Property Ownership: 5 Things to Avoid During Mortgage Application (Travel Hacking Included!)

We are extremely open about how we are able to travel on a tight budget. Our dream to explore Earth is not to be deterred by things such as massive student loans. I have already outlined how we travel hack our way to achieving our adventurous dreams. As much as we love travel hacking, we needed to put a complete stop on our strategies, at least for the time being. While we have proven to ourselves that travel hacking does not negatively affect our credit scores in the long run (how to understand your credit score, here), we also are very aware that it will affect our mortgage application short-term! Travel hacking violates a lot on the “Don’t list” of Mortgage lenders, so in order to understand why we should put travel hacking to a halt, let’s review what NOT to do when applying for a mortgage loan.

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1. Don’t allow tardy payments.

Missing a payment (or worse, adding judgements to a credit report) can surely tank any chances you have of getting a mortgage loan approved. It may seem as if a small missed payment won’t matter much, but your score can lower by more than 100 points if a 30-day late payment occurs on any type of credit account! After spending all this time being reliable and building up good credit, the last thing you want to do is give the lenders any indication that you are a risky borrower.

Be very wary of what you owe. Even missed payments for medical bills or court judgements can weasel their way, uninvited, and interrupt, delay, or all together annihilate the entire mortgage lending process. Even utility bills, parking tickets and library fines can cause damage. I would simply be hyper-aware about all payments that need to be made.

2. Don’t have revolving credit.

As I mentioned in my post, Understanding and Improving Credit Scores, the second most important factor in determining your credit score is how much you owe. Therefore, it is important to avoid revolving credit as much as possible and to pay off all credit cards in full. I mean, you should be doing that anyway, but now isn’t the time to slip. I know that during the entire mortgage process, you are likely thinking of so many other things, however, you want to make sure your credit report is at the forefront of your mind. You can lose as much as 45 points on your overall score just by maxing out one low-limit credit card!

Sometimes, travel hackers have that push to hit minimum spend within a certain time period, but they do so unwisely by spending more on their credit card than they can pay back by the end of the month, thus creating revolving credit. Live below your means, an advice that should be heeded at all times, independent of a mortgage application.

3. Don’t open any new credit cards! (Travel hackers, I am talking to you!)

Here is where travel hackers need to beware. You want to be approved for the mortgage but you also want to snag a credit card offer that’s pretty much handing you 80,000 points FREE. Your fingers are itching to pull the trigger and sending in that online application with just one click more. Don’t do it!

Unless, off course, your okay with risking mortgage approval. But if you are applying for a mortgage in the first place, I am assuming it’s because you don’t have the money to buy your house in cash. AKA, there is no alternative. Other sign-up bonuses will be there in the near future. The mortgage lender may not.

Here’s the thing: Mike and I have not seen our credit scores go down since we started travel hacking in November 2017. Within 6 months, we had opened 5 credit cards between us, and our credit scores have actually increased. They say that your credit score may go down 5 points with each credit card inquiry. If you have a really good credit score (800+), then I would consider your argument that one additional card will not reduce your score to a low enough point that a lender would deny you a mortgage loan. However, I like think we are better off safe than sorry. A recent inquiry will indicate to the lender that you may be a high risk candidate for a loan, let alone multiple recent inquiries. And if I am being honest, every time you do a credit pull, it will give you the top reasons why your score is the way it is. Me and Mike’s top reasons? “Recent Credit Card Inquiries”. Then again, our scores were around the 800’s. You may take that with a grain of salt, a dash of pepper, or however way you want to, but we chose not to open cards during this 45 day period.

The day after you close on the house, feel free to apply for whatever card you want. Just make sure not to max it out on home improvement stuff! (More on that, later.)

4. Don’t close unused accounts. (This too, applies to travel hacking.)

Many people believe in the fallacy that closing accounts will improve their credit score. Some believe in an even worse falsehood, and that is, closing credit accounts will wipe off bad credit history from their credit report. Sadly, no and nope.

The truth is that closing accounts can lower your credit score. Why? Because your credit history makes up a large part of your score. If you close an account that’s been open for ten years, that maybe you haven’t kept active in a long time, that will cut your credit history. Additionally, they will always consider the credit utilization percentage, which is the amount of credit being used versus the amount available. When it comes to closing cards, apply the same practice as with opening cards: wait until after escrow closes!

As far as travel hacking is concerned, there comes a time when credit cards need to be closed to avoid the annual fee. Mike and I were lucky in that we were not even close to any of our one year anniversaries for our credit cards. If you are planning to apply for a mortgage, it would be absolutely wise to plan ahead.

5. Don’t use this time to dispute anything in your credit report.

Which isn’t to say, don’t try to fix any inaccuracies with your score. Right away, if you see an accuracy, the best action to take is to notify your potential lender of the mistake. Current rules dictate that a single dispute under investigation by the credit bureau is enough reason to delay or nix the loan, in order to avoid consumers trying to improve their loan last minute by disputing negative (and possibly, accurate) information.

