[I’m not an expert. I’m just a guy who went from nothing 14 years ago to owning two properties now, one that generates income, and the other that I live in. If there’s something wrong here, email me and let me know. I will edit. I would also like to know about ways you got your place, mistakes you made, anything like that. This is more or less my personal story, along with stuff I keep repeating to friends who are looking to buy a place. ]
In 2008, I got a good office job, which I still have. At the time, I was working two jobs: one at a publisher, and the other at a comedy club. I had to quit the publishing job, but I kept the comedy club gig. The office job was enough to get by on, but I was using the comedy club job to get a paid education.
I opened a savings account and deposited every comedy club check in there. I was making minimum wage, usually working two shifts a week. I don’t remember exactly what it was, but it was just under ten bucks an hour. I would usually make forty bucks and change for a shift.
Every time I made a small amount doing comedy or writing an article, it went in that savings account, which grew surprisingly quickly. After two years, I had ten thousand dollars in it. Which is enough to buy a home.
Wait, what? Don’t you need a huge down payment? Wouldn’t this be a hundred grand or some shit? Is this a typo?
Not at all. I went through the FHA, which only requires 3.5% down. I ended up buying a two-bedroom condo for $152,000, which means I only had to put $5,320 down. Six years later, I sold it for a huge profit.
You can do this.
In 2003, I went through a bankruptcy. I owed so much money that I couldn’t make minimum payments on my credit cards along with a $400 rent and a phone payment. Mind you, that was half the rent everyone else was paying at the time. I was a kid who was great at math, good at the rest of school. I was no dummy, but I didn’t know anything about personal finance.
I sat there in court, waiting with the other people whose life had gotten out of control. I felt sick. I hated being poor. I had briefly made good money and it ruined me. I spiraled out of control almost immediately. I swore to myself I was going to reverse this.
Seven years later, I was lying on the floor of my new home, scared into tears that I was going to ruin this all again, and also overjoyed that I had a place of my own, which made me feel like the richest person in the Bay Area.
Your life may not be in place to do it at this moment, but you can get it there. Here are some things you will need.
Remember when you thought you would never use math? You’ll need it now. Look in your bank account. What you see in there is math. Your financial well-being is a math problem. Every capitalist country should teach math classes as money classes, as having money is crucial to our survival and getting our basic needs met.
Two Years of Legit Tax Returns
Mortgage lenders are going to ask to see your last two years of financial records, which start with your tax returns. They’ll eventually look through all your accounts, run credit checks, and give a thorough assessment of your financial situation. You must have a paper trail of all your income.
I know there are plenty of jobs that don’t look good on paper, or don’t show up at all. You may be making a ton in tips that you don’t declare. You may be moonlighting in under the table jobs. You may be making a living trimming weed. This is where those secret cash jobs aren’t good for you. All that counts for a mortgage loan and government programs is what shows up on paper.
Research Your County
Every county in the country has different assistance programs. You’ll have to do this homework yourself. A quick search for the name of your county along with “down payment assistance” or “first time homebuyer” will probably do.
These programs come and go. Some have a certain amount of money in them that deplete and refund every year. Some are only in effect for a few years. I took advantage of Obama’s first time homebuyer’s tax credit, which gave me eight thousand dollars back in my taxes, which was more than my down payment, although not as much as my closing costs (which we’ll talk about later).
These programs normally work in favor of the people making a percentage of the median income. Median is not average. Median is the halfway point. Half of the people make under this amount, and half make over. Math! So the more rich people that live in your county, the better for you in this instance.
For instance, in Alameda County, ravaged by the influx of tech workers, you can qualify for the Mortgage Credit Certificate program if you make under $117,000 a year. This gives you tax credit (not a deduction, a credit!) when you file each year, helping you make your mortgage payments. Other counties in the US will be under half this number.
Three Faces of Financial Health
There are three faces of your financial self: debt, equity, and cash flow. They all work together. They can combine to ruin you or let you live a life of luxury.
Cash flow is a simple one. It’s the amount you’re making every month. You should be making more than you’re spending. If not, you either need to make more or spend less. Before credit was easy to get, this was simple. Now, it’s more complex.
Debt is what you owe. Debt is not always bad. All debt is not equal. Judging your debt is only possible in relation to the other two factors. However, most Americans have unhealthy and crippling toxic debt that will guide their entire financial future.
Equity is what you own that’s worth something. You can sell it for money or use it to secure a loan. Hopefully what you own rises in value. You buy something now, and it’s worth a lot more when you need to sell it. Here again, most Americans buy things that become worth less over time.
How Your Landlord Makes Money
Still don’t think you can afford to buy a house? Here’s some news for you: you’re buying one for someone else right now. If you’re paying rent, you’re most likely paying a mortgage. Your landlord bought the house with a loan, and you’re making the payments. Your landlord got a fixed rate loan, and rents in the area keep going up.
