or the guy around the corner who claims to be an inspector, so they can save a few bucks. $325 is what I paid, and that's not too much to ask for a job well done.

Buying That First Home: Consumer Credit

NOTE: This is a migrated entry.

Seventeen people showed at least a passing interest in my previous entry. Maybe I'll get more viewers on this entry, which interestingly enough is directly piggybacked to the first.

Financing had some issues at the last minute. My broker contacted me and asked me about a collection account that shows on my credit report. I'd noticed it and disputed it on all three bureaus; the only one that didn't delete it is Equifax. I didn't pay it much mind, but apparently the banks don't like to see collection accounts in my situation.

What really bugs me about it is that, out of 25 accounts, it's the only true derogatory...and it's not even mine! Want to know what's worse? My credit score has actually gone up since it added itself to my credit! You can imagine how really ticked I was to be informed that it's the only problem the bank has - so a guy who has 25 paid or positive statused accounts and one collection that shows on only one bureau, is automatically a credit risk. Yeah, okay...I know it's the credit crunch that has them nervous about such things, but still. It's not like it's ING Bank or anything.

So, I informed the broker that said account was not mine and had been successfully disputed with two of the three. I then went and faxed a dispute to Equifax to get them to take it off - I'm sure it'll be successful.

The moral of the story kids, is this. Oh, and so you know, I used to work at a credit bureau, if you're curious...

• Keep an eye on your credit, even if you're not actively looking for a home. Things will just add themselves to your report without your knowledge, companies that won't ever contact you about the debt. Get a credit screen service - I suggest TrueCredit since you can pull your report unlimited times during the subscription.
• If you're going FHA, make sure your report is as clean as it can be.
• If you filed bankruptcy in the past, you can still get an FHA loan. Just make sure that, if it was Chapter 7, it's been at least 2 years since the discharge date. If it was Chapter 13, make sure it was at least 3 years since the filing date.
• Try not to open new credit accounts in the 6 months preceding your search for financing. It's just unnecessary explaining - the only exception to that would be if you had applied to a large credit limit card for the purpose of balance transfer - assuming it will actually decrease your monthly debt and not increase it.
• Work on maximizing your debt-to-income, according to your monthly pay. Minimize your actual monthly expenses as much as possible. Monthly expenses considered are credit-based; that is, existing mortgage payments, credit card payments, loans, and credit lines. If you don't have any existing debts - car paid off, no credit cards/credit cards paid off, no outstanding loans, etc., you should be in good shape. Just make sure to keep it that way.
• if you have stored assets - 401k, CDs, etc., offer them to the financing agent. They can use those to help approve the loan by substantiating the amount of money you have on tap.
• The little known factoid: FHA lenders can consider the amount you pay per month in rent. If your rent payment exceeds the potential future mortgage payment, that can be used to get approved. Usually this is used as a last resort to getting approved. But at least you know that isn't ignored.
• And now, a free credit scoring tidbit for you: Did you know that closing credit cards can actually hurt your credit score? it's true. The length of time credit accounts have been opened is a strong factor when calculating the score, but so is the amount of "usable credit" on credit cards. if you have three credit cards open for a total of $5,000, and nothing owed on them, that results in a higher score than 20 credit cards with 18 of them closed for a total of $5,000.

UPDATE: My fax to Equifax was successful, as they have removed the erroneous debt...I figured they would, Transunion did. I contacted my broker and let him know to re-run credit as soon as he gets a chance. I'm one step closer to the goal.

Buying That First Home: Securing Financing

NOTE: This is a migrated entry.

So recently I decided to take the plunge and buy a house out here in San Diego. After such an educational experience I figured I would post something here in the hopes it is of use to others in similar situations.
I figured I would cheat the system a bit and get the financing squared away first so I didn't have to fight after the fact. I selected Chase, somewhat by accident, and went through the trouble of getting pre-approved for a rather limited amount. I really think underwriting policy needs to be edited; instead of using score thresholds to determine whether you can do an automated underwrite or not, I think it should be based on all factors considered: how much net worth the buyer has, how long they've been in the same company/position, purpose for buying, etc. The days of manual underwriting really need to come to an end, and pool those resources towards clearing out the short sale backlog.

I also think FHA's DTI is not properly adjusted to compensate for the human element: in other words, it assumes you can't afford certain levels of mortgage payment, even though that customer may be paying that or more in existing rent payments without a problem (meaning the calculation is not accurate for that specific customer). I think 50% of adjusted monthly income (AMI) is more appropriate.. AMI works like this: If I make $70k/year, I make $5833.34/month (70k divided by 12). That compensates for the irregular pay periods of some companies and allows a customer to use their true buying power. If they did that little bit, my buying power would (potentially) double, and I'd really lose no more money in the long run.

Some might disagree with that logic, thinking it's overstating income, but it isn't. That would account for the amount of money I really do make. If there's only two pay periods in the month of May and three pay periods in the month of June, and another two pay periods in the month of July, it's the same amount of income as if there was one check a week.

Anyway, I digress.

I finally chose a home that seemed within my price range, assuming grant funding, and made my offer. The bank increased the money they wanted for the home slightly and played with the numbers so they were not paying any more than they felt they should have been under any other circumstance. Great for them, bad for me...because it was $5000 outside of my buying power. My agent suggested I consider a mortgage broker with whom he was acquainted - and I will say that while that broker seems to be getting the job done, his attitude leaves a LOT to be desired. Note to readers: do not let anyone force you into signing blank forms. If you get forms that aren't filled out, make them fill them out, or give you the information so you can review it. Of course, me being an auditor, I already knew this and was ready to call him out.

Current status: I'm waiting to hear back from the broker on the final underwriting. It's really the only piece that's holding me back from closing on the house I chose. It's hard, because while I no longer have a rent payment (I gave notice earlier in the month...even if the house doesn't pan out, I've got to get out of the place I'm at), I have to have cash on tap for such things as inspections and insurance and whatever else might come up, never mind that I still have to eat and put gas in my car.

Update: One lender dropped...three more to go. Let's see which lender is smart and which are short-sighted.

Update 2: OK, so the initial lender isn't quite "dropped" per se. See my message on Consumer Credit for more information, but they're in a limbo state. The broker is dealing with a different bank who claims to be more flexible on things like this. Fingers are crossed.

Update 3: Just got a packet from the first lender with some good faith documents. I left a VM for my broker (see my Consumer Credit posting). I think come Monday, I'll have some good news!