Our Home Renovation

Alternate title: The most expensive 4′x8′ trailer we’ll ever buy…

We’ve been looking for a small trailer for a while and were finally resigned to having to buy a new one. Then, on January 21, I found a 4×8 trailer listed on Craigslist for $80. I quickly emailed about it and then offered to buy it. Fast forward to February 28, the day I actually went to pick up the trailer (the owner lived out of town and that was when it worked out to get it).

Everything that could go wrong, did. First, I didn’t have the right size ball on my hitch, so we bought just a replacement ball thinking we could use a crescent wrench to take the other one off (ha!). We returned that one and finally got the right size. Then after waiting 20 minutes at the DMV (the last day of the month) they didn’t take debit or credit cards, so I went across the street to Walgreens to get cash out. Except that my debit card wasn’t being read by the machine. So we went to the nearest bank and got the cash, went back to the DMV and got the plates. Went back to finally hook up the trailer only to find out that the electrical wires on the trailer, as well as the chains aren’t long enough. AH! 45 minutes later, we returned and got everything in order and all was well.

During those 3.5 hours and 100 miles of driving, the guy I was buying the trailer from had been with me. We talked the whole time and got to know a bit about each other. I mentioned that we love fixing up houses and he mentioned that he had two houses that he was going to be selling at some point in the future - his dad’s and his grandmother’s. As we parted ways, I mentioned that when the time came to sell either house, to let me know as we might be interested.

Two days later he called and said that he was ready to sell his grandmother’s house and wondered if I would be interested in taking a look at it in two weeks when he returned to town. Two weeks later, we drove by and knew right away that we wanted the house. Then the next day as he gave us a tour of the house, he and I agreed on a price and decided to close on the house two weeks after that.

That’s how we came to acquire the Sheridan House, or, how one little 4×8 trailer is resulting in our spending tens of thousands of dollars.

Once you’re pre-approved for your mortgage, you’ll know how much the bank will allow you to spend on a house. It’s important to realize, however, that just because the bank may have approved you for a certain amount doesn’t necessarily mean that you can afford that amount.

A fairly major flaw in the mortgage process is that the bank looks are your gross income, not at your net income. As you might recall from the previous post in this series, during the interview process, the bank will look at your gross monthly income (that’s before income taxes, too) minus minimum monthly payments that are required on any obligations you have and then work with that total as the basis for your loan. For example, if your gross pay is $36,000/year, that works out to $3000/month. Subtract from that your car payments (for this example, we’ll use $500), and minimum payments on any credit card or other balances you carry (we’ll say the total minimum payment is $200). If you do the math, you’ll see that leaves us with an income of $2300.

With that $2300, the bank will figure out the price of house that you can afford. The flaw comes, though, from the fact that they don’t take into account that you may want to pay more than the minimum on your credit cards. You may want to pay a bit more on your car payment, or you may have major medical expenses to deal with. There’s a whole realm of possibilities that could suck money out of you that the bank doesn’t take into account.

So, moral of the story is to budget and figure out exactly how much you can afford to spend on a house payment (don’t forget property tax, homeowners insurance and Private Mortgage Insurance - PMI - if you’re putting less than 20% down). In many cases, this will be pretty close to your pre-approval amount; in many other cases, however, you’ll find that you can’t really afford to spend what the bank is telling you that you can. Keep that in mind.

In order to be able to renovate a house, we first need to buy a house. We’ve now been here (in Rockford, IL) for a month and a half, however we spent most of that time going back and forth between whether to buy a house or rent an apartment. We looked at houses, we looked at apartments, then looked at more houses before finally deciding to talk to the bank and see what kind of mortgage we’d be able to get.

Having never bought a house before, we were pretty nervous about the whole mortgage preapproval process. We met with Pat O’Gorman at Riverside Community Bank and were pleasantly surprised at how easy and painless the process was.

It took about 45 minutes and started with a bit of conversation so that Pat could get to know us a little bit. It was very comfortable and we were excited to learn that he sits on the board of directors for Habitat for Humanity here in Rockford (We’ve worked on several different Habitat projects and are looking forward to getting involved here in Rockford in the future).

As we were talking, he was asking us various questions about our required expenses each month (those that we are obligated to pay), including things like car payment, credit card payments, etc. Using those figures and our monthly income, he did some quick math and explained how they come up with a figure for your pre-approval amount.

We talked through things like down payment (believe it or not, it’s even possible to buy a house with no downpayment) and private mortgage insurance (PMI) - a monthly amount that you pay (generally $35-50/mo.) until you’ve paid for approx. 20% of the mortgage. There are also things like property tax and homeowners insurance, however the bank takes all that into account when pre-approving you. It often seems like owning a home would be unattainable because of all those extra costs, but as long as you’re planning for them and take them into account when budgeting, owning a home can be a reality for almost anyone.

He let us know about a few different grant options available for first-time buyers, including one that offers $5000 toward your down payment in the form of an interest-free loan which is forgiven if you stay in the house for 5 years. If you sell it prior to that, you pay back a prorated amount (still interest-free), but only if you make a profit on the house. In other words, if you buy a house for $80,000 and sell it for $100,000 three years later, you’d pay back the full pro-rated amount, in this case $2000. If you bought a house for $80,000 and sold it three years later for the same, you wouldn’t have to pay anything back. If you made a profit of $100, that’s the max. you’d have to re-pay (the re-payment amount won’t exceed the profit). Any way you look at it, it’s a good deal and will give us a bit more cash to put into the renovation process.

From there, Pat took all the figures that we had just talked about casually and put them into the computer. He ran a credit report which he walked us through and even gave us a copy of, then gave us several brochures and some paperwork to read through later. We were in a hurry, so he promised to call later and let us know the exact amount that we were pre-approved for and then he would mail (and email) the preapproval letter for us to have when making an offer (or offers, in our case).

Needless to say, the whole process was quite encouraging. He answered all our questions and relieved any fears that we had. We left the bank excited that we, on a fairly small, single income, even with a beautiful new car and not quite perfect credit were able to buy a home.

Later that evening, Pat called to let us know the price that he had arrived at and promised to mail the letter the next day. All said and done, the pre-approval process was a good experience and gave us a set price that we knew we could afford, so looking for a house became much easier.