 

Property Ownership: Understanding and Improving Credit Scores

It would be nice to buy a home entirely with cash. The transaction would be simple, and there’s only one dotted line to sign. Unfortunately, for many in California, this just isn’t feasible … at least, not any time soon. We debated waiting to buy a home until we can pay for it in cash (mostly because of the fact that I get sweaty palms every time I think about loans) but the trade-off was too great. Waiting to buy a home for cash would have taken us more than fifteen years, since we had to focus on paying down $500,000 student loans as well, which is equivalent in price to our most recent home purchase. That would be fifteen years of paying for monthly rent, which could be equivalent to fifteen years of paying down the mortgage. I ended up wiping the sweaty palms on my jeans, taking a deep breath, and choosing the latter. Meaning, I had to take on a new loan, at the exact same price as my student debt. *Deep breathIf it wasn’t for my husband, I am not sure I could cope with the thought. Reassuring hugs and “we-got-this” fist bumps go a long way.

While I can ignore the nervous sweat and the anxious breathing, there is one thing a buyer applying for a mortgage cannot ignore: their credit score. Credit scores can be supplied by different companies, the most commonly used being FICO, which stands for Fair Isaac Corporation. Each score is calculated by an elusive mathematical equation that evaluates many types of information with the patterns in hundreds of thousands of past credit reports. Simply put, they are trying to evaluate the risk that comes with loaning you money.

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Things to note: 

There are several categories that the FICO score considers, including your payment history, the amount you currently owe, the length of your credit history, any new credits you acquired, the types of credit in use, and the number of credit queries. Here are a few things to note, and then we will go in dept into each category.

  • A FICO score requires that at least one account has been open for six months of more, and at least one account has been updated in the last six months.
  • Although a score can quickly be lowered, it takes time to improve your score. If you are planning to buy a home, and your score is lower than 750, I would recommend starting to improve your credit score NOW. There is no quick fix to improving credit. In fact, quick-fix attempts may backfire. The best thing you can do is to manage your credit responsibly over a long period of time.
  • A score considers all categories mentioned above, not just one.
  • Everyone’s score is calculated a little differently. One category may have more emphasis when determining my score whereas another category may weigh more heavily in calculating someone else’s. It’s impossible to say how important each category is, because it differs from person to person, depending on the overall picture. Therefore, it is important to work on each of the categories. With that being said, the general rule for a majority of people is that the categories are listed in the order of importance, with the payment history usually being the most important and the number of new queries being least important.

With that, let’s get right into it!

Payment History

A good payment history shows the lenders that you will be reliable in paying back the loan. Your score will take into account:

  • Payment history on many types of accounts, including credit cards, installment loans, and finance-company accounts.
  • Public record and collection items, including bankruptcies, suits, wage attachments, liens, and judgements. Bankruptcies stay on your credit report for 7-10 years. A foreclosure, short sale, or deed in lieu of a foreclosure lower your score by about the same amount. These are considered serious delinquencies, so don’t expect to get a new mortgage loan with favorable terms for 5-7 years.
  • Details on late payments: Your score considers how late payments were, how much was owed, how recently they occurred and how many there are. For example, a 60 day late payment is not as damaging as a 90 day late payment. However, a 60 day late payment made one month ago affects your score more than a 90 day late payment made five years ago.
  • How many accounts show no late payments, which will help increase your credit score.

How to improve your score:

  • Pay your bills on time.
  • If you’ve missed payment, get current and stay current.
  • If you are having a difficult time making ends meet, get help. May I suggest a financial planner?

The Amount You Owe

Using credit accounts does not mean that you’ll be a bad borrower. However, using many credit accounts and owing a great deal in each one indicates to the lender that a person may be overextended and is more likely to make some payments late or not at all. Your score will take into account:

  •  The amount owed on all accounts and on different types of accounts.  The total balance on your last statement is generally the amount that is shown on the report. The score will also consider what types of accounts are being used.
  • How many accounts have balances. A large number can indicate overextension.
  • How much of the total credit line is revolving credit, meaning carrying a debt balance month to month. Those who are closer to maxing out on many credit cards may hold greater risk.
  • How much of the installment loan accounts is still owed compared with the original amount. Car payments are a great example. Even if you’ve been paying the monthly dues on a $10k car loan, if the majority has been going to interest, then you may still owe 80% of the car loan when you apply for a mortgage. Paying down installment loans at a quicker rate obviously looks good.

How to improve your score:

  • Keep balances low on all credit cards.
  • Pay off debt as close to 100% as you can.
  • Don’t close unused credit cards as a short-term strategy to raise your score. It won’t work, and it may even lower your score! Long established accounts show that you have a long history, which is good in the eyes of a lender.
  • Don’t open new credit card accounts that you don’t need. I am talking to you travel hackers out there. Put it on pause.

The Length of Credit History

In general, a longer credit history looks good to lenders. I remember when Mike was trying to apply for a car loan. He had no credit history, and had difficulty getting it. It blows my mind that being financially responsible and not having credit history is considered a bad thing by lenders. What a backwards world we live in. Unfortunately, when it comes to borrowing money, a credit history is considered a good thing. Your score will take a look at:

  • How long credit accounts have been established  – the longer “the better”. Also, the more diverse types of credits you’ve been managing, the more responsible you seem.
  • How long it’s been since you used certain revolving credit. For example, an inactive credit-card is given less weight in your credit score than active ones.

How to improve your score:

  • Don’t open a lot of new credit cards. Remember that new accounts will lower your credit score, even if it is temporarily.

