Seeking an Entry Point
Burdened with huge student loans and lacking a down payment, Maria and Eric Burkhardt have put off buying a home for more than three years.
Although they’re eager to jump into the market, the Irvine couple worry that if they buy now, at what they consider the peak of the market, their house may lose value, making it difficult to move up later.
“We need a house to grow with us and a family,” said Maria Burkhardt, 34, a physical therapist. “It’s scary to buy now, but I know it will only get worse if we wait.”
Maria’s fears are not unfounded. At the end of the first quarter of 2001, the median price of a condominium in Irvine was $249,000, a 10.7% jump from $225,000 the year before, said John Karevoll, an analyst at DataQuick Information Services. The median price for a single-family detached house in Irvine last quarter was $362,000, up 6.9% from a year ago.
Larry Garcia, a home loan expert at Wells Fargo Bank in Long Beach, said that prices are expected to rise further by the end of summer, so putting off a home purchase will not improve the Burkhardts’ situation.
“When people wait to save money, they usually don’t,” Garcia said. “They’ve got car payments, insurance and other expenses. Getting into that first home will help them financially, because it’s the only real tax-deduction middle-income folks have.”
Eric Burkhardt, 39, a strength and conditioning coach, said he and Maria are looking to buy a three-bedroom, single-family detached home or two-bedroom with den in Irvine. They also are willing to consider a townhouse in the Orange County community known for its excellent schools.
The couple currently rent a 1,100-square-foot, two-bedroom townhouse for $1,125 a month, including utilities. With their combined $7,500 gross monthly income, they feel comfortable going up to about $2,000 a month for a mortgage, but so far the townhomes they’ve looked at have been in the $275,000 to $290,000 range, which they believe would require a considerably higher monthly commitment.
To begin the loan qualification process, Garcia ran a credit check on the Burkhardts, whose greatest concern was Maria’s $125,000 college debt she’s committed to paying off over 20 years. Their recent $12,000 credit card debt has been paid down to $2,600, Eric said.
The couple’s credit record came up clean, with no late payments, bankruptcies or foreclosures, red flags that require explanations and often reduce an applicant’s chances of qualifying, Garcia said.
The Wells Fargo lender recommended that before the Burkhardts begin the loan application process, they pay off the remainder of their credit card debt, which will lower their $1,380 monthly total expenses by $186. By reducing that monthly payment, the couple could increase their purchasing power by $20,000, Garcia said.
“Getting rid of smaller debts--those department store accounts, for example--can bump buyers up to a different buying bracket,” Garcia said.
Garcia also recommended that Maria consolidate her student loans, reducing the $1,000 monthly payments by half by extending the repayment term. The decrease in payments will enable the couple to qualify for a higher purchase price, while keeping their debt-to-income ratios within required guidelines, Garcia said.
Once the student loan consolidation is complete and the credit card debt is paid off, Garcia said the couple has two options: buy a $245,000 home, with monthly payments of about $2,178, including association fees, or if they want to stretch, buy a $275,000 house, with monthly payments of about $2,500.
Under the first plan, which is more comfortable financially but limits their Irvine purchasing options, the Burkhardts could get into a single-family residence or townhouse with 0% down.
To get 100% financing, the couple must secure a federally backed first trust deed of $238,000--Fair Housing Authority, or FHA, loans are limited to $239,000--and a “silent” second mortgage of 3% of the purchase price, or $7,350.
The silent second mortgage is available through a California state bond program designed to help first-time buyers with down payments. Under the loan terms, borrowers do not have to pay off the loan until they sell their house or refinance the first trust deed. So borrowers don’t have to pay make payments on the second for 30 years, if they keep the house that long, Garcia said.
If borrowers do sell or refinance within the 30 years, they are required to pay back the loan in full, at 3% a year.
To cover the $5,850 in closing costs, impounds, interest, association dues and property tax, plus $2,500 for the credit card payoff, Garcia recommended that the couple borrow $8,500 from their 403B retirement account.
Although the Burkhardts expressed relief at keeping their monthly payments below $2,200 with the first plan, they doubted they would be able to find even a townhouse in that price range, based on what they have seen so far.
