Home buying rules.

[sigferl]

Hopefully the housing crisis is near an end and I wonder if we have learned anything new that will help prevent a repeat crisis. Here are some tried and true rules:

1. Always put at least 20% cash down payment(do not use emergency or retirement savings).

2. Always get a fixed rate loan no matter how enticing a ARM is.

3. Shop around for the best value, do not be pressured into making a deal 'now'.

4. If you can not follow ALL the rules, then keep saving, your time will come.

Any others? Thanks

Freedom is not free.

[OhioFiler]

Life isn't always about absolutes. Please advise why breaking any of these rules will cause a housing crisis.

Ignorance is free!

[sigferl]

Thanks for your post OF. From what i read, the mortgage crisis is cause by many reasons but some of the major ones are.

1. ARM mortgages adjusting to higher interest and monthly payments.
- SOLUTION: Always get a fixed rate loan.

2. House dropping in value.
- SOLUTION: If you but 20% downpayment then you immeaditly have 20% equity; therefore, if the house value falls 15% you still have 5% equity and can sell the house without a loss.

Do you agree with these solutions? Do you any advice about buying a house?

Do unto others as you would have them do unto you.

Life isn't always about absolutes. Please advise why breaking any of these rules will cause a housing crisis.

Ignorance is free!

[junker]

to others, dont be discourgaged by this guy, i am buying my 6th house, i have a judgement, i have filed bk twice over the years already, i have bought 3 houses the regular way with banks, the best deals i have gotten is with owner carry, with 10% down or less. they dont CARE about your credit.. this last time i put an ad in the local paper, saying what i wanted to spend and how much i would put down, no mention of credit at all. big deal if they charge an extra per cent on interest.. the last contract house i bought i made 400% profit... the last bank house i bought i barely made a profit...when i told this guy i had a judgement...he said i dont care, i am first on the lien.. they might not find out and it will expire for you..and they cant force a sale...if you dont plan on selling dont worry about it.....or file bk down the road....i also paid the lowest down with contract houses, the one i made the most on i paid less than 5% down.....

[JRScott]

If you are a first time buyer your house payment should not be more than 25% of your gross income.

I'm not sure they'll have 0% down in the future, let's hope not. Ideally 20% is good, but may not be required depending on your circumstance, shopping around is a good idea.

[OhioFiler]

Thanks for your post OF. From what i read, the mortgage crisis is cause by many reasons but some of the major ones are.

1. ARM mortgages adjusting to higher interest and monthly payments.
- SOLUTION: Always get a fixed rate loan.

2. House dropping in value.
- SOLUTION: If you but 20% downpayment then you immeaditly have 20% equity; therefore, if the house value falls 15% you still have 5% equity and can sell the house without a loss.

Do you agree with these solutions? Do you any advice about buying a house?

Do unto others as you would have them do unto you.

Sigfraud, thanks for your response. However it seems you failed to actually address my request so let me repost it for you:

Please advise why breaking any of these rules will cause a housing crisis.

If I choose an ARM and make my payments and fullfill my obligation to the lender I have not created a housing crisis.

If I put 5% down on a home and eventually increase my equity position to 20% I have not created a housing crisis.

If I find what I think is a "deal now" and purchase the home I have not created a housing crisis.

Please explain how these activities create housing crises.

[Minnymouth]

Ohiofiler,
I did not "take " the OP posting to mean "it would create a new crisis" if any of those rules were broken.
I understood his statement meaning "did we learn ANYTHING from our past crisis" to prevent creating another!
Such as:
Buying more house than we can afford
ARM's
etc

Minny

[robivi3]

I think sigferl intentions were just to give a general rule. On that basis, in general I agree with a couple of the points, not all. I know some folks now who are VERY happy with their ARM's, doing well and did not not do 20%. Depends on the situation. To get in a decent home I would use any savings I had. It is damned hard to save anything like 20% in Broward or Miami-Dade. In spite of a deep crisis they are not giving away homes. 250k still won't do much here.

[sigferl]

Thanks for your post OF. Thanks for the chance to have a intelligent discussion.

The mortage crisis is caused by people taking GIANT risks with their home. The home is supposed to be a place you raise your family, not a risky investment that you have a 20% chance of losing.

Following the old fashion rules will insure a 99.99% chance that you will NEVER lose your home.

Many people are smart enough to finance with ARMs while the majority cannot and this crisis proves it.

People took wild risks with their home(investment), probably hoping for a bailout like they have gotten before. Some of the people that I know of with BKs in their past are now in forclosure trouble becasue they did not learn from their BK.

Freedom is not free

Sigfraud, thanks for your response. However it seems you failed to actually address my request so let me repost it for you:



If I choose an ARM and make my payments and fullfill my obligation to the lender I have not created a housing crisis.

If I put 5% down on a home and eventually increase my equity position to 20% I have not created a housing crisis.

If I find what I think is a "deal now" and purchase the home I have not created a housing crisis.

Please explain how these activities create housing crises.

[sigferl]

Thanks you minny, that is exactly what I have been trying to say.

Did we learn anything from this crisis? Yes. The goverment will bail out people who make mistakes.

Do unto others as you would have them so unto you.

