Buying a house with my SO, but one of us has bad credit

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rianjs
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Buying a house with my SO, but one of us has bad credit

Post by rianjs » Sun Jun 09, 2013 4:25 pm

My SO and I are looking at buying a house. We are paying about $2100 in rent right now. That's about what we'd like to pay if we were to buy a house. $2100 including mortgage, various insurances, and local property taxes, NOT $2100 for mortgage alone. That means a mortgage principal of about $350K. It so happens that the max amount we'd like to pay for a house is about $350K, and we could probably do anywhere from a $10K-30K downpayment, so more realistically, we would be financing about $325K.

My SO is a schoolteacher. I am a software engineer. Our combined income is about $150K.

She has great credit, with about $10K left on her one student loan. I have [lousy --admin LadyGeek] credit, with about $60K left to pay on my student loans. (I was unemployed for a while post-graduation, and defaulted on my student loans. Argh.) I'm back on track with respect to payments, and AFAIK, I have no other debts outstanding that haven't been resolved. (I settled some consumer debt I had accumulated while unemployed.)

I have optimized squaring away my debt to retire as much debt as quickly as possible--settling at lower numbers vs complete repayment--as opposed to worrying about my credit score. I would do the same thing all over again if I had to.

The numbers:
  • My FICO: 560 as of Jan 2013 (up from 493 in July 2011; if anything, it'd be higher now)
  • Her FICO: 774 as of Jan 2013 (if anything, it'd be higher now)
  • My income: Call it $100K
  • Her income: about $52K
  • Her debt-to-income: 3%
  • My debt-to-income: 24.15%
  • Combined debt-to-income: 14.86%
We have talked to a broker at the credit union I'm a member of, and:
  • She qualifies for a: ~$310K mortgage by herself
  • In a perfect world, where I don't have [lousy --admin LadyGeek] credit, we qualify for: ~$520K
Both of these figures factor in our regular debt payments (car, student loans, etc.). We will both be out of all forms of debt in about 5 years at current repayment rates. (Unless we buy a new car or something.)

Values:
We want a nice place, but not a large place. We're both pretty minimalist, but tired of apartment living with sometimes annoying neighbors where we can't have a grill, and can't really entertain friends. I just turned 30; she just turned 31.

For us, a house is a place to live and have a life. We don't view it as an investment that we'll make money on. If we do, great. If we don't, that's OK as well. Naturally, we'd prefer not to lose money. Given our proximity to Boston, this seems rather unlikely.

What should we expect if we were to try to get pre-qualified for a mortgage? Is it better to just use her credit than to use both of ours? Should we investigate having her parents co-sign on the mortgage instead of having it be in our name? (How difficult would it be to change that later to remove them and add me?)

This is all uncharted territory for us. We're planning to talk to the mortgage people again in the next week or two, but I'd like to be prepared as much as possible before then.

ieee488
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Re: Buying a house with my SO, but one of us has bad credit

Post by ieee488 » Sun Jun 09, 2013 6:24 pm

I hate to break it to you, but buying a house does not eliminate the issues of having annoying neighbors.

I have both rented apartments and owned a house. I own a house now.

Not being able to grill is not a reason to buy a house.

Renting gives you the freedom. Owning a house ties you down. That's how I look at it.
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frugaltype
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Re: Buying a house with my SO, but one of us has bad credit

Post by frugaltype » Sun Jun 09, 2013 6:38 pm

ieee488 wrote:I hate to break it to you, but buying a house does not eliminate the issues of having annoying neighbors.

I have both rented apartments and owned a house. I own a house now.

Not being able to grill is not a reason to buy a house.

Renting gives you the freedom. Owning a house ties you down. That's how I look at it.
Agree. I have horrendous neighbors on one side. If I were a renter, I could easily move.

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LAlearning
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Re: Buying a house with my SO, but one of us has bad credit

Post by LAlearning » Sun Jun 09, 2013 6:49 pm

rianjs wrote:My SO and I are looking at buying a house. We are paying about $2100 in rent right now. That's about what we'd like to pay if we were to buy a house. $2100 including mortgage, various insurances, and local property taxes, NOT $2100 for mortgage alone. That means a mortgage principal of about $350K. It so happens that the max amount we'd like to pay for a house is about $350K, and we could probably do anywhere from a $10K-30K downpayment, so more realistically, we would be financing about $325K.
You will see most ppl recommend being able to put MINIMUM 20% down (~60-70k). Remember, then you need to furnish/paint/carpet/etc on top of that, and if the water heater breaks on day 2, you should have a hefty emergency fund left over. Personally, it sounds like you should wait a few more years to make this possible (which sounds do-able given your income).

My SO is a schoolteacher. I am a software engineer. Our combined income is about $150K.

She has great credit, with about $10K left on her one student loan. I have [lousy --admin LadyGeek] credit, with about $60K left to pay on my student loans. (I was unemployed for a while post-graduation, and defaulted on my student loans. Argh.) I'm back on track with respect to payments, and AFAIK, I have no other debts outstanding that haven't been resolved. (I settled some consumer debt I had accumulated while unemployed.)