So the couple decided to look at the second scenario, Wells Fargo’s California Easy-to-Own One-Percent loan, also a 100% financing option.
Under this plan, the Burkhardts would secure a 30-year, conventional first trust deed of $266,750, plus the state-backed silent second of $8,250, or 3%, of the purchase price.
The Burkhardts would have to borrow $2,750 from their 403B to pay 1% of the closing costs, a loan requirement. The balance of the closing costs, $5,852, also would come from their retirement fund.
Although buyers can ask the sellers to pick up some of the closing costs, in today’s competitive home-buying market, it’s preferable to avoid asking sellers to make that concession, Garcia said.
The Burkhardts will need to borrow an additional $1,398 from their 403B--for a total retirement plan loan of $10,000--to go toward paying off the credit card debt. They will have to dip into their savings account for the extra $1,202 needed for the rest of the credit card debt, Garcia said.
“I strongly recommend the Burkhardts go for the larger loan,” Garcia said. “In Irvine, where the bottom of the market is $245,000, they’ll have better luck finding something.”
Patrick Knapp, a longtime agent at Re/Max Real Estate Services in Irvine, agreed.
His initial search for two-plus-bedroom townhomes with 1,300 square feet in Irvine yielded only two possibilities: one at $269,000 and the other at $279,000. There were no listings for single-family homes in their price range.
“Everyone pays more than they anticipate in Irvine,” Knapp said. “The city is close to stores, freeways and Los Angeles, and it gets the overflow of Newport Beach. Everyone wants to live here.”
Knapp said that many first-time buyers begin their home searches in Irvine, but often end up buying in Lake Forest or Aliso Viejo, a newer community just 10 minutes south of Irvine. For the same price of about $270,000, buyers can get newer units with up to 600 more square feet.
If the Burkhardts are willing to settle for only 1,000 square feet and two bedrooms, Knapp found about 30 available townhomes in Irvine. He cautioned, however, that many of the townhomes in their price range in Irvine require fixing up, so an additional outlay of money is usually necessary.
To illustrate how dramatically prices have jumped in Irvine, Knapp said a house he sold for $480,000 a year ago is worth $750,000 today. In the Burkhardts’ price range, detached houses aren’t even an option.
“It’s very tough for first-time buyers here,” Knapp said. “My advice is, if you see a home you like, don’t squabble about the price, just move on it. Chances are there are several others waiting in line to get it.”
As for the Burkhardts, although the $275,000 loan is a stretch, the couple said they’re going to go for it.
“We’re used to macaroni and cheese, so it won’t be a shock,” Maria said. “It’s worth it in the long run to get into our own home.”
(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)
This Month’s Make-Over Home buyers: Eric Burkhardt, 39, and Maria Burkhardt, 34.
Occupations: Strength and conditioning coach; physical therapist.
Joint gross monthly income: $7,500.
Goal: Purchase a single-family residence or townhouse with three bedrooms or two bedrooms and a den in Irvine.
The problem: Huge student loans and do not have a down payment. Also worried about buying at the peak of the market.
Recommendations:
* Buy now; don’t wait.
* Pay down credit card debt.
* Consolidate student loans.
* Get 100% financing on a townhome, with a conventional first trust deed, and a silent second through a California state bond program.
* Borrow from their 403B retirement fund to pay for closing costs and pay down the credit card debt.
* Expand their home search to Aliso Viejo and Lake Forest in Orange County, where they will get more home for their dollar.
Meet the experts:
Larry Garcia is the branch manager at Wells Fargo Bank in Long Beach. He is a member of the Mortgage Bankers Assn. of America, and has originated home loans for 18 years.
Patrick Knapp is an agent at Re/Max Real Estate Services. He has sold real estate for 12 years, and is a member of the Orange County Assn. of Realtors.
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To be considered for a published Home Buyer Make-Over, print or download the questionnaire at https://www.latimes.com/hbm. Or write us at Home Buyer Make-Over, Real Estate Section, Los Angeles Times, 202 W. 1st St., Los Angeles, CA, 90012.