New Credit You’ve Acquired

Any credit less than a year old is considered “new”. The score will consider:

  • How many accounts you have. It will especially look at how many of those accounts are new.
  • How long it has been since the most recent account was opened. 
  • How many requests have been submitted for credits. Typically, inquiries remain on your credit report for two years, although FICO only considers inquiries from the last year.
  • The length of time since lenders made credit report inquiries. FICO will ignore inquiries that are more than a year old.
  • Whether your recent credit history is good following past payment problems. Off course, your score will be improved after getting current and staying current.

How to improve your score:

  • When you search for multiple loans, do them all within a certain time period. 

Types of Credit in Use

Usually, this category does not bear much weight in the score, however, it can if there is not much other information on which to base a score. This score looks at:

  • The different types of credit accounts you have. They look to see if you have a mix of credit cards, retail accounts, installment loans, finance company accounts and mortgage loans. Off course, this does not mean you should go out and get one of each!

How to improve your score.

  • You can open new credit cards but ONLY AS NEEDED. You don’t need one of every type. Plus you have to remember to manage them responsibly. Meaning, pay each credit card in full at the end of the month. Note that closing credit accounts does not erase them from your report.

Number of Credit Inquiries

Credit inquiries are defined as the requests that a lender makes for your credit score or report each time you try to apply for a new credit line. FICO takes this number into account. Here’s what you need to know:

  • Inquiries do not have a large effect on your score. Typically, this lowers the score by less than five points. That being said, there is a larger impact if you have a short credit history or if you have few accounts. Also, people with six inquiries or more on their credit reports are 8 times more likely to declare bankruptcy, something worth considering.
  • Many inquiries are not counted at all. The following are not counted, although they may appear on your credit report: orders made by you from a credit reporting agency, lender requests for your score in order to make you a pre-approved credit offer, and requests from employers.
  • The score looks for rate shopping. This is why I mentioned before that shopping around for a mortgage or an autoloan should be done at the same time. Multiple potential lenders may pull your credit report, even though you are only looking for one loan. The score counts multiple inquiries in a 45-day period as one single inquiry. Also, the score ignores all inquiries made in the 30 days prior to the scoring.

So there you have it! Trying to understand your credit score can be overwhelming. Score determination is muddled by the fact that each individual’s scores bear different weights for different categories. The most important thing to remember is that you want to prove that you have little risk for defaulting on a loan. So pay back debt, stay current, be responsible, and do this over the course of a long time period. And the best day to start is today.

Good luck!

Property Ownership: How much is it worth?

It is easy to get a feel for average market prices when you have been stalking the market for a year and a half. I am speaking out of experience. They say the best way to learn property values is to eyeball as many houses as possible and then monitor them until they sell. While I haven’t seen every single property on the market for the past year and a half, I HAVE monitored every single loft in Orange County and Long Beach. This focus on particular property styles in a certain location allowed me to be very educated about the general pricing of all lofts in our area. Lofts that were priced too high took longer to sell. Those that were priced fairly sold very quickly.

But even so, what houses list for is not always what they sell for. Unless you have access to the MLS or some other listing that also shows what houses sell for, you are guesstimating how much homes are selling based on the asking price. The actual selling price is not updated or revealed on search engines such as Zillow. Still, you need to know what a house is worth. Why? Once you understand how much a house is worth, you can finally separate your house buying decision from your emotions and buy based off of objective reasoning. Additionally, when it comes time to price negotiations when you are trying to submit an offer, you will have the upper-hand with FACTS supporting your suggested price. It’s better than struggling to make sellers see your side of the equation using emotion as evidence.

Before we go into how to determine if the listing price is fair, a few terms must first be defined. These three words are often used interchangeably but refer to very different things.

  • Value – Value is your opinion of what the house is worth. Value is entirely subjective, and it may change. Value is affected by internal factors, such as your current personal situation. Imagine a young couple who value living in an apartment in the center of a busy city, one which has an amazing walking score due to a number of neighboring restaurants and bars. But ten years from now, they may value a quiet street, a bigger home with a yard for their dog, and with a good school system for their kids. All of a sudden, their old apartment seems to hold little value. Conversely, value is affected by external factors outside of your control. If the city builds a garbage dump right next to your home, good luck trying to sell it.
  • Cost – Cost deals with yesterday. Cost was what someone paid for the property, and has nothing to do with today.
  • Price – Price is the correct term for what something is worth today. Seller’s have asking prices, buyers have offering prices, and together, they establish a purchase price, which is tomorrow’s cost.

Barring natural disasters, or states of duress, every home will sell at the right price, which is defined as the fair market value – a price that the buyer is willing to pay, and the seller is willing to accept for the home. Values are opinions, but fair market values are facts. It becomes a fact when the buyer and the seller agree on a mutually acceptable price. Therefore, it takes both the buyer and the seller to make a fair market value.

Now that those terms are defined, how do we go about finding fair market value? Median home prices are not the same as fair market values. They are simply the midpoint of all the prices of homes within the confines of a certain area. One must understand that there is a huge range of prices, and the median is just the middle. It’s too vague a number. There is a better way…

The best way to know whether a listing’s price is fair is to pull up a CMA report – which is a comparable market analysis, or a COMP for short. A real-estate agent can and should prepare a CMA for you before you send in your offer. When we were considering buying an over-priced turkey, we knew deep down that it was over-priced. But initially, it was difficult to separate our emotional ties towards a “dream home”, even though our heads knew better. What helped solidify our resolve was the CMA report that our real estate agent insisted we look at. Suddenly, we were able to turn down the seller, because over-priced homes that rob you of your hard-earned money are not dream homes at all.