For purposes of illustration, let’s say your landlord bought your house for $188,900, the national median. They put 20% down, which is $37,780, and have a 4.5% interest rate. Their monthly payment is $765.71 a month. Of course, what this gets you varies from city to city. Some places it’s a huge family home or an entire apartment building, and other places it’s a tiny condo in the bad part of town. [This illustration is very oversimplified and does not account for taxes, insurance, repairs, and property management fees, don’t fight me, I’m trying to keep it simple. Figures down with a quick mortgage calculator app]
They probably bought it from a previous landlord, who had tenants in place, and from a quick math problem, worked out that hey, the combined rents on this place are $800 a month. It pays for itself! Over the years, as the rents rise on the national average of 2.7% a year, the income increases. Home prices in the US rose 6% over the last year, and that’s making the building worth $11,000 more a year. Also, the tax breaks are very favorable for your landlord. And last, but not least, is that the tenants are paying down the principal of the loan for the landlord, increasing the landlord’s equity. Over time, the landlord’s debt decreases, cash flow increases, and equity increases.
Even if there was a tenant that stayed the entire 30 years of the loan without one increase in rent, the landlord would be out the down payment minus the tiny overage in rents, in this case, a little under 26 grand. What’s the building worth after 30 years? In 1987, the median home price in the US was $85,600. As a tenant, you would feel lucky to have the same rent for that long, but you basically handed someone else a hundred grand to do so.
Let’s say, in that same situation, you get the down payment together at 35 and buy the place. In thirty years, you retire and live without a rent or mortgage payment. You only have to pay living expenses. This is pretty much what the government assumes you are doing when thinking about America’s retirement. You can live on your social security payments and retirement accounts and pensions if you don’t need to pay rent.
I’ll put this another way: I have one investment property. I borrowed the money for it at 4.5%, and it returns 8%. The difference between these two percentages is profit. This debt makes more money than it costs. There’s that saying that it takes money to make money. Sometimes you can get someone to loan you the money it takes. The loan I took out will stay the same, and over time, the income it makes will increase. Also, the building’s worth will increase over time.
How You Make Money
You make money at your job. You make more than you did ten years ago. But things also cost more than they did ten years ago! You’re still struggling to get by. It’s not as tight as the Top Ramen days of your late teens, but you’re still watching your budget closely.
What was your rent ten years ago? What if you still had that rent? How much better off would you be each month? Is there a single market in which the cost of living went down over ten years?
This is what you’re doing by buying a place. Even if the payments are tight, hopefully, you will make slightly more each year while your payments increase. This year, I got a 3% cost of living raise from work. While I rented for a year in Los Angeles before buying a place, my rent raised 4%. I just bought a place that will be the same as renting, but over the years, it will quickly become a bargain. I’ve stabilized my cost of housing, while hopefully my income slowly increases over the years.
Back to Cash Flow
Your cash flow is your income minus your expenses. If this is negative, you’re in big trouble. It should be positive. There are two ways to make this better: increase your income, or reduce your expenses.
If you want to increase your income, you need: a promotion, a different job, or an additional income stream. If there is no room for promotion and you need more money, get out. If there is no more money to be made in your profession overall, maybe you should switch careers. There are also the options of working an additional job (like I did) or investing your money (which would be a whole other article).
Reducing your expenses can happen a number of ways using your own common sense. If you’re spending too much on luxury items like concert tickets or eating out, you can quickly save money. Spending five bucks a day during the week buying coffee on the way to work is $1300 a year. Paying off those credit cards completely is another good way to do this.
Lenders are going to look at your cash flow and quickly prequalify you for a loan. They want to know what kind of payments you can afford. Showing them you can already make your rent payments while being able to save money every month will help you out.
A college degree can improve your cash flow in many cases. Some professions, such as teachers, can get significant raises with graduate degrees. I would not have gotten my office job without the college degree. Be careful not to rack up a huge debt with a degree that won’t earn it back. Getting into debt for law school is not the same as getting into debt for a creative writing degree.
Determine if there is any training or certification that can improve your income potential at work. I don’t have any personal experience with this. But many manual labor jobs will have opportunities for those who are trained on specific equipment. It’s a good investment to spend a few months learning a new skill that will pay off forever.
Moving is also an option. If you are in a profession that earns roughly the same wherever you are, you’d be better off in a city where there is a cheaper cost of living. There are many urban areas where you can afford a home working retail, and some cities where that isn’t going to work. There are also areas where your profession may make more than in other areas due to demand and the market.
Dealing with Debt
If you have a lot of debt, many of your expenses are going to paying interest. In my case, I had so much debt that I couldn’t make minimum payments, and was also incurring penalties. Declaring bankruptcy was the best option for me at the time, but I recommend not doing it unless it’s your only option. Pay this down. Consolidate your debt. Get a second job, and put all of your pay to this.
If your debt is so bad it’s causing you to miss payments, you need to radically deal with this. It ruins your credit rating. If you’re in this situation, do whatever it takes to fix it, stop reading this, and deal with it. I don’t really know how to repair credit. That’s what you need, and you’re looking at the wrong article.
When used correctly, debt can reduce your monthly expenses (if it’s cheaper to own to rent, as it is in many cities), give you training or education to increase your income in the long run, or purchase equipment with which you can increase your income. You want to make sure that the debt you incur makes your financial health better rather than worse.
