The Waiting Game

Pat Cici Jr. is well prepped to buy a house. He researches neighborhoods, checks the rise and fall of interest rates as if he’s watching the stock market and keeps himself on such a tight budget that he tracks every expense on a piece of paper he carries with him in a pouch.

“Two dollars for lunch,” said his father, Pat, who chokes up every time he thinks about his youngest child moving out of their Hacienda Heights mobile home. “He even writes that down. He’s always been like this.”

With all his penny-pinching, the younger Cici, 32, has managed to squirrel away nearly $20,000 while living at home with his father and stepmother, Lea.

In fact, he’s never lived away from home--not even during his days as a drummer for a punk rock band.

“I could never understand throwing my money away on rent,” he said. After years of paying his folks $300 a month in rent and utilities, he’s saved enough for a down payment and wants to capitalize on today’s low mortgage interest rates.

“I’ve spent most of my waking minutes [lately] thinking about buying a house,” said Cici, who stills plays drums occasionally but now works as a project manager for a packaging company. “If I’m out with my girlfriend, I don’t want to bring her back to my one-room ‘house.’ I just want my own place.”

Though Cici’s done all the right things to get ready to buy a home, he couldn’t have prepared for this year’s sellers’ market and record-breaking prices.

Although he hopes for a bump in salary after an upcoming review, he takes home about $40,000 a year. That, along with only $45 a month for a credit-card payment and $350 a month for the lease on a 2000 Chevy Silverado truck, puts Cici in the enviable position of having excellent credit.

“Pat is not your typical first-time home buyer,” said Barron Delaney, branch manager with H&R; Block Mortgage in Woodland Hills. “He has a substantial amount of savings. Most first-time buyers usually don’t have that much.”

While Delaney might have recommended that Cici put nearly all that $20,000 down on a home, Cici, always thinking conservatively, is reluctant to deplete his savings. At the same time, he also feels strongly about not paying private mortgage insurance, or PMI, a monthly payment that protects the lender in case the borrower defaults.

Although most loans with less than 20% down require PMI, not all do. Instead, these types of loans are offered at a slightly higher interest rate in exchange.

To meet Cici’s desire to put less than 20% down yet still avoid PMI, Delaney recommended a 30-year fixed loan of $135,000 with a 5% down payment. The loan had an interest rate of 6.99%, slightly higher than today’s market rate, because it did not require PMI. Additionally, the loan required a payment of 2 points--an upfront fee paid to the lender--that amounted to $2,700.

In contrast, Delaney calculated that a similar loan requiring a $117-a-month PMI payment would cost Cici $7,020 over five years. However, that particular loan was offered at a lower interest rate of 6.75% and required no payment in points.

“That’s the baby he’s got to weigh,” said Delaney--to make the PMI payments or take on a higher-interest loan with points.

According to Delaney, how quickly a home might appreciate is important to consider when deciding whether or not to pay PMI. This is because when a homeowner has built up sufficient equity, the lender can remove the PMI payment. Another factor to consider, Delaney said, is the length of time the buyer plans to stay in the home. If it’s short term, PMI may not calculate as a big expense, especially when compared with paying a higher interest rate and points.

But because Cici said he planned to stay put for a while, ultimately Delaney recommended that he not take on the PMI payment. “PMI can be a ton of money over the long term in a slower-appreciating area,” he said.

The loan that Delaney recommended for Cici would allow him to shop for homes around $142,000 for a monthly mortgage payment (including principal, interest, taxes and insurance) of about $1,075, for a 45% income-to-debt ratio--definitely on the high end, but doable. His closing costs, including the 2 points, would be $11,897.

But after years of saving and scrimping, Cici was disappointed. “What the heck am I going to find for $142,000?” he asked. “I [feel like] I will have to wait and wait until I make more money or until the housing market comes down, and who knows when that will be?”

