I have arrived in Columbus, Ohio to do research over the summer, getting a head start on my PhD in physics at Ohio State. First things first, where am I going to live in this foreign
land?
A co-op, like the ones I lived in at Berkeley for three years? Nope, they don't have 'em in Columbus.
Well, how 'bout an apartment? I could, and am this summer...
But why not buy a house since I'm going to be here 5-7 years? What would the risks be? Do I have enough money? How would the payment compare to renting?
I just made my first offer on this house last week, and learned so much in the process. The house prices in Columbus are incredibly cheap, about 1/3 of what you'd pay in Santa Barbara, so even though I hadn't yet worked out the details, my intuition before coming to Ohio was that I just might be able to afford buying one.
The listing price at 119K is especially low because it's a foreclosed home (and needs some work), and at my realtor's suggestion I offered 90K since its been on the market for 3 months without any action. My realtor said that I might be able to get it for 100K because the bank often negotiates to show on paper that they worked hard to get as much money as they could, on average settling for 8% more than the initial offer.
A day later the bank rejected the offer outright.
So I raised the offer to 105K, and don't want to go any higher because we expect to be putting 20K into fixing the place up. Will the bank negotiate now? I'll find out on Monday.
So
why does it make sense for me to buy a house?
The first thing I learned is that there are
two kinds of loans:
- Conventional loan, where you must put down about 20% and the private lender bears all the risk, or
- Federal Housing Authority (FHA) loan, where you put down only 3.5%, and work with a private lender, and it's insured by the government.
An FHA loan requires inspection of the property by an FHA representative so that it meets their standards because you are required to live in the property, and it requires mortgage insurance, but even with the mortgage insurance an FHA loan and conventional loan end up having the same total mortgage payment. Actually, the mortgage insurance is often tax-deductible so it ends up being cheaper than a conventional loan.
FHA insures loans because it's their goal to help Americans become homeowners. I don't have enough credit to get a conventional loan, nor do I have the 20% capital, but through an FHA loan my parents co-sign which allows me to be on the loan, and at 3.5% I
do have enough capital. With a conventional loan they consider all parties signing, so if I tried cosigning a conventional loan they would look at my parents' credit and say okay, then look at my credit and say nope!
What you can't do with an FHA loan is buy a house and rent it out to other people without living there yourself, but I need a place to stay so FHA will do!
Okay, so 3.5% of 105K is \$3,675, and I've got that much in the bank. But how much will I expect to pay each month on that size of a loan?
There are a bunch of websites that calculate the principle+interest rate mortgage payment (like
bankrate's calculator), and it comes out to be \$543 a month for 30 years. That's on par with rent for a 1 person apartment here! But wait, there's also tax, which is about 4K per year (\$330 per month), expected maintenance, say \$250 per month, utilities about \$400 per month, and home insurance which is about $60 per month.
Add that all up and you get mortgage+taxes+maintenance+utilities+insurance = 543+330+250+400+60 ~
$1583 per month total.
Now, if it's a four bedroom house, at \$500 a head that's \$1500 a month from renters, which means that the house is paying for itself.
That's if everything runs smoothly; if I can find tenants to pay that much and no incredibly costly maintenance issues arise. There's risk, but it seems reasonable...