I have optimized squaring away my debt to retire as much debt as quickly as possible--settling at lower numbers vs complete repayment--as opposed to worrying about my credit score. I would do the same thing all over again if I had to.
Again, a few more years to build up some cash will also help re-establish your credit, continue to whittle down your debt, and improve your cash flow. Just a thought.

The numbers:
  • My FICO: 560 as of Jan 2013 (up from 493 in July 2011; if anything, it'd be higher now)
  • Her FICO: 774 as of Jan 2013 (if anything, it'd be higher now)
  • My income: Call it $100K
  • Her income: about $52K
  • Her debt-to-income: 3%
  • My debt-to-income: 24.15%
  • Combined debt-to-income: 14.86%
We have talked to a broker at the credit union I'm a member of, and:
  • She qualifies for a: ~$310K mortgage by herself
  • In a perfect world, where I don't have [lousy --admin LadyGeek] credit, we qualify for: ~$520K
They will always offer more than you should take! Gotta love 'merica...

Both of these figures factor in our regular debt payments (car, student loans, etc.). We will both be out of all forms of debt in about 5 years at current repayment rates. (Unless we buy a new car or something.)
You can't afford a new car (since you leased/borrowed to buy this one). Again, try to save up cash first for all purchases, and not be tied into debt repayment. If you want to accelerate your debt repayment, trade in/sell this car and get a good used one you can pay cash for. This will likely get you to your house purchase faster.

Values:
We want a nice place, but not a large place. We're both pretty minimalist, but tired of apartment living with sometimes annoying neighbors where we can't have a grill, and can't really entertain friends. I just turned 30; she just turned 31.

For us, a house is a place to live and have a life. We don't view it as an investment that we'll make money on. If we do, great. If we don't, that's OK as well. Naturally, we'd prefer not to lose money. Given our proximity to Boston, this seems rather unlikely.

What should we expect if we were to try to get pre-qualified for a mortgage? Is it better to just use her credit than to use both of ours? Should we investigate having her parents co-sign on the mortgage instead of having it be in our name? (How difficult would it be to change that later to remove them and add me?)
As for which credit to use, it doesn't matter all that much. You'll see when you get pre-approved as to what is the best scenario based on how much money you need.
But again, you don't yet seem to be able to afford this if you want your parents to help you out. I would not get family too involved.
Try figuring out mortgage payments using a 15 year loan, if you can keep up those payments, you've likely found an affordable house. Then you can decide whichever specific mortgage you want.


This is all uncharted territory for us. We're planning to talk to the mortgage people again in the next week or two, but I'd like to be prepared as much as possible before then.
Best of luck!
I know nothing!

eddiejov55
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Re: Buying a house with my SO, but one of us has bad credit

Post by eddiejov55 » Sun Jun 09, 2013 6:54 pm

A lot of things going on here:

1. Why the rush to buy a house? At best you have less than 10% to put down ($30k) and at worst less than 3% down ($10k). Why not save up a 20% down payment to avoid PMI? If your funds available are not sufficient, then perhaps you can't afford to buy at this time...

2. What does your investment picture look like? What are you contributing to tax advantaged and taxable accounts?

3. What does your debt picture look like? You've listed out a few student loans - anything else?

To get to the crux of your question, the best terms will be offered using only your SO's income and credit history. You could transfer your assets to your SO to put SO in best position for approval. If you go the joint application route, your credit is a problem because you have not proven to be a reliable gamble for credit issuers. You are a risk and your rate will reflect the risk that you bring to the table. Yes, you bring a higher salary, but you also bring a history of student loan and consumer debt defaults - and mortgage lenders don't want to see defaults. You might even be rejected if you joint apply due to your history...

But you have not provided enough information to make it seem like you are financially ready for home ownership. A lot of expenses creep up with home ownership: furnishings, repairs, etc. As far as her parents co-signing - absolutely not. Why in the world would you want to put her parents in potential financial risk? You have already experienced unemployment and you had trouble paying bills. What if you were to lose your job again? All signs point to home ownership being a bad idea for you and your SO.

I would advocate a 20% down payment and an emergency fund of 4-6 months expenses before you venture into home ownership land. Some other things: home ownership ties you down - renting provides you with flexibility. You could just as easily have terrible neighbors when you buy a house as when you rented...so don't base your purchase on those things...

rianjs
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Re: Buying a house with my SO, but one of us has bad credit

Post by rianjs » Sun Jun 09, 2013 7:39 pm

ieee488 wrote:I hate to break it to you, but buying a house does not eliminate the issues of having annoying neighbors.

I have both rented apartments and owned a house. I own a house now.

Not being able to grill is not a reason to buy a house.

