Ask Brian is a weekly column by Real Estate Expert Brian Kline. If you have questions on real estate investing, DIY, home buying/selling, or other housing inquiries please email your questions to [email protected].
Question from Jonna in OR: Hi Brian, I managed to get pre-approval for a $210,000 mortgage back in March and have been looking for my first home ever since. I don’t have to tell you how hard it’s been to find something that I can afford, to say nothing about something that I really want. Even what I consider to be my most basic requirements stretches the price above $250,000. I don’t want to give up but I’m out of ideas. How about helping me with a few outside the box ideas?
Answer: Hello Jonna. One suggestion that I’ve heard recently is moving overseas. But I doubt that you want to go that far outside the box. Two other ways you can consider for getting more of what you want are going with a serious fixer-upper or buying jointly with another person. Here are a few of the details about how these can work.
Remodel to suit yourself. Instead of looking at a house “As Is,” look at what you can turn it into. I don’t know the market in your area but ask your agent to show you several of the most run-down houses slightly below what you are pre-approved for. Expect the worst, envision the best, and plan for major inconveniences while it is being remodeled.
Jonna, you might need to go back to be pre-approved with a different lender because what you want is an FHA 203(k) loan. That should be in your wheelhouse because the minimum requirements are a 620 FICO score and a 3.5% down payment. Technically the FHA allows a 580 FICO, but most lenders require at least 620. One big upside is that you’ll build tens of thousands of dollars in additional equity very quickly by making relatively minor improvements.
These loans allow homebuyers to finance up to $35,000 into their mortgage for repairs, improvements, or upgrades to the home. However, an FHA 203k loan requires a “buffer” equal to 15% of the total bids. That means you need to plan for maximum repair costs at around $31,000. A portion of the loan proceeds is used to pay the seller and the remaining funds are placed in an escrow account and released as rehabilitation is completed. The purchase value of the property is determined by either - 1. the value of the property before rehabilitation plus the cost of rehabilitation, or 2. At 110% of the appraised value of the property after rehabilitation, whichever is less.
Purchase a property with another person. This is another option that many people fail to consider but can open a lot more possibilities. A common reason people hesitate with joint ownership is that they have to share the equity with another person. Where you will find joint ownership more common is with couples in relationships but not married or business partners for investment properties. Take a lesson from the business partner angle because neither a romantic nor domestic relationship has to exist to make joint ownership possible. It only means that someone else’s name is also on the property title along with yours. It could be your parents, a sibling, or even a stranger. One of the many possibilities is that joint ownership is often a way to bring more down payment money into the purchase, which can enable buying a bigger and better home.
Joint ownership offers a lot of flexibility such as the ownership doesn’t have to be equally split. Ownership can certainly be 50% in your name and 50% in someone else’s name. It could just as easily be 90% yours and 10% someone else’s or any other combination. It’s not limited to just one other person either, multiple people or business entities could have partial ownership. That should give you an idea of how flexible and creative you can get with joint ownership.
What you do want to do with a joint purchase is make sure it is done in a fully legal and coherent manner. This could add to the total cost slightly because it would be wise to have an attorney write the agreement that will be signed by everyone involved (including the lender). There could be some very specific language in the agreement if you’ll be living in the home and someone else is only a financial investor. For instance, most of the maintenance and repairs might be your responsibility. But that can also mean that you become entitled to more of the appreciated value in the future. Another scenario is that the ownership equity could change over time if you make improvements to the property. Other considerations are who is responsible for property taxes and insurance? Also, what happens to the equity if you make all the mortgage payments? On the flip side, what happens if you miss mortgage payments? Like I already mentioned, this is a very good case for having an experienced real estate attorney help write the agreement.
Jonna, I hope these ideas spark your imagination to come up with even more creative solutions suitable to your exact circumstances. No doubt that these are tough times for first-time buyers but there are still creative ways to start building equity in the American Dream.
What outside the box ideas for struggling homebuyers can you add? Please comment.
Our weekly Ask Brian column welcomes questions from readers of all experience levels with residential real estate. Please email your questions or inquiries to [email protected].