A First-Timer’s Balancing Act

Kannyn MacRae has dreamed for two years of owning his own home, but like many first-time buyers, he feels intimidated by the process.

In addition to the daunting prospect of qualifying for a loan and worrying about being stretched to the limit financially, MacRae, 34, said his reluctance to buy stems primarily from the fear that he has not saved enough for a down payment on the Westside duplex he is seeking.

The Mar Vista renter, a unit manager for a computer-accessory manufacturing company, said he has held off purchasing a home, hoping that prices would level off or drop. Meanwhile, as he’s waited for the “perfect scenario,” home prices have inched up, and he now realizes that his goal of putting 20% down has become unattainable.

“I worry that this may not be a good time to buy,” MacRae said. “But I think buying a home will be a good stepping stone for me. I just have to commit to it.”

To find out what his priorities are, Doug Perry, a home loan expert at Countrywide Home Loans, asked MacRae where he envisioned himself living and what he felt he could pay for a home.

The company manager said he wants to buy a two-or three-bedroom duplex in the $300,000 range, either in Venice or Mar Vista. He would settle for Culver City or Torrance, he said, but is inflexible about buying anywhere east of the San Diego Freeway.

MacRae said he wants a fixer with a yard so he can indulge his passion for home-improvement projects. He sees himself living in one duplex unit while remodeling the other.

On one point MacRae is adamant: He does not want to put down less than 20% on a home purchase because he does not want to pay mortgage insurance. MacRae also prefers not to buy a condo.

Perry said that MacRae is on track to achieve his goal, but that he will have to compromise on the type of home he buys and the amount of the down payment. The good news, Perry said, is that with interest rates hovering at about 7%, McRae’s buying power is better than ever.

“It’s time to take that first step,” Perry said. “I think he’ll be excited when he gets out there and begins the process.”

Before MacRae took that leap, however, Perry ran a credit check to see what, if any, bad marks popped up on the report. Despite MacRae’s fears about some late payments, Perry found that MacRae’s credit record was clean.

Like many first-time home buyers, MacRae assumed that credit card payments made after the due date would send up a red flag on his report. Perry said that as long as payments are made within 30 days, they are not considered late.

MacRae’s high credit rating, coupled with his positive financial profile, qualified him for Countrywide Home Loan’s “Fast and Easy” loan, which allows a higher debt-to-income ratio than most home loans, and puts him on the fast track to purchasing a home.

Under the terms of the “Fast and Easy” loan, MacRae qualified to purchase a $300,000 single-family residence. With a 10% down payment, or $30,000, his loan amount would be $270,000, or a conforming loan, whose interest rates and terms are more favorable to borrowers.

However, if MacRae decides to go with a “Fast and Easy” loan, he will have to buy a single-family detached home, not a duplex, Perry said. The loan terms for investment properties are not as lenient as those for single-family residences.

“In Kannyn’s case, the ‘Fast and Easy’ loan is the best way to go,” Perry said. “Like most first-time buyers, the majority of his cash reserves are going to a down payment. I’d like to see him get the extra funding.”

Although MacRae prefers to pay 20% down on a home purchase, the size of his loan, compared with the amount he has available in savings, dictates that he settle for a 10% down payment.

MacRae has about $25,000 in stocks and a savings account, which leaves him $5,000 shy of the $30,000 he needs for a 10% down payment.

Perry suggests that MacRae get a loan from his family or borrow against his 401(k) to make up the difference.

Because MacRae’s down payment is less than 20%, he is required to pay mortgage insurance, which protects the lender against a possible foreclosure.

MacRae’s monthly outlay would include $117 for mortgage insurance, $1,888 for the mortgage, $281 for property taxes and $65 a month for homeowner’s insurance, totaling $2,351.

That’s a far cry from the $650 a month he’s paying for his half of the rent on the Mar Vista apartment he has lived in for more than five years.

“Kannyn seems shellshocked about the increase in his monthly payments,” Perry said. “Everyone experiences that. It’s always a stretch to get in the first time.”

In MacRae’s case, it’s a stretch, but he can afford it on his $6,400 gross monthly income, which includes a two-year average of his $15,000 annual bonus.

To avoid mortgage insurance, Perry recommended that MacRae get an 80% first mortgage of $240,000, then combine that with a 10% second mortgage of $30,000. MacRae kicks in his 10% down payment of $30,000 and avoids mortgage insurance despite putting only 10% down.

If MacRae opens a home equity line of credit for the second mortgage, he could pay it off in two years, using his annual bonuses, Perry said.

After MacRae qualified for a home loan, Realtor Steve Goddard of Re/Max Beach Cities in Torrance checked out what was available in the $300,000 range in MacRae’s target areas.

The veteran real estate agent knew that MacRae’s dream house would be hard to come by in those desirable areas of the Westside.

Goddard concentrated his search on a single-family detached home after MacRae realized he would get better loan terms on that type of property.

In MacRae’s price range, Goddard found a three-bedroom, one-bath house with about 1,000 square feet in Redondo Beach. Little else was available, except condominiums, which MacRae said he will not buy.

Like most first-time buyers, MacRae probably will have to jump into a higher price range than he expected-in his case, to $335,000-to get close to the house he’s seeking, Goddard said. Or, he’ll have to lower his sights about the type of home he’s willing to accept.

“He has to get over the shock of what’s available out there,” Goddard said. “But he should get into the real estate market now, even if it’s not his dream house. Then the next time around, he’ll get closer to what he wants.”

For now, MacRae has decided to wait until he has saved the entire $30,000 down payment, which shouldn’t take too long. He still wants to buy a duplex, even if the loan terms are not as favorable, but he’s willing to buy a single-family detached home if that’s the only way to get into the market.

“I’m excited about getting into my own home,” MacRae said. “I’ve learned that you don’t need 20% down to get in, and I’m learning that I might have to move where it’s more affordable. I can step in with confidence now.”

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Diane Wedner can be reached at real.estate@latimes.com.

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.

(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)

This Month’s Make-Over

Home Buyer: Kannyn MacRae, 34

Occupation: Manager at a computer manufacturing company

Gross Monthly Income: $6,400, including a two-year average of his yearly bonus

Goal: Purchase a two-or three-bedroom duplex, a fixer, in Mar Vista or Venice, with 20% down.

The Problem: Does not have a 20% down payment, and is reluctant to borrow against his 401(k) to make even the 10% down he almost has saved. He’s worried about wiping out his savings on a down payment, and is reluctant to triple his monthly housing payments.

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Recommendations:

* Purchase a single-family detached home to get a loan that has better terms.

* Get remaining down payment from a relative, or borrow against his 401(k).

* Go for an 80% first mortgage, 10% second mortgage, and 10% down payment, to avoid paying mortgage insurance.

* Get a home equity line of credit for the second mortgage, and pay it off in two years with money from his annual bonuses.

* Look in Torrance to get more house for the money.

Meet the Experts:

Doug Perry is a first vice president and senior production manager at Countrywide Home Loans in Rosemead. He earned a bachelor’s degree in business economics from UC Santa Barbara and has originated home loans for 15 years.

Steve Goddard is a broker-associate and sales manager at Re/Max Beach Cities Realty in Torrance. He has sold real estate in the South Bay since 1972, and is past president of the Los Angeles County Board of Real Estate.

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This week marks the launch of a monthly Home Buyer Make-Over designed to help potential buyers overcome the obstacles to owning or moving up.