Renting gives you the freedom. Owning a house ties you down. That's how I look at it.
You probably don't have music and video games thumping above your living room. Or a neighbor next to your bedroom, playing the accordion and singing in Arabic. Or the neighbors above you smoking on their patio, with the smoke wafting in through your open door. ;)

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Re: Buying a house with my SO, but one of us has bad credit

Post by Ged » Sun Jun 09, 2013 7:44 pm

frugaltype wrote:Agree. I have horrendous neighbors on one side. If I were a renter, I could easily move.
One of my brothers had neighbors so bad he had to get a restraining order served on them.

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Re: Buying a house with my SO, but one of us has bad credit

Post by donall » Sun Jun 09, 2013 7:59 pm

Not sure how you can be approved for a $350,000 house with one good credit history at a salary of $52,000. That is 7X salary.

ieee488
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Re: Buying a house with my SO, but one of us has bad credit

Post by ieee488 » Sun Jun 09, 2013 8:04 pm

rianjs wrote:
ieee488 wrote:I hate to break it to you, but buying a house does not eliminate the issues of having annoying neighbors.

I have both rented apartments and owned a house. I own a house now.

Not being able to grill is not a reason to buy a house.

Renting gives you the freedom. Owning a house ties you down. That's how I look at it.
You probably don't have music and video games thumping above your living room. Or a neighbor next to your bedroom, playing the accordion and singing in Arabic. Or the neighbors above you smoking on their patio, with the smoke wafting in through your open door. ;)
I would move.

And, owning brings its own set of headaches with neighbors.
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ieee488
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Re: Buying a house with my SO, but one of us has bad credit

Post by ieee488 » Sun Jun 09, 2013 8:06 pm

Ged wrote:
frugaltype wrote:Agree. I have horrendous neighbors on one side. If I were a renter, I could easily move.
One of my brothers had neighbors so bad he had to get a restraining order served on them.
Could you provide more details?
When it escalates like that I am always afraid that the neighbor would retaliate with guns or something equally unpleasant.
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rianjs
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Re: Buying a house with my SO, but one of us has bad credit

Post by rianjs » Sun Jun 09, 2013 8:11 pm

eddiejov55 wrote:A lot of things going on here:

1. Why the rush to buy a house? At best you have less than 10% to put down ($30k) and at worst less than 3% down ($10k). Why not save up a 20% down payment to avoid PMI? If your funds available are not sufficient, then perhaps you can't afford to buy at this time...
Interest rates are really low now, and unlikely to ever be this low again. At least during my generation. The Fed has said it will keep rates at zero for at least the next year. A 3.5-4% mortgage over thirty years is a significant savings over even a 5% mortgage.
2. What does your investment picture look like? What are you contributing to tax advantaged and taxable accounts?
I contribute enough, and all of my raises go into my 401k to keep my taxable income the same. I'll do that until I'm maxing that out at $17.5K. At the rate I get raises, that'll be in ~3 years or so.
3. What does your debt picture look like? You've listed out a few student loans - anything else?
$12K on a car, because my old beater that I got for free a few years ago was costing me more to keep running than getting rid of it. Other than that, nothing. I pay about $25/yr towards my students loans (6.75%), well above the the minimum(s) which total around $14K/yr. When my SO moves in, that'll go back up to ~$30K/yr.
To get to the crux of your question, the best terms will be offered using only your SO's income and credit history. You could transfer your assets to your SO to put SO in best position for approval. If you go the joint application route, your credit is a problem because you have not proven to be a reliable gamble for credit issuers.
I've noticed that two years of perfect payment history (overpayment, in fact) has barely moved the needle. Very frustrating.
You are a risk and your rate will reflect the risk that you bring to the table.
Statistically, perhaps. Lots of people who graduated in 2008-2009 got boned pretty badly, and is not reflective of their financial habits or inherent creditworthiness.
Yes, you bring a higher salary, but you also bring a history of student loan and consumer debt defaults - and mortgage lenders don't want to see defaults. You might even be rejected if you joint apply due to your history...
Undoubtedly.
But you have not provided enough information to make it seem like you are financially ready for home ownership.
Why? Between us, we are paying the mortgage + property taxes + insurance + PMI on a $350K house. This wouldn't be a financial burden any more than renting is, aside from wanting to bump up the e-fund by ~$10K over what we already have (~5 mo's living expenses) to reflect the greater risk associated with owning. That'd only take ~3 months to do, if we dialed back the overpayment on our student loans, and redirected our monthly travel allocations. My SO is paying 500% more per month than she needs to, and I'm paying double what I need to. Wouldn't take long.
You have already experienced unemployment and you had trouble paying bills.
There's no data to indicate that being unemployed in the past is an indicator for future unemployment that I know of. Better indicators are the financial health of your current company, and the labor pool you're in. There is insatiable demand for software engineers in the Boston area. My TC is 15% higher than it was two years ago, and I haven't had to jump companies to do that.

Just to give you an idea of what the labor market is like for good developers: I fend off 3-5 recruiter solicitations a week... Search glassdoor.com for software engineer in Boston, and you'll see what I mean. I didn't graduate as a CS major--I worked my way there during my two years of unemployment.