There are two sections in a CMA. The Recent Sales section of CMAs should compare your home to others that are located in the same neighborhood, are approximately the same age, size, and condition, and have sold within the past six months. The Currently for Sale section of CMAs compares the home to others also on the market. This should include an analysis that checks for price trends. Do remember that sale prices are given far more weight than asking prices when determining fair market value. Sellers can ask for whatever fantasy price they want, whereas sale prices are facts and indicate fair market value. The best proof of what a house is worth is its sale price. Take the guess work out of the process by analyzing the sale of comparable homes. Be sure to factor in sales information, such as price reductions or large credits given to the buyer for corrective work.

Off course, CMAs also have their shortcomings. It is important not to compare two houses blindly, without knowing all the details of the subject properties. Here are a few reasons why the fair market values of seemingly identical homes (with the same floor plan, age, style, etc.) may differ.

  • Wear and tear: No two homes are identical after they’ve been lived in. Make sure you know the condition of both homes you are comparing.
  • Site differences within a neighborhood: A corner spot located by the park is a better location than a home facing a busy street, even if they are of the same community.
  • Distressed properties on sale: Identifying a foreclosure is easy, but a short sale, not so much. A short sale is not a good comp because it is considered as being sold under duress.
  • Floor plans matter: Two homes may have the exact same age, location, size, and condition, but one may have an open floorplan and another may be completely choppy. Therefore, the latter may have a lower fair market value.

If CMAs are not convincing enough, or you are of suspicion, then getting a second opinion is an alternative. You can pay several hundred dollars to get an appraisal of a property. The appraiser gives a non-biased opinion, because they aren’t trying to sell you anything. Personally, I would not recommend wasting money on a pre-contract appraisal. Firstly, a good agent’s CMA is usually as creditable as an appraisal. Secondly, it is not guaranteed that a seller will accept your offer. In which case, you would have spent hundreds of dollars for nothing, not even a chance at owning your ideal home! And that’s just not worth it.

So if property ownership is in the near future for you, congratulations! And hopefully, this helped.

Property Ownership: It’s Not About Finding Your Dream Home

I think back to just a few weeks ago when we were considering buying a loft in our neighborhood and we had come across an over-priced turkey. I think, in our minds, we saw a loft we have been dreaming of, but in our hearts, we knew there was something wrong with the big picture. The main problem was that the price the seller was asking for did not match the perceived value that we had of the loft. Luckily, signs of an uncooperative seller really pushed us away and his personality became an additional factor that made us hesitate for a moment. That moment was enough.

I remember how it happened very vividly. It was a pivotal moment in our house buying venture. We had exactly three days to respond to the seller’s counter-offer … if you could call it that. We received it on a Friday and Mike and I decided to go do something we hardly do, which was to dine out. We went down the street to a chicken and waffle stand called Bruxies to talk about the pros and cons. We both were dancing around the question of, “Do we let this go or do we just bite the bullet and sacrifice a huge expense in order to get this space?” Deep down, we both knew that it wasn’t worth the cost. But we were fearful, too. Of missing out on an opportunity. Of missing out on this imagined dream.

It turns out that all of this was a blessing in disguise. As we were sitting there that summer evening, waiting for our trays of fried food to be delivered to us, I remember casually turning on my phone and searching Zillow. It was a thing I’ve done the last year and a half or so, and I’ve probably memorized nearly every listing on the market. I just liked to see what was out there, out of curiosity. On that particular day, we were primed to buy a place. On that particular day, we were determined not to be duped of our money. On that particular day, we were in a specific headspace or state of emotions. On that particular day, a loft was added to the listings.

It was actually the first property that showed up on my feed, which meant that it was the most recent addition. Or, well, re-addition I should say. I knew exactly where the loft was located, and I knew what it was listed for before. There was a $20,000 price reduction. The loft was selling for under $500,000, which, if you live outside of California and New York, you probably would not understand how great of a deal this was. My obsessive habit of scrolling through Zillow has paid off! I knew right away that those lofts were selling for a bit more than the listing price. I showed Mike, and in an instant, I think we both knew the answer. Though we didn’t say it out loud, there was a hint of a spark, maybe from some neurons firing in our brains or a shooting star over our heads or whatever, that told us this could be the one.

After that moment, we couldn’t stay close-minded anymore about the property we were going to buy when we realized there were better opportunities. The main reason why we wanted the loft in our current neighborhood was because we had already lived here. We were comfortable, we knew the pros and cons. We knew the floor plans and the neighbors. We knew the HOA people and the surrounding businesses. But it does not mean that it was the best option. The minute you get comfortable, you start to close off doors to other opportunities. Practicing the art of purposefully seeking discomfort in life, it makes sense that we went with this other loft. We had texted our real estate agent and within minutes , we had an appointment to view the other loft the next day. The loft that we ended up getting. By refusing to entertain the grossly priced loft in our immediate neighborhood, we found a loft that checked off a lot more.