To increase Cici’s purchasing power, Delaney recommended that Cici eliminate the $350-a-month lease on his truck--Cici’s only real debt, but a large payment in relation to his income. After that, Delaney estimated that Cici would be able to shop for homes in the $180,000 range, provided he not take on any more debt.

“That car payment is standing in your way,” Delaney said. The downside was that Cici would have to find another mode of transportation to his job in the City of Industry--perhaps a car he would have to pay cash for with the remainder of his savings. And with a $180,000 loan, Cici’s monthly housing payment would shoot up to about $1,480. “He would definitely be pushing the envelope,” Delaney said.

Even at $180,000, Tom Rosas, a real estate agent with Century 21 Grisham Joseph in Whittier, could locate only eight townhomes or single-family residences with at least two bedrooms in La Puente, Norwalk and Chino Hills--all a reasonable commute to Cici’s job. There were no listings at that price in the San Gabriel Valley or Whittier/La Habra areas where Cici hoped to buy. Cici is not interested in condominiums, saying he feels they are too much like apartments.

“I really feel for the first-time home buyer right now,” Rosas said. “Interest rates are driving the market. Prices are going up faster than people can save.”

The properties Rosas found ranged from $165,000 to $180,000. But he cautioned: “It will be a fluke if he finds anything.”

Indeed, Cici was disappointed with the properties. While they were large enough and a few had nice yards, the surrounding neighborhoods, according to Cici, were not kept up. While Cici admitted that perhaps he is being too critical, he knows that what he envisions is not what he can afford.

To put things more in line with his dream home, Rosas and Delaney had a host of recommendations for Cici, such as buying a condo to build equity for the purchase of a larger home later and focusing on repossessed homes that might potentially offer some price breaks.

“I don’t know what the future looks like,” Rosas said. “There’s no way he can save fast enough to keep up with this market unless he wins the Lotto.”

Rosas additionally recommended that Cici look into city-sponsored first-time home buyer programs. One such program in Whittier, where Cici would like to live, provides $20,000 or $25,000--depending on the area where the home is bought--to qualified first-time buyers. Monthly interest on the loan does not have to be repaid until the sixth year, and then only at a 5% interest rate.

Additionally, 1/15 of the principal balance of the loan is forgiven each year after that.

But although Cici meets the city’s income limits of making less than $46,250 for a one-person household, he may have too much money saved up. “Everyone can’t use this program,” said Ann Ybarra, director of community development with the city of Whittier. “You can’t have too much cash.” The loans--about a dozen or so are funded each year--are granted on a first-come, first-served basis.

But the strongest advice given to Cici by all the experts was that he lower his expectations. And that has already started to happen.

“I fooled myself into thinking I could find something,” Cici said. “But now that I’ve looked, I’ve seen more of what is reality.”

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This Month’s Home Buyer Make-Over

Home buyer: Pat Cici Jr.

Occupation: Project manager for a packaging company

Gross annual income: $39,500

Goal: Cici has saved nearly $20,000 and wants to buy a single-family residence or townhome in the San Gabriel Valley or Whittier/La Habra area.

The problem: Even with excellent credit and carrying little debt, Cici’s income is too low to qualify him for a suitable property in today’s seller’s market.

Recommendations:

* Eliminate as much debt as possible to increase buying power.

* When weighing the decision to pay private mortgage insurance or not, consider how quickly homes in the neighborhood have appreciated as well as how long the first-time buyer plans to live in the home.

* Consider purchasing a condominium. Many first-time buyers use the equity in a condo to later move up to a single-family home.

* Seek agents who specialize in repossessed homes. While these properties may need a little extra work, they may offer a price break.

* Look for city-sponsored first-time home buyer programs.

Many cities offer them as a way to help middle-income families purchase homes.

Programs vary by city.

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Meet the experts:

Barron Delaney is a branch manager of H&R; Block Mortgage in Woodland Hills and has been in the mortgage lending business for 10 years.

Tom Rosas is with Century 21 Grisham Joseph in Whittier and has 17 years of experience in real estate.

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Allison B. Cohen is a Los Angeles freelance writer.