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Re: Buying a house with my SO, but one of us has bad credit

Post by rianjs » Sun Jun 09, 2013 8:16 pm

donall wrote:Not sure how you can be approved for a $350,000 house with one good credit history at a salary of $52,000. That is 7X salary.
The numbers are a little lower. $55K gross will get you approved for ~$313,000, so 5.69x salary.

(And yes, it is crazy. My SO would never go in on a house like that by herself. Assuming I had no student loans (~3 yrs left), we could be approved for $820K. Mind-numbingly hilarious/misguided/[(removed) --admin LadyGeek]. I asked the broker if the algorithm had changed since the bubble pop, and she said no. The mind boggles.)

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Re: Buying a house with my SO, but one of us has bad credit

Post by dm200 » Sun Jun 09, 2013 8:17 pm

The rules and scrutiny of mortgage lending has really tightened up in the last few years. LOTS of paperwork, regulations, and so on. I am not in the mortgage business, but it is my understanding that a cred score of about 640 or so is a dividing line above which qualifying for a mortgage can be smoother. Depending on the factors most influencing your credit score, you might be able to move it up above that threshold in a moderate amount of time. That might be worth doing (or trying) before buying (and financing) a house. A legitimate credit counseling organization (such as Balance, as one example) might be able to look at your credit and suggest a strategy to get the score higher in the shortest period of time. I would NOT go to one of these heavily advertised credit repair places.

You also might make a contact with another mortgage provider. That might open up mortgages that the current person might not be able to offer.

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Re: Buying a house with my SO, but one of us has bad credit

Post by rianjs » Sun Jun 09, 2013 8:21 pm

dm200 wrote:but it is my understanding that a cred score of about 640 or so is a dividing line above which qualifying for a mortgage can be smoother.
S'basically what my CU mortgage broker told us as well. I think she said 660.

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Re: Buying a house with my SO, but one of us has bad credit

Post by dm200 » Sun Jun 09, 2013 9:03 pm

rianjs wrote:
dm200 wrote:but it is my understanding that a cred score of about 640 or so is a dividing line above which qualifying for a mortgage can be smoother.
S'basically what my CU mortgage broker told us as well. I think she said 660.
Remember that there are many different "credit scores" from several different credit bureaus. Each credit bureau offers several different ones. The reason that it may be important to get some advice (say from a service like Balance) is that paying down one obligation might not help the credit score as much as paying down another. They can also advise you about keeping accounts open and, perhaps, which ones to keep using, even after paying down the balance. There also may be perfectly legitimate ways to arrange assets and obligations between you and SO to improve your credit score.

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Re: Buying a house with my SO, but one of us has bad credit

Post by Dave76 » Sun Jun 09, 2013 9:14 pm

What is "SO"?

Saving$
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Re: Buying a house with my SO, but one of us has bad credit

Post by Saving$ » Sun Jun 09, 2013 9:17 pm

frugaltype wrote:
ieee488 wrote:I hate to break it to you, but buying a house does not eliminate the issues of having annoying neighbors.

I have both rented apartments and owned a house. I own a house now.

Not being able to grill is not a reason to buy a house.

Renting gives you the freedom. Owning a house ties you down. That's how I look at it.
Agree. I have horrendous neighbors on one side. If I were a renter, I could easily move.
+100

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Re: Buying a house with my SO, but one of us has bad credit

Post by Saving$ » Sun Jun 09, 2013 9:18 pm

Dave76 wrote:What is "SO"?
Significant Other

jridger2011
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Re: Buying a house with my SO, but one of us has bad credit

Post by jridger2011 » Sun Jun 09, 2013 9:28 pm

I would suggest renting in the target neighborhood which you both intend to buy a house in, to learn about the area, and decide if it's the right place to stay for long term. I stayed at my last neighborhood close to ten years and it was starting to change, in a way I did not like.

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Re: Buying a house with my SO, but one of us has bad credit

Post by Watty » Sun Jun 09, 2013 9:45 pm

From what you have said it sounds like you have a significantly negative net worth right now which concerns me. If you buy a house then with all the costs of getting into the house you could being near 40 by the time you get to the point where you have a positive net worth, if you value the house at what you could get if your sold it after all the selling costs.

I think a bigger concern is that it is very risky for an unmarried couple to buy a house together since there are so many things that that can turn out badly if the relationship does not work out. Since you are near Boston I would assume that you in a state where you could get married even if you are the same gender. If there is some reason that you are not ready to get married then that is likely an equally good reason not to buy a house together.

If you do decide to buy a house together before you are married you should have lawyers draw up legal agreements that will control how your finances will be handled if the relationship ends.

I really don't think that buying a house now is a good idea

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Re: Buying a house with my SO, but one of us has bad credit

Post by Dave76 » Sun Jun 09, 2013 9:54 pm

I agree. It's better to buy property together when you're married. A financial and legal mess can result if the relationship goes south. Ever watch Judge Judy? Don't play 'House'.

