Learn me buying a house

OK.

Obviously I can't afford a house right now. But I still want to learn. I don't know anything about buying houses. I know a little bit about a lot of things, but NOTHING about houses. I know they have foundations, interesting constructions, and burn oil and use electricity. I also know that I want one probably more than anything.

For discussion purposes, let's say we're talking the Bangor ME area.

My credit rating is non existent. I have never had a loan or a credit card. My cell phone has been on the family plan since the beginning of time. The only thing I pay on the regular is car insurance.

Specifically, is there any feasible way to purchase a house, rent out rooms, and live there for free?

Yes. I did it. It will be a rather useful approach for investing in your generation.

First build up your credit rating. Start now.

SVreX wrote: First build up your credit rating. Start now.

Any tips on how to do this without spending unnecessary money? I'm a cash kind of guy, but I do comprehend the importance of a good credit rating.

Get a credit card. Whatever your monthly expenses are in food and other necessities, buy with said credit card. Pay it off at the end of the month.

Between doing that and the student loans I have, my credit was a 760 the last time someone ran it. That's hardly setting the world on fire, but for a 20 year old who has never actually owned anything of value it's a good start.

As for buying as house, I hope not to do that for some years, so I can't help there.

My first house I bought with an $800 a month mortgage, after my ex wife left I rented out 2 of the 4 bedrooms for $400 a month so I was living free. For a brief time I rented the 3rd room out too so I was making money. And, oh, I was in the military so they were giving me a $700 a month housing allowance but thats not pertinent to your situation.

But the credit rating is a killer. I have good credit, and before I bought my most recent house I had paid off everything and was living cash only. That actually hurt me when buying this house because I didnt have any current credit accounts. So get yourself a credit card, use it enough to establish credit but DONT get yourself in debt with it.

Your credit rating is a reflection of your ability to use credit responsibly.
With that said, you must then use credit to show how responsible you can be. This responsible use is why above is telling you to buy things on credit and pay them off right away. Quickly paying off shows great responsibility.

How does it work if you get a 15 year mortgage, and sell the house after living in it for ~3 years? How does your remaining interest payments work into that?

Taiden wrote:

SVreX wrote: First build up your credit rating. Start now.

Any tips on how to do this without spending unnecessary money? I'm a cash kind of guy, but I do comprehend the importance of a good credit rating.

You will always be spending unnecessary money when buying a home. The more cash you have up front the less unnecessary money you pay. There are plenty of sites out there to help you get started. One I enjoyed reading was creonline.com which in certain articles and stories outlines how to start with virtually no money and get into real estate investing (renting out a room is investing). Luckily you live in one of the cheaper areas, around here (seattle) you only find junk around $100,000. Disclaimer: I rent.

Taiden wrote: How does it work if you get a 15 year mortgage, and sell the house after living in it for ~3 years? How does your remaining interest payments work into that?

Paying off the principle early, regardless of why or how, will save you that interest cost.

Yeah, credit is best built up by getting a low- limit credit card and using it for regular purchases and paying in full on time every month for a bit. If you need a car, get a small loan even if you don't really need it, and pay that off on time as well. They want to see you making regular steady payments.

It may cost a small amount but it will be worth it in better rates (o even getting a mortgage at all).

Duke wrote: Yeah, credit is best built up by getting a low- limit credit card and using it for regular purchases and paying in full on time every month for a bit. If you need a car, get a small loan even if you don't really need it, and pay that off on time as well. They want to see you making regular steady payments. It may cost a small amount but it will be worth it in better rates (o even getting a mortgage at all).

I'm about to buy a <$750 forester, any point in approaching my bank for a loan for that? I was just going to pay cash.

Taiden wrote: How does it work if you get a 15 year mortgage, and sell the house after living in it for ~3 years? How does your remaining interest payments work into that?

Interest is due monthly. Actually technically, it's daily.

So you don't owe interest for future time that you have not yet lived through.

You are borrowing money. Interest is the money they make for lending you money for a day. If you borrow it for 3 years, you pay for 3 years. Then you get a payoff amount (which is the remainder of what is due, and it will look suspiciously close to what you originally borrowed), and pay them back at closing with the money you made on the sale of the house.

