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Xenosaga, Say What?, Huh?


I... uhm. I got a call from Dan Crittenden, the mortgage guy, this morning.

I got approved.

First-stage only, there's still more to go through, but I got approved for a $450,000 mortgage. I have to put down $20,000, but that's way better than the $90,000 that Mike and Keith have been pushing for, and the payments are still lower, and I'm allowed to declare the $20,000 a gift -- meaning I can beg it off of mom from her inheritance, and it won't affect the approval. And the interest is 6.5% fixed.

I got approved.

...are these people INSANE?! o.O;


While it's cool that you got approved, I'd sleep on it if I were you.
Oh, I don't intend to go 'wow' and rush into buying the house. Even Dan himself knows that. I still don't intend to be bullied into buying, though I like the house and neighborhood; I still don't think Keith's in touch with reality asking $450k for a house that still has single-pane leaded-glass windows!

But I'm still just sort of in shock that I got approved at all. $450k is an insane amount.
It is, I agree, and he's not, I also agree. ;b Wow. I agree!

I'm all in favour of stability, but this particular form just seems to have the potential to be a solid cement albatross.
I would suggest that you get someone to review the terms. I sat there with my girlfriend when she was working on getting her mortgage and I have enough finance and real estate experience (my mother worked in property management from a bunch of years and I pick up a lot through osmosis) that I was able to help her decide what she wanted. Just keep in mind what YOU want and make that the primary focus. Buying a house needs to be more about 'this is where I want to live' than it is about 'I want to stop moving and this place will do'. It's the biggest purchase you'll ever make, so make sure it's a comfortable one. Don't feel pressured. Don't let bullshit be your motivation. If you can get approved for a 450k loan w/ a 20k down payment, you've got the credit to get what you want. Just be patient and make sure it's right.
I completely and utterly agree with this piece of advice.
Someone very badly wants your business. AKA your money.
As everyone else has said, don't rush. First-time buyers can get approved for mortgages with as little as 3% down. $20k is about 4.5% of $450k, so you'd actually be doing better than the minimum first time buyer.

However... the less you put down, the more likely the bank will make you take 'default insurance' on the mortgage. That's because they figure with such a large debt outstanding, the odds that someone will not be able to handle the payments later are higher - and that insurance is an additional monthly fee. If possible, it's better to make a larger down payment (even if you buy a less expensive house) and then that money goes towards paying off the mortgage, not a hedge against default.

Finally, now is a good time to get that fixed rate while the rates are low, but interest rate isn't everything. Find out what your options for faster repayment are - some banks have a cap on how fast you can pay off the mortgage (double payments plus 10% per year, for example). If you think your ship will come in a few years down the road, pay attention to those terms.

Again, don't rush. Find what you're happy with, and please avoid overcommitting - ultimately the decision about what you can afford is one you have to make, not the bank.
What sie said.

Also, if they want you to get mortgage insurance, just say no. If you've got good credit (and it certainly sounds like you do), you can get around the mortgage insurance by getting two mortgages at once. That's what we did five years ago, and it should still be possible today. The second one will have a higher interest rate, but unlike mortgage insurance, when it's no longer necessary, it'll go away automatically.

$450k sounds like an awful lot of money, especially for a house you're not thrilled at the possibility of owning.
What sie said.

Also, if they want you to get mortgage insurance, just say no. If you've got good credit (and it certainly sounds like you do), you can get around the mortgage insurance by getting two mortgages at once. That's what we did five years ago, and it should still be possible today. The second one will have a higher interest rate, but unlike mortgage insurance, when it's no longer necessary, it'll go away automatically.

$450k sounds like an awful lot of money, especially for a house you're not thrilled at the possibility of owning.
There is something very fishy here. To give you some idea of why I think so, when I was making $75k I qualified for up to $250,000 with a 3% down payment. I had about $500 a month in payments already (car, student loan, credit cards), so that affected the amount I qualified for. But, for my loan of $235,000, my principal + interest every month is $1544. Yours, at a loan of $430,000, 30 year fixed, at 6.5% would be $2717. Add onto that hazard insurance, property tax, and private mortgage insurance (oh yes, you would be paying PMI) and you could easily top $3200 a month. Can you afford this? I am simply amazed that they approved you for this amount due to the monthly payment. It smells fishy.

Add onto that that I think $450k for that house is absurd. Granted, I don't know the prices in the area, but I do know that your house, in the middle of San Francisco during the height of the boom there would not have gone for that much.
What they'll approve you for, these days, and what you can actually pay, are often really different things.

