Now that the bloom is off the predatory lending rose for this real estate cycle, it seems impossible for people in the Bay Area without a six-figure income (and challenging even for those with) to purchase their own home.
After all with a February 2007 median sale price for single-family homes of $790K in Santa Clara County (and $870K in San Mateo County), the amount of the mortgage and its monthly payments seem insurmountable, particularly in the face of all the 1% interest subterfuge that's been going on.
I ran across an article on My Money Blog that outlines the steps Bay Area woman took to buy her own home and discusses the trade-offs she made. She not only made sure she was in a good position to buy a house, she was also willing to make some hard decisions.
Some of the hardest decisions she had to make were in terms of her goals and financial attitude. Here are some of the things she did right and some of the questions you should ask yourself, whether you earn six-figures or not.
1. Setting Goals
Gum is an impulse purchase. It's there in the checkout aisle just waiting to be pocketed for less than a handful of change. But if you saw your dream house in the checkout aisle, do you know that you want it? At this point in your life, is that sort of stability and control important enough where you want to take responsibility for it?
If so, why do you want to buy a house? Is it a stepping-stone investment, or a place where you plan to live a long time and maybe start a family, or are you looking to make a better life for yourself and your family (in terms of convenience, safety, status, space, etc.)?
Knowing this information will ultimately determine how much you need in available money to buy the house you're looking for. Based on questions like these, we can come up with a target price range and location for your housing search, figuring out how much it will cost overall and monthly.
By setting your goals upfront, you'll be able to plan ahead; and planning ahead lets you break goal into attainable pieces, then save money by focusing on what's important.
Should you buy the gum? It's less than a dollar and it's not going to make a difference, right? But think of the amount of money that goes into all the wishing wells in the country just from people throwing pennies in.
Does that cup of Starbucks coffee a day make you as happy as the thought of getting rid of your landlord or neighbors who treat the place they live like... well, a rental? If the goals we set in the step above are important to you, then those little decisions --- whether to get the tall, grande, venti, or empty --- become much easier!
3. Saving Money
The determined woman in the article cut her rent and utility bills by getting a roommate. Not everyone as that option, especially people with families. But there are literally millions of ways people can save money with very little effort.
One of them is, before you buy something, ask yourself if that item is more important than buying a house. If it is, then ask yourself if you already have a substitute lying around somewhere. If not, try putting that money away in a savings account or other investment. Since you were going to spend the money anyway, you're just deferring where you spend it!
There's a wide array of personal finance blogs that will help you save money. Some of them include (in no particular order) My 1st Million at 33, Lazy Man and Money, The Digerati Life, Get Rich Slowly, and The Simple Dollar.
4. Understanding and Discovering "Must Haves" vs. her "Nice-to-haves"
Many people know what they need but not how to get it. Other people know what they want but forget about things so intrinsic to them that they take them for granted. But either way, everyone has an idea of some of the things they'd like in their new place.
The best way to narrow down your list of requirements to the things you really, truly care about --- the ones you won't give up no matter what --- is to experience a variety of homes with an expert. I've seen literally hundreds if not thousands of places and the key is not only to choose the ones that meet your list, but to nail down ones that will help differentiate your "musts" from your "nice-to-haves."
A simple story comes from a client who came to me and said, "I want a house built within the last ten years." We talked for a while and he mentioned that his family has guests over a lot. He lamented that his old house was noisy and that you could hear the thumping of stairs all the time.
I setup an initial tour for him that showed him a wide range of options at his price range so that we he could get a lot of exposure without taking a lot of time. The places included (among others) a brand new townhouse and a 50 year-old ranch. When he saw the list, he asked, "Why are you showing me this smaller old place?"
We went to the townhouse first and I made a point to march up and down the stairs. Thump. Thump. Thump.
We then went to the ranch which was recently-renovated, including new plush carpets. It was smaller but he noticed that the master bedroom and the guest rooms were on opposite sides of the house, a configuration usually seen more commonly in newer homes. We went through his other criteria and the place just worked, much to his surprise given what he'd said about his requirements.
5. Putting Money Down
The days of 100% financing are coming to an end and common sense is returning. After all, how much do you really value a house if you haven't put anything into it? If your house goes down in value, but your 100% loan amount doesn't change, then you'll still owe money if you need to sell your house for some reason. It's called being upside-down. How much risk are you taking in not giving yourself a financial buffer using a down payment?
The heroine in our story saved up enough for a 10% down payment, which in this day and age is quite reasonable. And if you're old-fashioned like I am, you can sometimes get lower interest rates (plus save mortgage insurance or piggy-back interest rates) using larger down payments.