Back before I knew anything about real estate, I remember how confusing the whole buying-a-house thing was to me. How was I ever going to be able to save up enough money? Every month I would give my landlord hundreds of my hard-earned dollars, and each time I would wonder what I was going to have to do to be on the other side of that equation. If I was going to put 20% down on a house here in Portland, that would have meant having $40,000 or more in the bank – and at the rate I was saving back then it would have taken – well, basically, forever. One day I was talking to a local artist who did, in fact, own her house (a 2-unit apartment building), and I asked her how she did it. What she told me rocked my world, opened up the doors to home ownership, and required almost no money out of my pocket. Beautiful! The coolest thing is that it’s totally legitimate, involves low-interest FIXED-rate mortgages, and is designed for people like you and me – people who are looking for a low-cost way to get a first home, without any gimmicks that could come back to bite us.
I bought my first house, a 4-unit apartment building, with $2000 of my own money. That was eight years ago, and the programs that existed back then still exist – in fact there are even more options these days for a first-time homebuyer to get into their first house. This article isn’t about buying foreclosures, and it’s also not about any fancy mortgage financing – so you’re not going to have to worry about auctions or getting taken for a ride by a predatory lender. There are a few things that you will need, however, in order to qualify. Those are:
- Good credit. It doesn’t have to be amazing credit, but you should have a credit history that shows your ability to pay your bills on time. A late payment or two won’t be a problem, but anything more than that and you’ll probably need to repair your credit. There are PLENTY of articles on the internet about repairing your credit.
- A little bit of savings. You’re not going to need a ton of cash either, but some savings will show the bank that you’re capable of managing your money effectively. The bank might only require 1 or 2 percent as a down payment – but that’s still something. In my case it was 1% of the purchase price of the house that I needed.
- Steady, documentable income. This doesn’t mean that you need “a job” – although being a W2 employee with a regular ol’ paystub is probably the easiest way to go through the process. Ultimately, though, the underwriters (the people at a bank who check up on you to make sure that you’re going to pay the bank back) just need proof that you’re making enough money to pay your loan payments (which generally include loan principal, interest, taxes, and insurance) – plus some money left over for your personal expenses. Typically for these programs you’ll actually need to be making LESS than a certain amount – so if you’re already rich you won’t qualify (for these programs anyway). At the time I bought my house, I had just taken a job making 40k/year – prior to that, however, I had been freelancing – and my “career” was a relatively new choice.
OK, next step – you need to find the programs that are available to first-time homebuyers in your state. This link will bring you to a list of all of the “housing authorities” that exist for each state in the U.S. These housing authorities are non-profit organizations that typically combine public financing and private financing (i.e. government loans/grants and bank-offered mortgages) to come up with low-interest, fixed-rate mortgages for first-time homebuyers. That’s what we’re after!
If you’re in another country, a good place for you to start would be to call the local office of your government’s version of a “Housing and Urban Development” department – they can hook you up with local agencies meant to help get you through the process of becoming a first-time homeowner.
Find the agency for the state where you live – on their website you will find information about programs available, interest rates, income limits (which tend to be different based on the county in which you live), and price ceilings for homes (i.e. the home you buy must be under a certain price).
Another great place to find programs that are specific to where you live is to visit your city’s Housing (or Community Development) department, and to ask them if they have any programs for first-time homebuyers (or apartment building buyers). Frequently your city will have special loans and grants available, and they’re generally not well-publicized. The program that I used was actually a joint effort between my city and my state’s Housing Authority.
The State Housing Authority will tell you what programs are available, help you figure out if you qualify, and tell you what lenders (i.e. banks) are participating in the program. The next thing that you’ll need to do is visit the bank to meet with a loan officer (or “originator”) and fill out a loan application. I recommend doing this in person, not on-line. Ideally, you’ll find a loan officer with whom you have rapport, and they can walk you through the finer points of filling out the application, along with gathering the required documentation. Your loan officer is your advocate within the bank for the entire mortgage process – which is why it’s good to establish a relationship with that person. Most of these programs have special requirements, which your loan officer will help you navigate. Your success is in their interest, after all, since they get paid when mortgages HAPPEN.
At this point, it’s a good idea to take a homebuyer-education course – and in the States, a HUD-sanctioned course is generally a requirement for these first-time homebuyer programs. It won’t be the most exciting couple of Saturdays you’ve had, but you will get some useful information AND you’ll get whatever certification you need to round out your qualifications.
IMPORTANT: Complete all of the preceding steps BEFORE you go shopping for a house. You will then be “prequalified” for a mortgage. When you make an offer on a house that you want to buy, having a pre-approval letter from the bank will often be an important factor in the seller’s acceptance of your offer. In other words, it shows that you’ve already spoken to the bank and makes you a more attractive buyer.
There’s one last thing that we should mention before we go on to the shopping phase. For many of these first-time homebuyer programs, the bank requires that the seller pay “points” on the loan – in some cases, as many as 3 points. A “point” is simply a way of saying “percentage of the purchase price of the house”. Each point is the equivalent of one percent. So, in other words, if the seller has to pay 3 points, that means that they will have to pay 3% of the purchase price as a fee for making the loan happen. These fees probably go toward subsidizing the overall program, as well as towards buying down the interest rate that the bank is offering you on your loan.