  • Location: The loft we found was in the heart of downtown. Originally, we were hesitant to even consider these lofts because of the location. But once we opened up to the idea, the location ended up being its best feature. We initially feared being located in the heart of downtown, where there would be potential noise from concerts on weekends, or busy sidewalks and traffic during the day. But once we got over that, we realized that this location had more pros than we thought. Walk outside and there are many restaurants, bars, and coffee shops to go to. We would be one block away from the farmer’s market, three blocks away from one of my work offices, and within a few blocks from the courthouse, the library, the post office, and many other governmental offices.  It is one block from Main Street and located on 3rd Street, so that if and when we do decide to open our own business downstairs, we would get decent foot traffic. But best of all, the loft we ended up with was next door to one of our close friends! As in, we share a wall. As in, the exact friend whose housewarming party we went to three years ago and whose loft inspired us to live in a loft of our own.
  • Style: The style we were looking for was a live/work loft. I would admit that it doesn’t look nearly as industrial as the one we currently live in, but it definitely has the vibe of something more than just a traditional home. Vaulted ceilings, large windows, cement floors, metal railing, and exposed vents. We can always add additional industrial touches at a later date.
  • Price: The asking price for this loft was incredibly cheaper. As I calculated in the previous post How to Decide if Property Ownership is a Good Financial Decision for You, the equivalent of our current monthly rent would be a property that is less than $520,000. The loft we bought was actually originally listed at $520,000! But after a previous potential buyer changed their mind, the seller lowered the costs down to $499,000. That weekend, we placed an offer for their asking price, which is $150,000 cheaper than if we went with that fake seller. Since I have been studying the market for over a year, I knew right away when this came on the listings that the price was fair. Our appraisal came back at $505,000, so we were very happy with the one we chose.
  • Commercially Zoned Space: The loft is already commercially zoned for business! Just thinking ahead to our future dream of starting a business that’s our own gives me the shivers.
  • No Immediate Renovations Needed: Unlike the first loft we were considering, the bottom floor in this loft is already partitioned with it’s own full bathroom. Which allows our roomie to stay with us. Plus, the loft requires no immediate renovations. The inspection report came back with minor tweaks, but we can move in once escrow closes and assume our day to day without a hitch.

All of this to say that persistence and patience pays off. That fear of a new adventure should be stifled almost immediately. That comfort will lead you to over-priced turkeys and closed doors. That curiosity can lead to wonderful new paths. That sometimes, it’s not about what you plan for, what you prepare for, or what you dream of, but rather, what life gives you, and whether or not you choose to take it by the reigns and just go with the flow. That it is not about finding a dream home, but instead, finding a home that will get you to your dream life.

Property Ownership: The 45% Rule in Mortgage Lending + IBR’s Saving Grace

So I know that we WERE in the process of refinancing our student loans in the Spring, which we announced on zee blog prior to an Oregon trip. Now that we are returning to Oregon once again in a week, I wanted to say that we STILL have yet to finalize the refinancing. And no, we did not wuss out. Don’t fret, refinance is still in our near future plans. If anything, we manned up a bit more. How? It was at that time that we decided to tackle property ownership as well! So why did refinancing have to be put on hold?

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There were two moving parts that we were balancing at the same time. Firstly, we decided that we can tackle student debt quicker by refinancing to a lower rate than our current 6.7%. Secondly, we also agreed that a sure heck of a lot of money was going towards rent, and then disappearing into thin air. After much consideration, we decided that tackling property ownership was yet another financial challenge we wanted to pursue.

Here’s the catch. Both actions would affect the results of the other.

The 40% Rule and the 45% Rule in House Buying

The general rule with mortgages is that lenders will want to see that your property’s monthly mortgage payments do not exceed 40% of your monthly gross income. For example, if you’re monthly take home pay was $5,000 a month, then the monthly mortgage cannot exceed $2,000. Which is fine, because we chose a home that would be a close equivalent to what we were already paying for in rent, and it is nowhere near 40% of our monthly gross income.

The problem lies in the second general rule. General rule number two states that your monthly housing expense and monthly repayment of non-housing debts, can total up to, but generally be no more than, 45%. By non-housing debts, I mean car payments, credit card payments, and yes, student loans. Uh-oh! Do you remember when I told you that 100% of my income was going towards paying down student loans? How in the world were we able to get a mortgage loan with a rule like this? Well, IBR is our saving grace.

IBR is a Saving Grace

When you are under the IBR program and are applying for a mortgage, they consider only your minimum monthly payment, which is a small percentage of your income. This is regardless of whether you are funneling more than the minimal payment towards the loans in hopes to reach financial freedom faster, or not. So buying a property while under IBR is “easy”! Because no one assumes that you would be crazy enough to pay down your student loans, when you can wait for loan forgiveness instead.

If we had refinanced prior to getting a property, the monthly payment of the refinanced loan would be $5,500/month. When you add that towards the monthly mortgage payments, then we get very close to exceeding the 45% rule. Even though we would still fit the rule, the tightness in the budget does not allow enough breathing room for emergencies, or whatever life chooses to throw our way. We all know I need breathing room! And once you refinance, there is no turning back. IBR is lost for good. There goes your saving grace.

So refinancing would have likely swept away all hopes of property ownership in the upcoming few years. Which means more money spent on rent and not funneled towards building wealth. Now you can see why we had to put our refinance on hold. We do not wish to refinance until after we close escrow on a property. Refinancing student loans first would have put us much farther behind on our financial goal of owning property. But buying a home first does not put us much farther behind on our financial goal of paying down student debt.

