Upon reaching my mid-thirties with a wife, a kid, and a dog, it became apparent that the “dream” of renting a tiny box on the island of Manhattan was over. My family and I decided against the Brooklyn half-step, because paying Manhattan rent for a slightly bigger box that would itself be too small for our family in ten seconds seemed stupid. So we zeroed in on buying in Westchester because: Grand Central >> the holding pen at Gitmo >> buying a mule >> Penn Station >> Chernobyl >> Port Authority.
The problem of course with buying property in Westchester is that we’re poor. Not “poor” in the “I need government assistance” sense (though, more on that later). Not even poor in the “I’m a salaried employee and don’t mind when Charles Barkley makes fun of my city” sense. I mean poor in that uniquely NYC/LA/London sort of way that makes you feel “How IN THE F**K do I not make enough money to afford this?”
The other problem was that I’ve spent the better part of the last six years screaming at people to avoid crushing debt obligations. To buy a house, I’m going into more debt than I’ve ever been before, and we know that things didn’t go so smoothly the first time.
But… kids man, what are you going to do? As part of my ongoing attempts to make egregious mistakes and then write about them, here are five things I didn’t really understand about the house-buying process. Note, I had my lawyer hat on, which means I wasn’t flummoxed by things like “taxes” or “closing costs.” Still, there’s a bunch of stuff that doesn’t come up in Real Property or Trusts and Estates…
1. Using The FHA Loan Is Like Trying To Buy A House With Food Stamps.
The Federal Housing Administration has a great program for first-time home buyers of modest means. The administration will insure the mortgage you get from a private lender. You end up paying a higher mortgage than you would otherwise, but it means that the banks won’t require you to put 20% down before giving you a mortgage. In fact, you can put as little as 3.5% down. That’s a sweet number for anybody who has been renting in the city and can’t dream of getting together a huge lump sum of cash while also paying the going rate for shelter in New York. It’s a bit of a sucker’s bet, but if you have 20% down to buy a house in Westchester you probably don’t need internet tips on home buying.
Some of the problems with putting so little down are obvious: in addition to the higher premiums, you are financing more, so you are just going to pay more than the more financially stable person who gets a conventional mortgage. Making a short-term decision like this is one of the reasons poor people stay poor.
But what’s less obvious is that you kind of end up in the house that nobody else wants, because sellers react to FHA loans like you are offering them magic beans instead of legal tender. While the seller isn’t at all affected by who, if anybody, is insuring your mortgage, people who can put 10% or 20% down are in a better position to overpay for the property. And sellers like that. They also feel like there will be fewer “complications” with the loan since it doesn’t have to get approved in D.C.
You are not going to win a bidding war with an FHA loan, so you’d better hope that nobody else wants to buy the house you’re eyeing.
2. The Lawyers Will Screw You.
This was a hard lesson for me to swallow…