Responsible borrowing will mean borrowing what you can afford to repay, NOT what they SAY you can afford.

Make sure to leave some buffer in case your house sells for less than you anticipated.

Do not borrow for buying the $750 Subaru.

+1 for getting a credit card, then paying it off every month.

I was able to buy a 30k car based on the fact that I paid off a $600 Best Buy credit card on time, and had an average income.

As for the house, the wife (gf at the time) were able to easily get approved. We had good credit and low debt to income.

Just remember, its alot easier to wreck your credit than it is to fix it. Ive had friends learn that the hard way.

Taiden wrote: How does it work if you get a 15 year mortgage, and sell the house after living in it for ~3 years? How does your remaining interest payments work into that?

The first payments are primarily interest payments, the last payments are primarily principle payments. Equity is something you need learn about, get comfortable with, and learn how to leverage, it equals value minus principle remaining. When you sell you will get that equity. Unfortunately if you pay your minimums on the mortgage then you gain equity slowly unless you do renovations or the market goes up.

Hypothetical Scenario with really high rates and simple napkin (ti83+) calcs, this may be incorrect:

Say you bought a place and loaned $50,000 from the bank (it really cost $62,500 but you had the down-payment of $12,500) and have $500 monthly payments, in the first 3 years you will pay $18000 ($50036 months) of which maybe $5000 will go towards principal and the rest will go towards the bank for letting you borrow the initial $50,000. If you keep it longer then a larger ratio of your payments go to capital. When you sell the new buyer pays your bank the price of the home (let's assume $62,500 sale price) and you get the price of the home minus closing costs (if you are in contract to pay them) and minus the principle remaining. In this situation you would get $17,500 (down-payment + $5,000 principle) back from the sale because that's what you paid against the principle after paying $18,000 and the down-payment. Now if you rent 1 room for $400/mo then at the end you only paid $16,100 ($10036 months+down-payment )out of pocket AND get the $5000 from the sale, a net return over 3 years of a whopping $11,100 ($16,100- $5,000 principle) with an extremely low cost of housing, You did not make a profit but lived for $100/month. In the end if you kept the place for all 15 years you will end up paying $102,500 with a $500 payment the entire time with the bank profiting $40,000 total over 15 years for lending you the money. If you make double payments or even an extra $50 per month then the banks cut will be much lower saving you money in the long run because future interest accumulation will be based on less principle.

I'm bored so here goes this:

Now lets say you bought a $62,500 duplex and paid your 12,500 down-payment (really cheap for a duplex but lets go with it for an equal comparison). Now in this duplex you live in half, and you manage to rent out the other half for 10months out of every year and you are renting it for $800 (average for Bangor per rentometer.com) and payments are still $500. You pay your $500 that you would normally pay without a renter and the renter pays too which will allow you to pay off the house in 52 months. Your $12,500 down-payment and $26,000 rent that you paid empowered you to pay much higher monthly payments on the loan. You would then have an equity of $62,500 after paying $38,500 assuming the value of the home didn't change. Equivalent to you making an extra a monthly income of $461.53.

Not factored in was the time value of money, another subject you should research after you get the basics down.

The actual rate in my calcs was 8.75, I went online and found a calculator to find the rate that my calculations would correspond to. I used this calculator:

Taiden wrote: How does it work if you get a 15 year mortgage, and sell the house after living in it for ~3 years? How does your remaining interest payments work into that?

If you got a 5 year new car loan on a $20k car, in 3 years you may still owe $13k on the car. If you sell the car for $14k then you get $1k and the bank get the $13k from the sale to satisfy the loan.
If the car sold for $12k but you owed $13k then not only do you give all the proceeds to the bank to pay off the car you also have to write a check to the bank for $1k to cover the remaining $1k owed. You have likely hear people say, "I would sell it but I owe more on it than it is worth."

If you got a 15 year new house loan on a $200k house in 3 years you may still owe $130k on the house. If you sell the house for $140k then you get $10k and the bank get the $130k from the sale to satisfy the loan.
If the house sold for $120k but you owed $130k then not only do you give all the proceeds to the bank to pay off the house you also have to write a check to the bank for $10k to cover the remaining $10k owed. You have likely hear people say, "I would sell it but I owe more on it than it is worth."
Not being able to afford the payment to keep it and not being able to get enough money to cover selling it is what the house foreclosure thing is all about.