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Re: Buying a house with my SO, but one of us has bad credit

Post by White Coat Investor » Sun Jun 09, 2013 9:59 pm

You can rent houses, not just apartments.
1) Invest you must 2) Time is your friend 3) Impulse is your enemy | 4) Basic arithmetic works 5) Stick to simplicity 6) Stay the course

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Re: Buying a house with my SO, but one of us has bad credit

Post by rr2 » Sun Jun 09, 2013 10:02 pm

Here's my story.

It was 2004ish. I wanted to buy a house. Everybody told me to buy as prices would continue to go up. However, I had fair amount of debt and credit scores not very good. In spite of that, banks and mortgage brokers were eager to lend. I had nothing to put down and decided to wait it out. I was lucky, I bought one 7 years later. A nice house in a good neighborhood for a affordable price.

Wait it out. For now, rent a house in a neighborhood you might plan to buy in.

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Re: Buying a house with my SO, but one of us has bad credit

Post by Saving$ » Sun Jun 09, 2013 10:42 pm

You have received some good advice. Your and SO's goal should be:
1. 6 mos emergency fund
2. 20% downpayment to avoid PMI
3. 2 mos mortgage payment for inevitable house emergencies

In your case the added advantage is that that the time you buy will raise your credit score, which will lower your eventual interest rate, making your payments even lower.

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Re: Buying a house with my SO, but one of us has bad credit

Post by rianjs » Sun Jun 09, 2013 11:05 pm

jridger2011 wrote:I would suggest renting in the target neighborhood which you both intend to buy a house in, to learn about the area, and decide if it's the right place to stay for long term. I stayed at my last neighborhood close to ten years and it was starting to change, in a way I did not like.
We already live here. :)

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Re: Buying a house with my SO, but one of us has bad credit

Post by rianjs » Sun Jun 09, 2013 11:06 pm

EmergDoc wrote:You can rent houses, not just apartments.
The rent on a house in the greater Boston area is more than the mortgage and associated expenses on the same house would be.
Last edited by rianjs on Sun Jun 09, 2013 11:15 pm, edited 1 time in total.

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Re: Buying a house with my SO, but one of us has bad credit

Post by rianjs » Sun Jun 09, 2013 11:15 pm

Watty wrote:From what you have said it sounds like you have a significantly negative net worth right now which concerns me. If you buy a house then with all the costs of getting into the house you could being near 40 by the time you get to the point where you have a positive net worth, if you value the house at what you could get if your sold it after all the selling costs.
The time to positive net worth would be moved up by buying a house, not backwards, assuming transaction costs are <= two years of rent. We are already paying in rent what we'd pay in a $350K house. That includes ALL the costs: mortgage, PMI, various insurances, and property tax.

Exchanging [(removed) --admin LadyGeek] (rent) with the exact same expense where you get to keep what you're paying for moves the net worth timeframe up, not back. I'm not sure why people keep glossing over that, other than it's common to assume that new posters are idiots in a domain they're asking about.
If you do decide to buy a house together before you are married you should have lawyers draw up legal agreements that will control how your finances will be handled if the relationship ends.
We've talked about that months ago, and agreed that drawing up a contract to govern ownership in the event of a breakup is something we will do.
I really don't think that buying a house now is a good idea
So far, no one has shown any math.
Last edited by rianjs on Sun Jun 09, 2013 11:18 pm, edited 1 time in total.

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Re: Buying a house with my SO, but one of us has bad credit

Post by rianjs » Sun Jun 09, 2013 11:16 pm

Saving$ wrote:You have received some good advice. Your and SO's goal should be:
1. 6 mos emergency fund
2. 20% downpayment to avoid PMI
3. 2 mos mortgage payment for inevitable house emergencies

In your case the added advantage is that that the time you buy will raise your credit score, which will lower your eventual interest rate, making your payments even lower.
We have everything except #2. We are already paying in rent what the house would cost: mortgage, PMI, various insurances, property tax etc.

Avoiding PMI just because it's PMI isn't a particularly compelling reason to put off buying a house.

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Re: Buying a house with my SO, but one of us has bad credit

Post by TomatoTomahto » Mon Jun 10, 2013 7:56 am

rianjs wrote:We are already paying in rent what the house would cost: mortgage, PMI, various insurances, property tax etc.
Repairs? Ever had a boiler/roof/hot water/etc. expense to deal with?
I will triple the suggestion not to do this unless you're married or have a contract you've drafted with the help of two attorneys (one for each of you). Co-signing with parents is a huge NO vote from me (ever watch Judge Judy? :D )
Exchanging p*ssing into the wind (rent) with the exact same expense where you get to keep what you're paying for moves the net worth timeframe up, not back. I'm not sure why people keep glossing over that, other than it's common to assume that new posters are idiots in a domain they're asking about.
That's not quite fair, is it? You've gotten honest postings from people who have been around the block a few times. You keep swatting away responses like so many houseflies, so I wonder if you don't have your mind made up and the negative responses are just a nuisance to you. I don't think anyone thinks you're an idiot (although I won't rule out stubborn :D ).