Mortgage’s Effects on Refinancing

Unfortunately, there ARE effects of a mortgage on student loan refinancing. Owning a property can affect the refinanced loan rate of the student loan. Since the loan company will now see that we have a mortgage to pay on top of the student loans, they may apply a higher loan rate to our refinanced loan than the originally quoted 5.5%. But the chances of refinancing at a rate lower than 6.7% is still present! Now in our particular case, a student loan company may think that $500,000 in student debt is crazy. They may not trust in our ability to pay them back in ten years, on top of having a home. And we don’t blame them. It is a scary thought, after all, and they know nothing about our personalities or financial story. So if a loan DOES deny refinancing the full $500,000, here is what you do. Refinance part of your loan. For example, get $250,000 refinanced at a lower rate. That seems more doable to the refinancing company. Then pay only the minimum amount towards the refinanced loan, and funnel the rest into the loan at 6.7%. Why? You want to pay down the loan with the higher percentage first, since the interest rate will be charging you like crazy. Meanwhile, you’ve cut part of the interest that you would be paying under IBR. As the numbers dwindle, consider refinancing again in the future, this time the loan in its entirety. Since we still plan to keep up with our $6,500 payments per month towards student debt, a lowered interest rate will help us out, no matter what. If they do not approve the loan in its entirety, we take baby steps. Even if only a portion of the loan is refinanced, it still doesn’t deter us or set us back from our plan to be free from student debt in less than ten years!

In the end, our choices were this:

Refinance first, and have a very difficult time securing a mortgage.

OR

Pursue property ownership first, and refinance at a slightly higher rate, but still at a lower rate than the current loan.

As you can see, we went with the latter.

And I am pleased to say that we are almost there! Once we’ve secured the property portion of our game plan, we ARE going to refinance. And I will share with you guys THAT process as well!

 

Property Ownership: How to Detect and Avoid Fake Sellers

What is a fake seller and why would anyone want to knowingly waste time and money on something so lame? It may seem like a bogus idea, but fake sellers are out there. Trust us, we know. From our short-lived personal experience to boot! I feel a story unraveling…

From the onset, we knew what we wanted. We have been mulling the thought of buying a property for a year and a half, and we had extensively narrowed down the price range, location, and types of homes we would be willing to consider. Additionally, we had been spying on the market over the course of the last few years. For every home type that we were considering, I knew the neighborhoods in which they were located, the price ranges, and the typical pros and cons of the properties. I knew which agents were specialized in selling those particular places as well. So the time came when we were ready to make a leap of faith, I reached out to an agent who specialized in lofts in Orange County, CA.

Originally, we were very specific in which lofts we wanted. We wanted a loft in our current and exact neighborhood. We specifically wanted one that faced the market and commercial area, rather than one that faced Main Street or Memory Lane, which limited our search to less than twenty particular properties. We requested that she reach out to any owners to see if they would be willing to sell their loft.

She returned to us on the same day saying that there IS one owner who is interested in selling. He isn’t listed on the market, and is willing to do it without opening the deal up to other buyers And by that night, we were looking at the property.

That’s where the good parts of this story ended.

The owner had an asking price that was $50,000 more than the average value of the property. He claimed that there were upgrades to the loft, which was very true. We looked at the property and we agreed there were updates. We pulled up a comp report and analyzed the selling price of neighboring lofts in the last 6 months. They were usually selling for $575-$590k and the seller was asking for $650k. We accounted for the upgrades he had made to the home and the slightly larger square footage, and the comp report analysis returned at a value of $612-$617k. Since we really wanted the space, we offered $620k, trying to work with the seller.

Unfortunately, when the counter-offer returned, we knew this was not going to be the home. He returned with a counter offer of $645k AND we had to pay for all of HIS closing costs. He was using the downstairs space of the loft for a digital business and did not physically need to be here in California. Since he does not live in this state, he viewed the selling of the house as an inconvenience and is not willing to put any effort in the selling of his house. When we confronted his agent about the ludicrous price, he simply shrugged his shoulders. He knew that the loft would be appraised at a lower rate than $650k and that the difference will have to be covered by the buyer in cash. The seller’s agent informed us that this entire thing is an inconvenience to the Seller, to which we replied, “Then why bother say he wants to sell?” And like that, we dropped them like a handful of hot coals.

How to Spot Fake Sellers

So here’s the rub. Fake sellers can easily seem like real sellers. They do all the things a real seller would, such as put the house on the market, place FOR RENT signs on the lawn, have an agent and host open viewings. However, whether knowingly or unknowingly, they waste their time and money doing all of this because they are not really READY to sell. If you don’t know how to detect fake sellers, then you cannot avoid them. And if you don’t avoid them, then you may waste precious time and money to fruitlessly negotiate buying a house that isn’t really for sale.