So it really is true that money is just a resource, and not money.

Actually, current credit calculations will benefit you more if you have a credit card and do not pay it off entirely, but maintain a small balance.

Never, Never, NEVER pay it even ONE MINUTE LATE. Set up auto payments if you have to.

The primary thing the credit ratings are looking for is a proven ability to pay on time.

The next thing they are looking for is your ability to pay interest on time. They are trying to make money. Your ability to borrow their money and use it for free then pay them back on time doesn't earn them anything.

Look at 50+ homes. Become an expert. Learn pricing and the market. Look at everything.

Then you will know when you find your home.

Another thing about credit cards - a higher limit is better than a low limit. If you have a $1000 limit, charge $800/month and pay it off, you'll get dinged for using so much of your available credit. If you have a $6000 limit and charge $800/month and pay it off, you're viewed as a better risk. Don't try to understand it, that's just how it works.

But they're nothing to be scared of. Just don't spend money you don't have. Pay 'em off at the end of the month. It really is that simple. I don't maintain a balance or do anything to artificially build credit, but I was able to finance a house two years after coming to the US with a brand new SSN and no credit rating just by using one credit card and paying it off on time every month as well as paying the utilities on the apartment I was renting.

Say you need to buy a new X, be it furniture, an appliance, a tv, whatever, and you want to buy new. Inquire about 0% financing, even if you have the cash in hand. Its essentially a free loan. Pay it on time, and pay it off before the accrued interest hits.

Its kind of annoying having multiple bills for such things, but it doesnt cost you anything, and doesnt have the immediate hit on your bank account, allowing you to hang onto some cash in case of emergency.

I think it goes without saying, don't get in over your head with this type of stuff, dont go out and buy a bunch of stuff you dont need/cant truly afford.

Also...on roommates. This either works out or it doesnt. A co-worker of mine was trying to do the exact same thing, get a roommate to try and cover most of the montly costs for the house and save himself some money. He was looking for strangers. In general, his consensus was that theres some pretty berkeleying weird people out there that he learned that he could not stand. Im not sure if he has a roommate now, but last I heard he was kicking one of them out. He's worked 2 jobs as long as I can remember so has no problems covering his expenses for the house, he just wanted to save some more.

On the other side of the coin theres always friends. I roomed with a buddy of mine when he bought his townhouse because he was stretched kind of thin. I thought I would be there at least 3-5 years. Well about a year in, I got engaged and then moved to the in-laws to save for my own house, he was stuck looking for other roommates. He got 2 more of our friends to move in, now one of them is about to get engaged and move to his girlfriends, so its kind of the same situation.

The last thing I can say about home ownership is if you enjoy having the luxuries of high speed internet, don't trust any of the cable providers, call them a few times to check if they service a property you may be interested. The first guy may say yes, then you call back later and someone basically says "I don't know what that guy was looking at, but we definitely don't service your house." Ask me how I know.

You can put cash away in the bank, and buy a house at a Sherif sale for pennies on the dollar. Use credit cards to fix it up, paying them off each month to build good credit. Then start renting out one floor while you live in and remodel the other.

MG Bryan wrote: Get a credit card. Whatever your monthly expenses are in food and other necessities, buy with said credit card. Pay it off at the end of the month. Between doing that and the student loans I have, my credit was a 760 the last time someone ran it. That's hardly setting the world on fire, but for a 20 year old who has never actually owned anything of value it's a good start. As for buying as house, I hope not to do that for some years, so I can't help there.

You can do this. I just use the card from time to time, maybe once a year. My credit is about the same as above. Keep in mind you heave three credit scores.

When you apply for a pre-approved mortgage, they will use your middle score. Anything over 740 is basically considered excellent. When you are ready to buy, get a realtor and they will help you with the rest.

I may put an offer in on a house in South Saint Louis today. Wish me luck. 4 bedroom, 3 car garage. 84 years young.

Taiden wrote: So it really is true that money is just a resource, and not money.

Yes. With little money saved, I can benefit from buying a house and renting out two rooms just because I have good credit.