There's no way that Brian and I could live a non-ramen lifestyle on our income if we had to pay the mortgage associated with the maximum amount they approved us for, for instance.
Ah, the days of fiscal irresponsibility. :)
Okay. Slow down. :)

I'd suggest that you actually deal with a mortgage broker. Go to them, and get a letter of pre-approval (sometimes called a "letter of commitment"). They will require a credit check, as well as declarations of your assets, backed up by your last couple of paystubs and bank statements. They'll approve you for $X dollars, expiring on a certain data (up to six months in the future, often). They'll also tell you what you'd be looking at in a monthly payment, at the best rate you quality for, at that amount. Be careful; don't only look at the loan rate. Look at the fine-print terms (can you pay it off early? are there any penalties for doing so? what are the "junk fees"? etc.).

Mortgage brokers are good because they'll shop your loan around. If you don't use a broker, compare as many rates from as many different sources as you can to find something that you like. (You're basically doing what the broker would be doing, in that case, except yourself, manually, rather than getting to use their computer systems.)

You will probably want to do an 80-15-5 or something of that sort -- 80% on the first loan, 15% on the second, and 5% of your own money. That gets you to the 20% down payment needed to avoid personal mortgage insurance (PMI) on the loan, which is really important. The second loan will be at a slightly higher interest rate, but you can pay it off early if you want, and its interest is tax deductible, and you save the PMI. Furthermore, the 80-15-5 is especially good for you if you can get the size of your main loan down below jumbo-loan size -- jumbo loans have higher interest rates.

Once you have a letter of commitment, that'll show you the maximum amount of house that they'll approve you for. (The house must appraise for at least that amount before the deal closes.) However, this is often a much higher figure than you can actually afford; they don't really care if you have enough money left for food after you pay the mortgage. So you'll need to take those figures and do some calculating to determine what you can actually spend for a total monthly payment (including house insurance, etc.) and figure out what purchase price that is. (The Motley Fool site has some good tools for this.)

Letters of commitment are great because they're generic -- they're not tied to you buying a specific house. You could buy any house for that amount or less, and they'll give you a mortgage. (Indeed, for a less expensive house, you'd probably get a better rate, if your loan is no longer jumbo.)

You really need what's called a buyer's agent -- a real estate agent who is responsible for protecting your interests. In many states, the seller pays the commissions of all of the agents. It normally doesn't cost you anything to have a buyer's agent, so definitely do get one. The seller's agent is there to get as much money as possible for the seller. They don't care about you, even if they pretend they do. Get your own agent -- get a recommendation from a friend you trust.
This is a mortgage broker. To be honest, Dan Crittenden is the first person I've dealt with in all this who I /didn't/ feel pressured by. Dan's said 'well, we'll shop you around, see if we can find you a place willing to do this all for you, do your credit check and so on... if we find something that works and you want the house, then we'll talk to Mike more about it. If you don't feel comfortable with the payments or the price Keith's set, and you can't argue him down, and you still want to buy something to avoid renting, I'll work with you on that, too. And if you want to take more time to look through it all, that's definitely a good idea -- rushing into things isn't a good plan.'

So while I'm a little stunned that Dan managed to find someone willing to do the $450k at those terms, he also said 'I'm out of town right now, but we can meet up and I'll show you the pros and cons of this thing later when I get back, and we can discuss any questions you have and decide to keep looking or whatever.' So to be fair, while I feel like Mike and Keith are pressuring me, I do /not/ feel like Dan is.
Dan should be able to give you a letter of commitment for the $450K at a certain set of terms. You can then take that letter and do any type of house shopping you'd like -- whether existing houses or new houses. You then don't need to deal with him again until you've made an offer on a place.

In the meantime, definitely do get that buyer's real estate agent, whether you're deciding to get this place, or continuing to shop. They'll help you figure out if the price is reasonable, what your alternatives could be, handle the negotiation, and so forth.

Also note that in addition to your down payment, you will need a certain amount of money in closing costs, in cash. Closing costs could easily exceed $10,000 on a house like that.
The way I went to buying my house was as follows:

Looked up what I could afford. I think it was 2.5 or 3 times my salary. It depends.

Spent about 6-8 months looking for a house with keeping mind that it was an investment; so, I was thinking new construction, new neighborhood, new school district, etc...because I'd figure I would sell it in about 5 years.

Found my house. I went through a realtor's office.

My realtor suggested a few banks where I should go to obtain a loan for myself.

I secured the loan, and I have been making house payment ever since.

A cautionary note, you might be approved for $450k, but you could end up with a house, where you can't afford the taxes, utilities, furniture or food. :)
Once you buy a house, you are locked into the payments for a long time (30 years) or until you re-sell it.

It seems to me this house has been on the market for a long time, which means if you buy it, you may very well have a hard time selling it should you want to get out of it.

While houses are an investment, they can also be a terrible way to lose money if you suddenly find yourself needing to relocate and have to lower your asking price just to get out of it.

If you lost your job tomorrow, would you still be able to meet your payment? For six months?

All things to keep in mind. I think its fantastic that you were approved, I think buying a $450K house, just cause you can, is absurd. Why is it worth so much? Do you need a house that costly? Have you looked in similar markets to see what else you could buy for that price?