  • Are the sellers realistic? The number one reason that people cannot sell their homes is because of a grossly high asking price. When you hear that an owner is having difficulty selling their home at such a high price, beware! As with the case of our first loft offer, what it actually means is that the seller is refusing to accept the market’s opinion of what their house is worth. They may have an alternative motive, such as making up for the costs they’ve spent to upgrade their place. Or just to try to get more money from a buyer who knows nothing about the current market. This, by the way, is different from real sellers who mistakenly place too high of an asking price. Real sellers will wise up over time. Fake sellers will not. My advice is to move on.
  • Are the sellers motivated? Getting a seller who is motivated is important. Most sellers are motivated by a life change, such as a job transfer, a recent marriage or divorce, retirement, etc. Having a REALLY motivated seller makes it better for the buyer, because they will have a better chance at negotiation. Our fake seller was obviously not motivated at all, which made it easy for him to be uncompromising. Lack of motivation is a giant red flag. Run the opposite way, especially if you hear them say “they are just testing the market”.
  • Do sellers have a time frame? Deadlines make things happen. If the seller has no deadline, then he is in no rush to meet deadlines. It’s easy for fake sellers to start an escrow process and decide to not meet deadlines and kill the deal. Only because there is no urgency to sell the home.
  • Are the sellers forthright? Genuine sellers are open about the condition of the home and the legal status. Why? Because they are aware that withholding vital information can ruin the sale. Early disclosures of possible problems help indicate whether you’ve got a real seller on your hands.
  • Are the sellers cooperative? Real sellers want to sell their homes. They will look for ways to make the transactions go more smoothly. Inconsistent behavior is another red flag. If seller’s become uncooperative or start missing their deadlines, they may have lost the motivation to sell. When you start to see these signs, ask why they are happening. Otherwise, you may be in for a surprise if the deal ends up blowing up in your face.

My best advice is to do the same as we did. If you find yourself dealing with an unrealistic, unmotivated, and uncooperative seller, it’s time to walk away. Find something else. Maybe that seller will wise up, but then again, maybe not. You don’t want to waste your time and energy trying to coax reason into a seller like that.

Plus, you may find that it ends up being a blessing in disguise and you find a property that checks off even more boxes! Like we did!

How to Decide if Property Ownership is a Good Financial Decision for You

This post may contain affiliate links. Please see my disclosure to learn more.

Well, we are doing it! We are in the throes of purchasing our first property! Currently, we just started the escrow process, so it’s all new enough to accurately relay our experience on zee blog. I have been MIA on the finances front for a while, but I’ve decided to start a new series on Property Ownership (I say property ownership because, as you will see, we did not go with a traditional home, therefore I think home ownership is too selective of a title), in which I hope to cover a collection of thoughts and well-meaning advice.

The first of which is this: You’ve got to know what you are doing when buying a home. Unless you want to get your money swept from underneath you or risk ending up with a home that you absolutely hate, I highly suggest getting informed before even considering any of this. May I suggest starting with the Home Buying Kit for Dummies? Not saying you’re a dummy, just saying I read this from front to back and felt confident in the home buying process, which went quite smoothly for us. In fact, today’s topic of deciding whether to buy is outlined in their first chapter. Sans my own personal stories and interjections. You’re welcome!

Deciding Whether to Buy

We all make consumption choices in our lives. Whether that’s a cup of coffee, a sustainable product, or an eco-friendly gadget. Sometimes, purchases can lead to buyer’s remorse, especially when they fall short of our expectations. When it doesn’t cost much, you can get over it quickly by either choosing to return the product or deciding you will not make the same mistake twice.

As a very mindful consumer, you likely already know that I weigh the pros and cons of every purchase I make. This is especially important with large purchases, such as a car or home. Sloppy shopping can lead to financial and emotional disaster. And I love the analogy that consumer debt is the equivalent of financial cancer. So, buying a home should not be taken lightly. It should not be an entirely emotional decision. And it is not right for everybody. If that is something you did not want to hear, then I am very sorry.

The goal of this series is to go through the process that Mike and I went through in order to help ensure that we have a home we are happy with, we get a good deal on the property, and most importantly, that owning a home helps us accomplish our financial and life goals.

But before we could have even decided whether owning or renting was best for us, we had to learn the advantages and disadvantages of both!

The Pros of Ownership

Not everyone should buy homes, and not at every point in their lives. That’s a statement I believe in. That being said, there are many pros to owning your own property.

  • Owning should be less expensive than renting!

This is the first guideline that Mike and I wanted to follow. We have thrown away so much money in rent. How much, you ask? Our first 18 months, we paid $2,800 a month for our beautiful 1,599 sq. ft., 2bed, 2ba live/work loft in Orange County, California. For those of you thinking we are financially crazy, I just want to point out that an 800 sq. ft. 1bed, 1ba apartment in an apartment complex runs around $2000-$2200 in our area. I agree, it is crazy expensive to live here. I also agree that we weren’t exactly financially savvy when we started out. The next 8 months, we received a huge rent reduction to our space. We made a bargain with our landlord which stated that we ourselves will fix any problems (that totaled to no more than $200 per month) that came up, and she reduced our monthly rent from $2,800 per month to $2,600 per month. Additionally, we took on co-housing and we further reduced our rent to $1,900 per month, while giving our roomie her own bedroom, bathroom, and access to the entire house for $700 a month. She was happy because she avoided having to hemorrhage $1,500 for an old, run-down studio space, and we were happy because our rent went down almost $1,000 with those two simple changes. The savings of $900 over the course of 8 months was $7,200! YAY US!

All of this to say, that over the course of the last 26 months, we have spent $65,600 in rent. If we didn’t have our roomie, then we would have spent $71,200 towards rent, with nothing to show for it. Now if it seems like your monthly rent looks way smaller than the price of a home, which is likely to be hundreds of thousands of dollars, think again.

A very simple calculation of the home you can buy that would have approximately the same monthly cost as your rent can be completed using the following equation.

$______________ per month x 200 = $ _____________________

Example: $2, 800 per month x 200 = $ 560,000. The property we decided to put an offer on? $499,900.

