buying a house (typewritten image)

Credit On the Spectrum

Self-Subsidized Housing

(Buying a House)

This describes house purchase transactions.


Why Do It?

This is really only relevant for people who really want to live in a house they own. There are convenience factors inherent in renting, and many people do quite well in rental situations. If you prefer rental housing, there's no reason to change.

There are certain advantages to owned housing:

  • If you want improvements or additional features beyond what is typical of rental housing. This can range from fixtures (e.g., flooring materials) to appliances.
  • Pets. If the pet is permitted by law (or condominium covenent), and you can take care of the pet, then you need no further permission.
  • Investment - The advantage is that you get to use your investment.
  • Not having to deal with a landlord or property manager.
... and of course disadvantages:
  • You have to sell to move, or make other arrangements.
  • Maintenance and unexpected expenses.
  • Long term maintenance.
The real issue here is whether you would prefer your own place. If so, a house is a good investment because you use the investment.



The Big Kahuna - Buying a House



Mortgages

Mortgages are of course multi-factored. A mortgage lendor is interested in:
"Good Credit"
This relates to timely payments, and no significant defaults.

More on credit at
credit.html

Income
In other words, ability to pay.

Income, assets and debt apply more to the maximum one can borrow, as opposed to credit rating. Someone with bad credit may be eligible for a large amount (e.g., a costly house), but the credit rating may result in less favourable rates (increased interest or increased down payment).

Total Debt load

Assets and Down Payment
It is common for mortgage lendors to lend without regard to income if the borrower makes sufficient down payment. My guess is that they do want some indication of income, but are willing to accept "off the books" income if the borrower's financial situation makes sense. With sufficient down payment, the lendor's risk is fairly low and it's unlikely someone would make a substantial down payment with no way of making payments.


Mortgage Options

Most countries have various mortgage programs. The following are offered in the US:
Conventional Mortgages
Typically 30 year in the US.

FHA (US)
This is the "original sub-prime mortgage". Generally requires 3.5% down payment. Mortgage brokers typically don't encourage FHA mortgages, but this seems to be related to incentives given to mortgage brokers from commercial lending companies. The FHA interest rates are generally very close to the commercial rate.

FHA is for "first time home buyers", but this is a term of art. As an example, it is possible to be a "first time home buyer" if you rented for the past three years. One can be a "First time home buyers" even though one owns rental property and vacation property.

NACA (Neighborhood Assistance Corporation of America)
NACA offers 0% down payment mortgages at good rates. They require that the purchasor not own another home at the time of purchase. NACA has maximums that are below the median house price for some areas but higher than median in other areas, and do not cover all parts of the country. (e.g., Philadelphia has higher maximums than NYC and Washington, DC.) They do finance up to 4 family dwellings, but require owner occupancy (in one of the units) for at least 5 years.


"Lease to Own" Installment Purchases for Housing

Don't do it. - There is very few circumstances where "lease to own" purchases make economic sense. The cost is substantially higher than ordinary mortgage purchases, and the risks are much higher than for a mortgage.


Working With a Real Estate Agent or Mortgage Broker

As with any business arrangement, if you don't understand a gimmick, don't do it.

On purchasing, "walk away from" (decline) anything that sounds like a bidding war with other purchasors. If you want to bid on something, go to eBay and search for an item which doesn't require financing.

NOTE: As used here, "realtor" is used in the generic sense to refer to real estate agents and brokers, because that is the commonly understood meaning of the term. "Realtor" is also a registered trademark, at least in the United States; however even in the US, it is common to see the mark used without a generic description.



Specific Issues with Realtors

Avoid exclusive contracts (as a buyer)
They don't need an exclusive contract to protect themselves and you don't need an exclusive contract to avoid mistakenly looking at the same property twice. There are some instances where a willingness to go to another realtor (without formal notice procedures) is helpful.

Generally, an engagement contract is unnecessary, and most are one-sided. (I figure that if the contract were important enough, the realtor would have gone to a law firm that is competent enough to write a good even-handed contract.) There are always realtors willing to work without those kind of restrictions.

Do not competitively bid.
If you want to bid, go on eBay. If a house purchase turns into a bidding war, look for the next property. If you refuse to bid once, the realtor will get the message -- if you even stay with that realtor.

Avoid arrangements that you don't understand, or which don't make sense.

Insist on being shown what you want, with criteria that you define.
Of course it is important to be flexible on features if you need to limit cost.

There are some criteria which don't fit into pigeon holes. Once you decide that you've adequately explained your criteria, insist that the criteria be followed.
Examples are type and condition of house. Another example is location criteria that doesn't match the divisions of local real estate maps. This may mean that a realtor must look at property listings in several divisions to find a few that meet one criterion.

Insist that the realtor explain disadvantages of each property, and avoid "fluff" comments.
You don't want to hear the realtor's surprise at seeing what seems to be the first fireplace that person ever saw in person. One approach: "That's not helpful."

Object to BS
BS often surrounds the realtor's description of details of the real estate contract. BS often involves false expections, and suggestions that something will somehow affect the final price. By way of example, a house sale depends on an appraisal, but the appraisal almost always comes in at the sale price unless the sale price is very unreasonable.



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First posted Jan 06. Last revised 08 May 10.

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