How are you going to get the seller to pay thousands of dollars so that you can buy a house? If you’re in a buyer’s market (like we’re currently in – fall 2007), then the seller might be willing to pay points just so they can finally sell their house, especially if their house has been on the market for any length of time. In a hotter market, where houses are selling more quickly, you might actually offer the seller more money for their house than they were asking to offset the cost of the points they’re going to be paying. That’s what I had to do, as I’ll detail below.
Also, most programs will require that the house you’re buying be “up to code” – so some rehab costs can be factored into the loan, up to the limits of the program. Just something to bear in mind – because you might find a fixer-upper, and the cost for fixer-uppering can be built in to your mortgage!
When you’re ready to go home shopping, there are a couple more things you’ll need. First is knowledge of the price limits for the houses/apartment buildings that qualify for the first-time homebuyer program you’re using. Second thing you’ll need is a good buyer broker. A buyer broker is a real estate agent who works exclusively for you, helping you find the right home and navigate the home purchasing process (including help with negotiation, keeping your terms of the Purchase and Sales agreement, and making sure that everything happens in a timely fashion). If you can find a buyer broker who has experience finding homes for first-time homebuyers using the SAME PROGRAM that you’re using, that would be the best. Your buyer broker will help you make the strongest offer possible, while at the same time helping you get the best deal possible. Ultimately, they are paid as a percentage of the sales price, so their “fee” is already built-in to the purchase price that the seller has set (the seller’s broker and the buyer’s broker split a commission, which is usually 5-6% of the purchase price, and which comes out of the proceeds that the seller receives from the sale). While that would make it seem like it would be in their best interest for you to pay as high a price as possible, since their fiduciary duty is to YOU, they are obligated (by law) to help you negotiate the lowest price possible.
By the way, if any questions come up for you during this process, feel free to contact me using my contact form, and I’ll do my best to find an answer for you.
So here’s my story – how I bought my first house for two thousand dollars. I decided that I would look for an apartment building. Buying an apartment building seemed like a good choice for a first home, since the maintenance demands weren’t much more than a single-family home, and since the income from the rental units would go towards paying the mortgage (helping me qualify for “more house” than I would have qualified for on my income alone). Buying an apartment building is a smart investment decision as well, as it allows you to leverage your money over the long term – if you buy right, then the bulk of your investment will be paid for by other people (your tenants). The first-time homebuyer program that I was using was an “urban revitalization” program – meaning that it was allowing people to buy apartment buildings (as long as they lived in one of the units) as a way of helping improve urban neighborhoods, since people tend to care for the place that they call home (and you definitely keep a closer eye on your tenants when you’re living in the same building).
I looked at building after building – none of them were right. My only real criteria (other than those imposed by the limits of the first-time homebuyer program) was that I wanted an apartment building where I would be happy to live in any of the units. I figured that the only way I could judge whether or not an apartment was “rentable” was by knowing whether or not I would want to live there myself.
This was before Craigslist, so every day I would scan the “houses for sale” listings in the local paper, looking for something that might be right. When you’re in house hunting mode, I definitely suggest looking through the paper and craigslist (or your local alternative to craigslist) first thing every morning, so that you can catch things as soon as they come onto the market. After a couple months of looking, I saw an ad for a 4-unit building that was priced just below the price limits for 4-unit buildings – so I tried to make an appointment to check the place out.
As it turns out, the advertisement had been a mistake. The building was accidentally priced lower than the seller had truly wanted, but I was persistent in trying to get a chance to look at the place. I showed up with my buyer broker to check the place out, and, as it turned out, my buyer broker actually knew the seller – which I think really helped in terms of helping the sale go through, despite the erroneous price on the house. Now the house had been advertised for 180,000 dollars (the limit, at the time, was 190,000 dollars) – and the market was “hot” at the time, so we actually offered a full 190,000 – with the seller paying 3 points (that meant that he was going to have to pay 3%, or $5700 for the sale to go through). Even after paying the 3 points he was still going to receive a few thousand dollars more than his asking price for the house. As I recall, the only work that had to be done to bring the place up to code was to replace several of the doors with fire doors – and the money to do that came out of the purchase price as well. So, all told, the seller probably ended up with about 183,000 dollars in his pocket (before paying the real estate brokers their commission). The first-time homebuyer program that I was using required a 1% down payment. One percent of 190,000 dollars is – yep $1900 (great job, math whizzes!). Since the program I was using also gave the buyer (me) a grant to cover all the other closing costs (various fees associated with finalizing your loan), that was all I needed to buy my first house. That plus signing about one hundred various documents. It was definitely worth it!
If you’re looking to buy your first home, there are definitely programs out there to help you do it right. You can find a low-interest, fixed rate mortgage that requires little-to-no down payment, and you can find a home for yourself that is exactly what you’re looking for as long as you go through the process step-by-step. Consult your State Housing Authority (or local equivalent) to see what first-time homebuyer programs you qualify for, and ask questions every step of the way so that you have as much information as possible to help you make your decision. It’s a great way to enter the world of home-ownership, especially because these programs are designed to help you succeed – keeping your monthly expenses affordable over the long term, and helping you get into your first home with a modest contribution out of your own pocket.
I look forward to hearing your stories, especially if this article has helped to make homeownership a reality for you.