Sunday, November 06, 2005

An Evening with A Real Estate Agent

Last night, at a gathering party, I met a REMAX real estate agent who had a few tips and advice for the first time home buyers. I brought back some advice from the conversation;

>> Make sure your FICO score is in the good or excellent range.

>> Make sure that I am not spending over half the allowed limit on my credit cards. Have more than one credit card in order to prevent this.

>> Make sure you keep a good rental history of two years and that you can have a copy of all the rent checks from the bank to give proof of this to the lender. The lender wants to see both front and back of each check.

>> Have at least $6,600 to 10,000 (depends on the price of the property you're buying, though) in reserve money. This money is not part of my downpayment. I can show 70% of my 401/457 K money and Roth IRA money as reserve money.

>> It's better to buy a two to three bedroom home rather than a one bedroom apartment or condo. I had been aiming for a one bedroom condo/apartment with my budget limits. She said it's better to buy a two to three bedroom home and rent out the spare rooms to help pay for the mortage payments. Condos/apartment conversions will not do well in re-sale at all. They are becoming popular due to the housing price momentum of the single family homes. They are in more of danger for a bubble burst than other types of homes.

>> I should buy soon although I don't have the 20% downpayment since the home prices will probably cool down 5 - 10 % only, and the majority of the homes that will cool down in price will be at least $800,000 or more (the higher priced homes). With the interest rates going up, I will never win this race whether I wait or buy now. Do not wait more than a year.

>> Do not get interest-only loans. They tack the money/principal you owe during the interest-only years onto the back end of your loan, and once, you start paying the principal portion as well (once the interest-only period ends), you will realize that you have a mortgage bubble of a payment each month since you only have 25 years versus 30 years to pay off the whole bloated loan. Assuming you took out a 5 year interest only loan. At this point, she pointed to my sister and said they have done that and they will find it hard to cope in three years.

This is all that I can remember from that wine-filled evening. I'll keep her advice in mind but I still want to some more hard cash in my hands before taking the plunge. I also understand that, eventhough she might have good intentions in mind, she is still a real estate agent and might have her own interests in mind. Most of her advice was general and common sense, though.


  1. Sounds like good advice. I'd add, find a credit union or mortgage broker you want to work with and get prequalified before you go shopping. They'll tell you exactly what you can afford, and if you find a place you want you'll be able to bid in confidence. You'll also know exactly what you can be looking at- no sense falling in love with a place, then finding out that it's 'No way Jose'

  2. Good info. If you don't know your FICO score yet, you should go ahead and find out what it is. Once you know what your number is you can either breath easy or work on improving it.

    The Credit Card advice is correct. The other thing to do is to not make any large purchases in the next year while you look for your new home. Don't buy a new car in this period for example (if you can avoid it).

    Beside the two years of rental checks you will also need two years of tax returns and depending on your mortgage lender a certain amount of pay stubs from each employer you have worked for two years prior to getting your mortgage. So if you have just switched jobs keep those old pay stubs.

    My mortgage company wanted to see that I had 3 months of mortgage payments in a savings account after deducting my downpayment, points, and closing costs.

    If you can afford to get a two bedroom or three bedroom home than go for it - having the flexability to rent out rooms to roommates is a smart thing. However, if you can only comfortably afford a studio or one bedroom then just buy that - don't over stretch just to get the larger home. Realtors are always trying to tell you to buy more sq. footage because it is in their best interest.

    Don't let the interest rates or market drive your home buying decision. Instead focus on location, affordability, and practicality. If you like the area, can afford the monthly payments, and it suits your lifestyle (enough space, sunlight, style, whatever) then you will be fine.

    Just as trying to time the stock market does not work, neither does trying to time the housing market.

    Great Post - Keep up the good work!

  3. Jane and Bel,

    Thanks so much for the tips! Could I edit my post and put both of your tips on there as well?

    I will provide links back to your blogs as well, of course. I don't get that much traffic yet, so it's not much of an offering, of course.

    The main reason why I want to put your tips on the post is because one of the main reasons for me to keep this blog is to put financial educational tidbits for me to remember easily down the line (in the future). Sort of an educational diary.

    Both of your posts have helped me tremendously! Bel, you can link to my earlier post about the indecent proposal, of course. I would like to learn more about risk analysis matrix from your blog and will checking for it frequently.

  4. its good advice but don't be in a hurry to buy. i'm in San Deigo and prices are down 10% this year in my area and I expect a further 40% drop over the next 2-3 years.

    Californians have started leaving the state as housing becomes unaffordable. This is reducing the demand and as interest rates rise, prices will have to drop to maintain the same 10% affordibility level.

    Historically homes prices are 5.8 times the average salary. Currently they are 9.2 times in CA, and as all things regress to the mean, so will home prices. Unless corporate america takes pity on everyone and gives us a HUGE raise.