The American Dream is dead.
I’m certainly not the first to make this proclamation, but I can confirm its demise personally. I saw the body, riddled with bullets, pockets turned out, crows already feasting on its flesh.
How do I know this?
I just bought another home.
In 2006, several factors fortuitously came together that allowed me to buy a home in Philadelphia. I was only 26 at the time. It was in an area that was on the cusp of gentrification and revitalization (translation: money flowing into the area, poor people being displaced), but it’s taken a bit longer than I had anticipated. The transformation I was expecting is only now starting to creep in. So, I’ve decided to hold onto that place and rent it out as another income stream. After nearly nine years in that house, with a wife and toddler, it’s time to move out of my beloved city and into a town with grass, trees, and, according to CBS News, the second-highest property tax relative to household income. So I got that going for me.
In the early ‘70s, my parents bought 4 acres of farm land forty miles northwest of Philadelphia for $12,000. Granted, this was a decent chunk of money back then, but they were able to use the land as collateral for a down payment on a house that they then had built on the land.
In the past, my Philly home would have meant that I had another asset to bring to the bank in exchange for a mortgage. No longer. In the old days, you could use things like other real estate properties as collateral. You basically said to the bank, “I’ll put up this house or this piece of land as insurance for this mortgage loan you’re giving me. If I can’t make payments on the new house, you can take both back. That way, you’re protected.” And the banks did that. That’s fair.
Then 2008 happened.
And the banks, the ones that fucked everything up, no longer want your assets. They want cash, nothing more, nothing less. Banks now own thousands of homes and plenty of land. They’re trying to sell it to you. They don’t want collateral. Oh, you have a house? That’s nice. We have McMansions and condos we’re trying to unload. We don’t want your house.
But you knew all that already. So instead of climbing on my soapbox and sermonizing about the popping of the real estate bubble, I’m going give you the benefit of my experiences and pull back the curtain to give you a realistic view of buying a home.
It’s not pretty.
Finding a house isn’t as easy as you think. You watch House Hunters? Fantastic. That’s the exact opposite of what shopping for a home is like. In reality, it is such an ordeal, particularly if you are relocating. But even if you’re just moving to the other side of the neighborhood, it won’t be nearly as easy as you expect.
You have to find a realtor. No problem. One that is both good and trustworthy. Much harder.
What’s your budget? You don’t know? Well, how will you (or your realtor) know where to look? This is when you talk to a mortgage representative and get an idea of your budget. Let’s say it’s $300,000. Go to Realtor.com and see what 300K gets you. Not very impressive, is it? Take that number and multiply it by twenty percent. So, if your budget is $300,000 (which really isn’t all that much for a home these days), twenty percent is $60,000. That’s how much you need for a down payment. 60 G’s. Cash.
If you don’t have sixty large just lying around, you can put down less. You can put down as little as five percent. That’s $15,000. Not bad. You can probably scrape and save that, right? Well, because you’re putting down less than 20%, you need to pay PMI, which is Private Mortgage Insurance. This protects your lender because by giving less than twenty percent, you’re now considered a risk to default on your mortgage. So that PMI, along with property taxes, will be added to your monthly mortgage payment. But we’ll worry about all that later. Let’s find a house!
Now, you have to pick a few towns in which you’d like to live. Are you sure you want to live there? Do you have kids? Well, how are the schools? Is it in a flood area? A hurricane area? A tornado area? Is it close to restaurants or a shopping district? Is it too close? Is the neighborhood on the upswing or the decline? Is it close to family? Is it a little too close to family?
Now that you’ve found an area, you have to find a house within that area. How many bedrooms do you want? How many bathrooms do you want? Do you need a finished basement? How about an attic? Do you want a garage? Do you want the garage to be attached? How about a shed? Do you need a driveway? Are there too many steps leading to the front door? Is the slope of the driveway going towards the house rather than away from it so that all the rain and snow will be trying to get inside? Are you willing to give up a bedroom in exchange for more closet space? Is there a bathroom downstairs? Are there bedrooms downstairs? Are you going to let your teenager sleep down there alone?
Basically, you need to figure out the items on which you will and will not compromise. Will you buy a house with an outdated kitchen if everything else is perfect? Is the possibility that you may need to replace the roof enough to prevent you from buying a house that is otherwise outstanding? Can you live with one less bathroom? Are you willing to convert the den into a guest room? Do you want a yard?
You’ve found five houses you like. Excellent. They’re in a good area with decent schools and access to public transportation and entertainment and not too far from work or daycare. When are you going to look at them? This weekend? At the open house? That’s cool. Just be warned: there will be someone else at that open house with more money than you that will bid higher than you. They (used to) say that you send out 100 resumes to get 10 interviews to get one job. In this environment, I would multiply all of those by about a trillion, but the concept is still the same and it’s true for houses. It will be rare that the first house you’ll place a bid on the first house you’ll like and it’s rare that your first bid will be accepted.
This process takes months, sometimes years. For me, it took less than two months, but I had a terrific realtor and I was determined. I walked through fifty-six homes in less than six weeks. That’s a ridiculous pace. On the day we found the house we ultimately bought, we saw 11 homes. Each house takes about a half-hour, not to mention the driving time going from house to house. It consumes your entire life. When you’re not actually walking through homes, you’re online looking at the next batch you want to look at or waiting to hear about one on which you’ve already bid.
Finally, you get the call. They’ve accepted your bid! Congratulations!