Another consideration between the cost of buying and renting is the cost of doing so today versus the cost in the future. As a renter, you are fully exposed to inflation rates. A reasonable annual increase in rent is 4% per year. Remember that if you pay $1,000 in rent per month, that is the equivalent of buying a $200,000 home. Well, in 40 years, with 4% inflation per year, your rent will balloon to $4,800 per month, which is like buying a $960,000 home! On the flip side, after buying a home, your housing costs are not exposed to inflation if you use a fixed-rate mortgage to finance the purchase. So only the comparatively smaller property taxes, insurance, and maintenance expenses will increase over time with inflation.

This isn’t to say that you must buy because of inflation. But, if you are going to continue renting, you must definitely plan your finances accordingly.

  • You can make your house your own

This is a great pro to all the creatives out there. However, a word of caution:

Don’t make the place too unique. I understand that you may have a distinct taste or style. And while that may lead you to a happy life in your home, it could make it very difficult to sell in the future. If you do make improvements, focus on those that add value, such as adding skylights, energy-efficient  upgrades, and updated  kitchens and bathrooms.

Avoid completely running yourself into financial ruin. It’s easy to get carried away in the emotions associated with owning a new home. There is this urge or pressure to make it look picture perfect straight away! There is nothing wrong with making your home a dream one the slow way. When you feel the urge to throw all your money straight into renovations, think of the things you already have. Say, a roof over your head?

  • Avoiding Landlords You Can’t Get Along With. Mike and I have never personally had an issue. However, we have heard stories of landlords who neglect their tenants needs or continually refuse to fix rental units that are falling apart.

The Pros of Renting

  • Simplicity. Signing up for a place to rent is definitely easier than going through the process of securing a home. You don’t have to deal with financing, inspections, and other possible issues like you would if you were buying a home.
  • No upkeep. When you have a rental property, your landlord will be responsible for property maintenance and upkeep!
  • You have flexibility! This was actually one of our initial reasons to continue renting. Renting allowed us to not feel tied down. In the last few years since we got this place, we were going through so many changes. We got married, Mike got a new job, we started tackling our student debt, and we wanted to travel the world. I just started work and Mike and I did not know if we would like our new jobs and if this is the area we wanted to stay. Luckily, since then, we have fallen in love with our city and our jobs. We have proven to ourselves that tackling the student debt is doable, and we are comfortable enough to now tackle on housing. But if you are at a stage in your life where you need any sort of flexibility at all, then maybe renting is better for you right now. If you plan on not keeping your property for more than five years or plan to move soon, buying and then selling a property is not the way to go.
  • Increased liquidity. Many people buy their first home and wipe their finances clean with the down payment and the closing costs. Plus they have to make their monthly payments. Renting will help prevent you from being financially stretched.
  • Better diversification. Buying a property could mean that your wealth is tied up in the house. As a renter, you can invest money in a variety of investments, not just one.

Do NOT Fall for the Following Pitfalls

  • Renting because it seems cheaper than buying. You must consider the monthly cost as well as the future cost. See discussion above.
  • Buying when you expect to move soon. Additional costs that come with buying and selling a home are pretty large. Unless you plan on keeping the home for a while after you’ve moved, it may be better to wait until you are more sure of where you will be one year from now.
  • Allowing salespeople to sell you something you don’t want. Many people in the biz have a vested interest in getting you to buy, because they work off of commissions. But remember that when you buy a property, you will be the one coming home to it every day. You will be the one paying for it. So make sure that you do you!
  • Ignoring logistics. You should probably think through how every aspect of your life is affected by your home purchase. Imagine buying a home that has everything you are looking for and is within your price range, but which adds an hour commute to work. How much would you resent that home? Or imagine having a home that happens to be located in a loud neighborhood, and you are a light sleeper. These are important things to consider!
  • Don’t become house poor! Either you own a home, or it owns you. Nuff said.
  • Being peer pressured. This is a toughie. Typical me, I had to really dig deep and figure out why I wanted to buy a home. Was it entirely socially ingrained? Was it purely from a financial perspective? Was it part fantasy? I had to rationalize and confirm (and re-confirm) that I was not being peer pressured into this. That this is something Mike and I decide to do, for reasons of our own. Just because siblings, friends, and co-workers are buying homes, it does not mean you should too. Maybe they own a home, but have no finances left over to travel. Maybe their house is keeping them from quitting their work and pursuing a passion. Don’t assume their life is better than yours. And as always, never compare your beginning to someone’s middle.
  • Misunderstanding what you can afford. To be honest, if you haven’t gotten a feel for your financial situation and life goals, you are just guessing how much you should be spending on a home. So having a good grasp on your financial stance is the place to start. Also, unless you are a high-income earner, if you do not have a back up plan for unexpected life occurrences, you may find yourself in a tight situation. A job loss, family emergency, or natural disaster can make you house broke in an instant. Understanding all of this and having a back-up plan is very wise!

Given all of these pointers, only you can ultimately decide if buying a home is right for you. Not me, not your peers, not your real estate agent, and, no offense, but not even your parents. More importantly, you must analyze whether NOW is the right time for you. It may be that waiting until you have a bigger down payment, a more stable job, or a better financial back up plan is the best option. Something we as humans tend to avoid thinking about is the worst case scenario. But think about it you must.

Also, learning about the property buying process is quite necessary. If you are feeling a bit overwhelmed after reading this post and need a place to start, start with this book! I highly recommend it. Do you have other recommended reading for first-time home buyers?  Feel free to share with the community in the comments below!