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Re: Buying a house with my SO, but one of us has bad credit

Post by NorCalDad » Mon Jun 10, 2013 8:38 am

rianjs wrote:The time to positive net worth would be moved up by buying a house, not backwards, assuming transaction costs are <= two years of rent. We are already paying in rent what we'd pay in a $350K house. That includes ALL the costs: mortgage, PMI, various insurances, and property tax.

Exchanging p*ssing into the wind (rent) with the exact same expense where you get to keep what you're paying for moves the net worth timeframe up, not back. I'm not sure why people keep glossing over that, other than it's common to assume that new posters are idiots in a domain they're asking about.
I'm curious where in Boston you pay $2,100/month rent on an apartment, and you can buy an equivalent or better house for $350,000. Those factors seem misaligned to me. In high COL areas I know where apartment rent is that high, the average house in a decent neighborhood sells for more than $500,000. Unless you're in an upscale apartment now and downscaling to a house in a lesser neighborhood.

If we're talking true equivalencies here, then the purchase decision seems reasonable for a standard buyer. But many of us cringe at seeing rent described the way you do because it's the age-old saying that has proven wrong before (see 2003-2009). You can build your wealth as a renter or homebuyer. There are plenty of hidden costs renters don't consider: repairs, yard/home maintenance, transaction costs, extra furniture, utilities built into rent.

If the $350,000 home is in a less upscale neighborhood than where you live now, I would look for a cheaper place to rent and use the savings to pay down student and car loans. In 2-3 years' time, you will have made a big dent, your credit should be improved and you will be in better position to buy.

As for the PMI issue, many people here subscribe to the belief that buyers should have at least 20% down before buying. It avoids PMI, it gives you more of a cushion against a market downturn and I think there's just an old-school sense here that it reflects your discipline to save for a goal. The reason you've suggested you want to buy now with PMI is, "Interest rates are really low now, and unlikely to ever be this low again. At least during my generation." This amounts to market timing, and Bogleheads just don't like market timing.

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Re: Buying a house with my SO, but one of us has bad credit

Post by Confused » Mon Jun 10, 2013 8:54 am

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Re: Buying a house with my SO, but one of us has bad credit

Post by Curlyq » Mon Jun 10, 2013 10:56 am

I would appreciate it if you wrote in a less vulgar fashion. The admins keep having to edit your responses. The people on this board are trying to help you and your vulgarity is off-putting.

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Re: Buying a house with my SO, but one of us has bad credit

Post by TomatoTomahto » Mon Jun 10, 2013 11:07 am

Confused wrote:
rianjs wrote: Interest rates are really low now, and unlikely to ever be this low again. At least during my generation. The Fed has said it will keep rates at zero for at least the next year. A 3.5-4% mortgage over thirty years is a significant savings over even a 5% mortgage.
Buy a house when you are ready, not when the market is ready.
Confused, that's great and pithy advice.

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Re: Buying a house with my SO, but one of us has bad credit

Post by rianjs » Mon Jun 10, 2013 12:03 pm

TomatoTomahto wrote:
Confused wrote:
rianjs wrote: Interest rates are really low now, and unlikely to ever be this low again. At least during my generation. The Fed has said it will keep rates at zero for at least the next year. A 3.5-4% mortgage over thirty years is a significant savings over even a 5% mortgage.
Buy a house when you are ready, not when the market is ready.
Confused, that's great and pithy advice.
Indeed. My SO and I have talked, and we're going to put this on the back burner for the next year, and just enjoy the other milestones that are imminent. :)

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Re: Buying a house with my SO, but one of us has bad credit

Post by rianjs » Mon Jun 10, 2013 12:07 pm

TomatoTomahto wrote:
rianjs wrote:We are already paying in rent what the house would cost: mortgage, PMI, various insurances, property tax etc.
Repairs? Ever had a boiler/roof/hot water/etc. expense to deal with?
I have, in fact. That's why I said earlier that we'd bump the e-fund by another $10K to offset the greater risk associated with owning.

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Re: Buying a house with my SO, but one of us has bad credit

Post by Watty » Mon Jun 10, 2013 12:10 pm

rianjs wrote:So far, no one has shown any math.
Ok lets assume you buy a $350K house with a $50K down payment and $300K 30 year fixed rate mortgage at 4%.

To buy the house there will be various expenses for things like inspections, appraisals, loan origination costs, etc. 1% of the purchase price is probably low for this but I will use $3,500

You would also need to add in the extra legal fees to handle setting up various agreements since you are not married, let's call that $2,000 since you will need two lawyers.

The day after you move in the value of your house will be worth what you could sell it for after the selling costs. It can vary but assume a 6% real estate commission and 1% misc other selling costs(this may be low) 7% of $350K is $24,500.

Combined that is $30,000 (3500 + 2000 + 24500) that your net worth is decreased when you buy the house.

On the $300K mortgage at 4% you would have a mortgage payment of $1,432 with about $440 of each mortgage payment going towards paying down principal each month for the first year. That is about $5,280 in in principal that would be paid down the first year.

At that rate it would take 5.7 years (30000/5280) for your net worth to break even on owning the house.