Now it’s time to sign your life away and enter into the biggest financial hole of your existence.
Most of us have some sort of debt. After all, you need debt in order to establish credit, but you need to have low debt in order to have a high credit rating so that you can be approved to purchase a home that will put you even deeper into debt. Quite the paradox. What’s the largest amount of debt you’ve ever had? Is it $40,000 or $80,000 for student loans? Is it $15,000 or $25,000 in credit card debt? Maybe it’s a $12,000 car you purchased.
All of that is chump change compared to a house. Your $20,000 student loan is a meager down payment. Even on a $300,000 home, thirty stacks is still only 10%. You still have ninety more percent to go. Possession is nine-tenths of the law and you own one-tenth of that house.
Hopefully one of you has a job that allows you to scan, email, and fax documents, spend hours on the phone, and generally focus on nothing else during business hours. Even in this age of technology, there are some people that still only do business over the phone and through actual postage mail. Many of those people work in the real estate industry.
Before your mortgage application contract even goes to processing and underwriting, it needs to be pre-approved. The number that your mortgage rep quoted at the beginning of the process? Just a ballpark figure. Now that it’s serious, they need the proof. Before a bank will even consider giving you an estimate, they require all of the paperwork associated with your finances (and if you’re buying it with another person, they need it for both of you). The W2’s, tax returns, pay stubs, driver’s licenses, stock portfolios, bank statements, and retirement statements of the past two years are required.
Next, they’ll look at those numbers and then compare them to what you need to pay. You’re going to put down 10% of the down payment and pay the PMI? No problem. That’ll be $30,000. Since you’ve saved $35,000, you’re confident that you’ll have a little bit of a cushion left over after the down payment, right? Sorry. There are closing costs, prepays, and, in some states, attorney fees. Your total due on closing day has now ballooned to something like $43,000. All of a sudden, you’re in the hole again! And that’s just the down payment! How will you pay a monthly mortgage of about $2,500 for the next thirty years?
I know, you think to yourself, I’ll liquidate my retirement account.
It’s not a bad strategy, but it’s not as great as you may first think. When you go to Fidelity or TIAA-Cref or Vanguard or whatever brokerage house holds your 401(k) or 403(b) or IRA, the number that you see on the screen is not the number that you can withdrawal. Depending on vesting, you may have only half (or less) of what your account says you have. Plus, you need to factor in a 10% penalty, 10% for taxes and anything else that may rip into it. You thought you had $25,000 in your retirement? Well, you left that one job six months before you were vested, so they took back their $8,500. Now, you’re down to $16,500. Try withdrawing that money and see how much you end with in your account. Assuming all goes well (and why would it?), you’ll have at best $13,000. Not a bad chunk of change, but almost half of what you thought you had in there.
That withdrawal is also seen as earned income and, as such, will be added to your regular salary on your taxes at the end of the year, so it will look like you made $13K more than you did. That may bump you up into the next tax bracket, which will mean that you will have to pay more taxes, which could mean that instead of that lovely refund in the spring, you may be forced to write a check to Uncle Sam to cover the difference. That’s another check on top of the mortgage that has you stretched to your limit.
All because you want to own a piece of the American Dream.
Now, you have about $48,000 to bring with you to closing. You finally have a cushion! Yes, you sacrificed your future and your retirement, but who cares? Thanks to all of the stress that you’ll be under because you’ve taken out a loan for one-third of a million dollars. You’re going to die while raking leaves in that yard before the mortgage is even paid anyway, so who needs a retirement account? Maybe you’ll take the leftover $5 G’s and plow it back into your IRA just to get the fund going again on the off chance that you do make it to age 60. How responsible!
You need to get a home inspection. Although this itself is not expensive — during this entire process a few hundred dollars is viewed the same way as change in the Take-A-Penny Leave-A-Penny trays because you’re usually dealing with six figures — the results may be costly.
Perhaps you need a new roof. Maybe termites ate through your foundation. What if the basement floods? Does the kitchen need to be renovated? I wonder if the house is structurally sound. The inspector will give you a list of things to consider and suggest you get an estimate on those things. The estimates are usually free, but the work is not. Depending on your area, you also may need to pay for other items as well. $250 here, $325 there, and the next thing you know you’ve spent another two grand. Then, there’s moving. A U-Haul is cheaper than hiring movers, but it’s also backbreaking and uninsured. Either way it means more costs.
It’s only the beginning.
You get through all of that and, about two months later, the day arrives! Closing day! From now on, will stop throwing your money away on rent and begin putting equity into your home, an investment that always goes up (except, of course, when the bubble bursts and the market crashes, as it has several times in the past). But you’re optimistic. Nothing will bring you down today. You meet with everyone, sign even more documents, hand over your life savings, and walk away with a set of keys.
Finally, you have become a true American. You own a home. After the monthly mortgage payment, you won’t have any money left for furniture or food or even to pay utilities, but you don’t care. You’ll sleep on the floor. In the spring, you’ll sleep on the deck.
You have a house! Everything will work out.
Christopher Pierznik is the author of six books, all of which can be purchased in Paperback, Kindle, and Nook. A former feature contributor and managing editor of I Hate JJ Redick, he has also written for XXL, Please Don’t Stare, Amusing My Bouche, Reading & Writing is for Dumb People, and others. He works in finance and spends his evenings changing diapers and drinking craft beer. He once applied to be a cast member on The Real World, but was rejected. You can like his Facebook page here, follow him on Twitter here, and Tumblr here.