Ohiofiler,
I did not "take " the OP posting to mean "it would create a new crisis" if any of those rules were broken.
I understood his statement meaning "did we learn ANYTHING from our past crisis" to prevent creating another!
Such as:
Buying more house than we can afford
ARM's
etc

Minny

[OhioFiler]

The housing bubble and bust were created not by any of Seigferl's list but rather by the government forcing lenders to deal in sub-prime mortgages. The real question becomes:

I wonder if the fools in Washington have learned anything new that will help prevent a repeat crisis

[HakunaMatata]

The standards presented are excellent; although, they do not apply to my situation.

I purchased my house ten years ago. I put 20% down and paid cash for my original mortgage fees (they weren't rolled into my loan). I shopped for value and purchased a home in a highly sought-after area. I've had great success with three distinct ARM mortgages. Despite the current mortgage crisis, my expiring ARM just reduced (for the next 12 months...one can only imagine where my rate will go following this period). It's important to note, I've refinanced twice and taken money out (my refis have been no-cost as they were completed by a friend). This money was used exclusively for home improvements under the assumption I was gaining equity. With the exception of a one year period when I was unemployed, my mortage payment has always been less than 25% of my gross income.

I think there are numerous factors to consider pertaining to this "mortgage crisis". With a home that has devalued significantly, an "economic crisis" is more akin to my situation. I clearly haven't taken wild risks. Unfortunately, I'm in an area that has suffered economically. Michigan ranks high in unemployment and foreclosure rates. I'm sure there were some who were in over their heads on mortgages (likely, uninformed risk takers). I'm also sure there are many who didn't take such risks; although, due to unforeseen hardships they have been unable to satisfy mortgage obligations. As jobs decrease, foreclosures increase, and property values plummet. The banks are accountable to some extent. Individuals have accountability as well. In Detroit, we often blame the Big Three. It simply isn't fair to target one sector. We're in an widespread economic crisis and culpability is shared among financial instituations, the government, corporate entities, and individuals.

[HHM]

Those are good rules. Nothing wrong with them.

However, at current housing prices (even after the decline), coming up with 20% down is still problematic and unrealistic. But it is a goal, I think 10% is more of a realistic goal for most people.

The main problem was not the "type" of loans, per se, but bank lending to people who never should have been given a loan in the amount they received. The problem is, people started using exotic mortgages that were typically reserved for investors as a way to purchase a home (a home that was too expensive for the buyer). If you are buying a home, to live in, you really have no business in a ARM and certainly not an interest only payment. And, there was some stupidity, it's one thing to get into an ARM when interest rates are in the teens (think early 1980's), but when rates are in the 5's, really, rates only go up from there (historically).

[HakunaMatata]

HHM-

I completely agree with you on the exotic loan platform! My desire to maintain ARM loans in a house I intended to keep stemmed exclusively from the fact that I had the ability to refi into another ARM or fixed mortgage at any time and at no cost. I have watched rates throughout the years and I've been able to save money by maintaining ARMs. This program has worked well for me; although, stricter lending standards and reduced equity will ultimately have a negative impact on me should rates increase next year and I remain in my home.

Why do I feel like a 20% down payment is actually easier now for the employed considering market conditions (affordable homes and low interest rates)? A house valued at $200k years ago is feasibly worth $150k (or less) in my area. If I was able to enact the original purchase plan that I did years ago in today's market, I'd get a lot more house for the money or I could put more money down for the same house. By no means am I presenting an argument...I'm really curious why 20% may be more problematic now.

Thanks!

[oldhack]

As HHM says, nothing wrong with the 'rules' the OP stated, except maybe calling them 'rules'. If it's possible NOT to follow them, then I'd say they're not really rules. And, alas, there is a very large number of hard-working American families who will NEVER have 20% of a home's value socked away in cash, regardless of hard they save and how carefully they spend. Should they never be able to buy a home?
Anyway, I think, too, that the importance of equity varies with how long a buyer intends to stay in a house. If your family and income is still growing, chances are good you're going to be selling that house and buying another one within a decade or so. Then, sure, you want some equity when you swap.
But, over the very long term, homes haven't been very good investments. Yes, some folks made some killings in real estate the past 15 years or so but, then, we now realize that was a 'bubble'. Over the Post-Prohibition period in which we traditionally rate investment returns, houses only appreciate about 2.7% annually, accounting for inflation. So, you don't really want equity for equity's sake, if you don't have a viable reason for maintaining it. There are better returns to be had for your money, and equity will build even slowly in a well-structured purchase.
Personally, I recently acquired a 30-year mortgage for the home I intend to retire to and in within the next 10-15 years (it will be paid off in that time). I feel no unease in having paid the minimum FHA down payment of 3.5%, because the market value of the home isn't a real concern of mine -- I paid a reasonable price and I don't plan to sell it. Additionally, I expect inflation to surge once the recession ends, a natural reaction to the huge amounts of liquidity pumped into the economy over the past 18 months (not to mention the last 18 years!). If that happens, I'll be paying back a fixed, low-interest (5.5%) loan with 'cheaper' money. So, sometimes there is 'equity' in using as much OPM (other people's money) as possible.