If you had not bought the house then you would have had the $50,000 down payment invested for over five years so you would also need to take that into account.

I'm not sure that you have budgeted for enough for maintenance expenses. It varies from month to month but when you include yard maintenance (I cut my own grass) I'm sure that I spend at least $200 a month on average on small maintenance items.

There are also large things like roofs, furnaces, or hot water heaters will need to periodically be replaced on a regular schedule so you need to be sure to include that in your plans. For example a roof might be expected to last 20 years depending on a lot of factors. In the first five years you may not need to replace it but you have in effect used up a quarter of its expected life so you need to count that as a very real expense.

There are a lot of knowable other factors like property tax increases, rent increases, job relocations, unexpected maintenance, etc but the average person only stays in house for about seven years so I don't see a compelling reason to buy now.

This is especially true since you live in a very expensive area and it sounds like even $350K doesn't that great of a house in a decent area. There lots of areas in the country (probably most of the country) where $150K will get you a very nice small house in a pretty good area. If you lived in an less expensive area then making a stretch to buy a house in less than ideal circumstances might more sense.

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Re: Buying a house with my SO, but one of us has bad credit

Post by TomatoTomahto » Mon Jun 10, 2013 12:16 pm

rianjs wrote: Indeed. My SO and I have talked, and we're going to put this on the back burner for the next year, and just enjoy the other milestones that are imminent. :)
I can only speculate on the other milestones, but congratulations. :sharebeer

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Re: Buying a house with my SO, but one of us has bad credit

Post by rianjs » Mon Jun 10, 2013 12:20 pm

NorCalDad wrote:I'm curious where in Boston you pay $2,100/month rent on an apartment, and you can buy an equivalent or better house for $350,000. Those factors seem misaligned to me. In high COL areas I know where apartment rent is that high, the average house in a decent neighborhood sells for more than $500,000. Unless you're in an upscale apartment now and downscaling to a house in a lesser neighborhood.
I don't live in Boston; I live about 20 minutes northwest. Houses in my town range from $250-450K. I did some research in January when I first visited this question, and comparable houses were available for rent at $5-800/mo more than owning that house would cost.

My SO and I live in two different places. At the end of July, she will be moving in with me, which will drop our expenses by about $850/mo. Right now, our collective rents + utils are $2100/mo. We are content to exchange this amount of money to live someplace, provided that place is owned by us.
If we're talking true equivalencies here, then the purchase decision seems reasonable for a standard buyer. But many of us cringe at seeing rent described the way you do because it's the age-old saying that has proven wrong before (see 2003-2009). You can build your wealth as a renter or homebuyer. There are plenty of hidden costs renters don't consider: repairs, yard/home maintenance, transaction costs, extra furniture, utilities built into rent.
Yep. I've done the math. We are funding our retirement accounts, paying down debt much faster than we need to, and we are willing to take on the increased risk of ownership. Right now we are exchanging money for the ability to live in someone else's building and not have to fix anything if it breaks. I would prefer to exchange money for the ability to live in my own building, and have to fix anything if it breaks.
As for the PMI issue, many people here subscribe to the belief that buyers should have at least 20% down before buying. It avoids PMI, it gives you more of a cushion against a market downturn and I think there's just an old-school sense here that it reflects your discipline to save for a goal. The reason you've suggested you want to buy now with PMI is, "Interest rates are really low now, and unlikely to ever be this low again. At least during my generation." This amounts to market timing, and Bogleheads just don't like market timing.
It's not market timing. It's an awareness of history, the same way people reason about present vs deferred taxation given the current historic low marginal tax rates.

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Re: Buying a house with my SO, but one of us has bad credit

Post by rianjs » Mon Jun 10, 2013 12:25 pm

Watty wrote:
rianjs wrote:So far, no one has shown any math.
<snip math>
Thanks, this is honestly what I've been looking for since I started the thread. I've never gone through the mechanics of buying a house before. I'll adjust my spreadsheets based on your hypotheticals, and then build a couple of different variations to get a clearer idea of best vs worse case. (For future planning; as I noted above, we're tabling the idea for at least a year.)

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Re: Buying a house with my SO, but one of us has bad credit

Post by TomatoTomahto » Mon Jun 10, 2013 12:50 pm

rianjs wrote:Right now we are exchanging money for the ability to live in someone else's building and not have to fix anything if it breaks.
AND the ability to leave, for whatever reason, for the cost of a few thousand dollars. That's not small potatoes (potahtoes).

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Re: Buying a house with my SO, but one of us has bad credit

Post by ieee488 » Mon Jun 10, 2013 1:17 pm

TomatoTomahto wrote:
rianjs wrote:Right now we are exchanging money for the ability to live in someone else's building and not have to fix anything if it breaks.
AND the ability to leave, for whatever reason, for the cost of a few thousand dollars. That's not small potatoes (potahtoes).
+1

Right now, the OP claims he has horrendous neighbors.
What is he going to do when he a horrendous neighbor moves in next door to his $350K house? Move again and pay the 6% realtors commission + closing cost?

