Financing My Condo, Grandma Style (part 1 of 2)

I nearly have a panic attack every time I think about the process I underwent to finance my condo. I very nearly got myself into the situation in which many Americans are finding themselves–in an oversized adjustable rate mortgage with no equity in their properties.

After I found my dream condo by accident, I took a few weeks to explore other markets to be sure that Portland was the city for me. One of those places was San Francisco, where it was hard to find a 1-bedroom condo in a nice area for under $500k (the situation hasn’t improved much even now). I did mange to find a little (and I mean LITTLE) condo in the tony neighborhood of Nob Hill for a tidy $400k. The seller’s realtor encouraged me to go see a mortgage broker to get pre-approved (good advice for anyone house-hunting).

I really liked the mortgage broker. I felt like he “got” me. He was nice, funny, and supportive of my desire to purchase a condo. I felt like his support was a vote of confidence from the bank. I felt this way because I did not understand the difference between a mortgage broker and a mortgage lender. I did not realize that as a mortgage broker, he was a salesman–his job was to make me feel good.

This broker–let’s call him Ken–took down my numbers. Income, debt, social security.* He ran the numbers through his laptop and said “congratulations, you’ve been pre-approved for a $600,000 loan.” That seemed like a lot of money to me. He said that just because I was approved up to that amount did not mean I had to spend it all.

We ran some numbers on this $400,000 condo. “You’re young, this is your first place. You’re a rising professional – you’re not going to live here long. You’ll stay a couple years, maybe rent it out after that, and then flip it.” I liked the way he was talking. Yes, yes, yes, I thought. I *am* a savvy young professional who buys and sells condos like it’s nothing. He advocated a 5/1 ARM loan, which I’d never heard of. But it made sense in a way…get a lower interest rate now, then after 5 years, either sell for a big profit or refinance. (Looking back, this of course was a false construct–those were NOT the full set of choices. He didn’t have “endure a massive housing crash, be unable to sell your place, and then suffer a balloon payment.”)

I didn’t ask any of the right questions, and I left feeling empowered, sassy, and ready to buy.

I’ll leave the remainder of this story for Part 2 of this mini-series. But already we can see a few warning signs:

1. I should not have looked at condos before getting pre-approved by a lender

2. I shouldn’t have met with a mortgage lender/broker before having a rough idea myself of what I could afford based on my income and living expenses

3. I should have researched mortgage types in advance to avoid getting sold a product I’d never heard of

4. Someone who makes a commission off your home purchase should not inform your real estate strategy–my mortgage broker’s job was to get me a loan at the lowest possible cost, not to encourage me to engage in real estate speculation

…continued in Part 2

* I should mention that this conversation happened while I was up for a promotion at work in the next few months which would bump my salary 30%. The promotion seemed likely, but was not guaranteed. We operated under the assumption that I would get the promotion–which we should not have done. But it was late 2007 and people still lived like nothing could go wrong.