His mind is mind up.
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Re: Buying a house with my SO, but one of us has bad credit

Post by rianjs » Mon Jun 10, 2013 1:22 pm

ieee488 wrote:Right now, the OP claims he has horrendous neighbors.
They're not horrendous. Just inconvenient at times.
His mind is mind up.
Clearly it isn't.

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Re: Buying a house with my SO, but one of us has bad credit

Post by NorCalDad » Mon Jun 10, 2013 1:22 pm

rianjs wrote:It's not market timing. It's an awareness of history, the same way people reason about present vs deferred taxation given the current historic low marginal tax rates.
I respectfully disagree. Yes, interest rates are near historic lows. But none of us know for certain what rates will do in the future - will they stay the same, go down or shoot up? If you think interest rates are destined to go up, what will home prices do? How will competing home buyers react? The point being, buy a home when you're financially ready to buy, not because you think your interest-rate window is closing.

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Re: Buying a house with my SO, but one of us has bad credit

Post by ieee488 » Mon Jun 10, 2013 1:38 pm

rianjs wrote:
ieee488 wrote:Right now, the OP claims he has horrendous neighbors.
They're not horrendous. Just inconvenient at times.
His mind is mind up.
Clearly it isn't.
It seems like it is to me.

But I have no horse in this race. Good luck to you.
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Re: Buying a house with my SO, but one of us has bad credit

Post by rianjs » Mon Jun 10, 2013 1:48 pm

NorCalDad wrote:The point being, buy a home when you're financially ready to buy, not because you think your interest-rate window is closing.
That's what we've decided.

(Btw, it's basically impossible for mortgage rates to go lower because the lender's cost is largely derived largely from the federal funds rate, which is at ~zero right now. That means the only place they have to go is up, margin games aside.)

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Re: Buying a house with my SO, but one of us has bad credit

Post by NorCalDad » Mon Jun 10, 2013 1:58 pm

rianjs wrote:(Btw, it's basically impossible for mortgage rates to go lower because the lender's cost is largely derived largely from the federal funds rate, which is at ~zero right now. That means the only place they have to go is up, margin games aside.)
30-year mortgage rates in my area are running 75 to 100 basis points above last year's bottom. They could return there, they could not.

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Re: Buying a house with my SO, but one of us has bad credit

Post by rr2 » Mon Jun 10, 2013 2:26 pm

rianjs wrote: Indeed. My SO and I have talked, and we're going to put this on the back burner for the next year, and just enjoy the other milestones that are imminent. :)
This is a wise decision that both of you are taking. Get married, have a wonderful honeymoon without worrying about roof leaks, boiler leaks, pipes freezing. Also looks like renting a house together will save you money. Take that extra $850/month and in a couple years you will have a nice down payment. Congratulations.

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Re: Buying a house with my SO, but one of us has bad credit

Post by kenyan » Mon Jun 10, 2013 2:53 pm

Don't know if it was explicitly mentioned - I just scanned the posts above - but if they use both of your credit/incomes, it's just going to be your credit score (specifically, the middle score of your three credit bureau scores). Now, lots of people are claiming that it's harder to get a mortgage now, though we had no problems with preapproval and basically seemed to have people throwing offers at us (we are currently hunting). That said, we are probably model loan prospects as far as first-time buyers; perfect credit and 20% down payment in cash with ample reserves beyond that. I imagine that if it is indeed harder, a sub-600 rating either won't cut it or will result in much, much higher rates.
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Re: Buying a house with my SO, but one of us has bad credit

Post by kenyan » Mon Jun 10, 2013 3:05 pm

30-year mortgage rates aren't directly related to the federal funds rate; they're related to prevailing 30-year (or applicable term, with prepayment and other risk considerations) treasury rates. The federal funds rate is a target rate for short-term lending. Consider that the federal funds rate has been pegged at zero since December 2008, but prevailing 30-year conventional mortgage rates have fluctuated between 5.5% and ~3.25% since then. Movement lower from today's 4.0% or so is certainly possible.
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Re: Buying a house with my SO, but one of us has bad credit

Post by frugaltype » Tue Jun 11, 2013 5:39 am

rianjs wrote:
ieee488 wrote:I hate to break it to you, but buying a house does not eliminate the issues of having annoying neighbors.

I have both rented apartments and owned a house. I own a house now.

Not being able to grill is not a reason to buy a house.

Renting gives you the freedom. Owning a house ties you down. That's how I look at it.
You probably don't have music and video games thumping above your living room. Or a neighbor next to your bedroom, playing the accordion and singing in Arabic. Or the neighbors above you smoking on their patio, with the smoke wafting in through your open door. ;)
How about a neighbor in the house thirty feet away playing loud music at all hours? Or using jet skis 200 feet away up and down the cove? Or filling your house with smoke from a firepit left unattended at all hours of the night, when you have a lung condition and all your windows and doors closed and have done the max air sealing possible. Yes, some of these are code violations, but complaining to the police will only make things worse.

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