Here’s the other thing about home ownership: it’s a great way to borrow money. The equity in your home is equal to the sale value of the home minus what you still owe on it. Banks love this when giving loans. If you have something of value, and you default on the loan, they own the thing of value. You’ll get a great rate.
I had a $35,000 medical bill out of pocket for 2016. I paid it with a loan against the equity I had in my home. The interest rate on this was better than what I had on the mortgage. Also, the interest was tax deductible. Your credit card interest is not, and the rate is horrible. When I sold the home, the loan was paid in full automatically.
Bad surprises happen. Having equity is a great guard against these moments in life. You won’t have to sell your home to have access to the money it is worth. There are costs of the loan, but it’s so much better than borrowing money other ways.
If your parents paid for your college tuition themselves, chances are they got an equity loan from the bank for it. Ask them. The idea that they saved in an account is cute, but unlikely. Chances are, their equity increased greatly from the time they bought it until the time you decided that you needed to get a creative writing degree.
Yes, Yes, Get to the Part about Buying a Freaking House
Oh yes. Sorry. I got a little carried away, but you need to understand your basic personal finance, since you’re about to expose yourself to people who assume you know what you’re doing.
Buy a printer and scanner. There will be a lot of items for you to print out, sign, scan, and return. Also, people will need to see a lot of documents that you will need to scan and send as PDFs. It will save you a lot of time if you have these at home, and they’re not very expensive.
Get your paperwork together. You’ll need tax returns from the last two years. Paystubs from the last two months. Checking, savings, and retirement account statements.
This will give you an idea of your price range. This part of the process will be simple compared to what’s about to come. Basically they look at how much money you made and spent over the last two years, and assume you will make at least that much for the next thirty years. The first loan I was prequalified for was four times my yearly income. The second was five times. I don’t know if this is normal.
Find an Agent
Personal referrals are usually the best way to go. Find someone who found a great place and ask who they used. The agent will ask what price range you’re looking in.
Your agent is likely aware of down payment assistance and other incentives. Sometimes their ideas may seem a little weird. But the good ones flat out know a lot more than you and you should listen. There are a lot of things that are up to you. They will not force you to buy or do anything. Usually you get a set of pros and cons on each decision.
The best thing to do is put 20% down. This gets you a good interest rate and you don’t have to pay a small thing called mortgage insurance.
My current mortgage is a 10% conventional. That means I put 10% down. I’m not eligible for first-timer programs. Also, rather than spending the extra on the down payment, I have plenty for the renovation.
There are also 5% conventional mortgages. This isn’t as good as the others, but it allows you more flexibility than a lot of first time buyer programs.
Where to get the down payment? You’d be surprised that a relative might lend you the money for this when they wouldn’t pay for dinner.
Your 401K probably has a loan program in there where you can borrow against it. The fun part of this is that the interest the loan generates goes right back to you. If you’ve been working an office job for like, ten years, you probably can get enough out this way.
First Timer Programs
There are a lot of programs that will help you as a first-timer. You need to research all of these. There are stipulations to each one. Usually they involve the property being used only as a primary residence with no rental income going to you. Sometimes there is a minimum length you must live there before you sell. Some structures, like mobile homes and houseboats, will not be eligible.
The FHA is probably the most-used resource for first-time homebuyers. The big advantage is that you get to put down 3.5%. You still have to qualify for the loan, but the down payment is much easier to come up with. In my first home, the down payment would have been over 30K had I gone conventional. Saving $5K was so much easier.
The downside is there are stipulations. No fixer-uppers. You must not rent out the property for a certain number of years. Look this up yourself. I don’t remember all of them, and they probably change over time, anyway.
Find Compatible Programs
You can use multiple programs together often times. Usually there are income limits, and some are not allowed to combine. It’s a case-by-case scenario.
California Housing Finance Agency
This agency will loan you the down payment for your FHA loan. You’re getting in for no money down. They also have other programs if you are a K–12 teacher in California.
Below Market Rate
BMR housing exists primarily in the really expensive cities. When there’s a giant condo complex going up somewhere, they’re usually required to make a certain amount of them available more cheaply than the others. However, in some markets, they’re still well out of range.
In San Francisco, you’re eligible for this program in 2017 if you make less than $80K. That’s the Area Median Income. The more intense the economic climate becomes, the high the AMI raises. There are also plans for getting you the down payment funds, and additional money as well.
The main drawback to BMR housing is on resale. You also have to sell it below market. You won’t get the appreciation. But you will likely get to live in a really nice condo in the meantime.
Once you know where you stand with a lender, you have an agent, and you have financial help in place, you will be able to start looking.
Your agent will ask about neighborhoods and types of housing. Usually, you’ll meet up and they’ll take you to see a range of places in the same area.
Here’s the thing: you have to live where you buy. Bottom line, aside from the financial potential, do you want to live there? Don’t buy anything you don’t want to live in.
Forget these. These are the ones that are trashed inside. Great bargains! But unless you are a contractor, don’t do it. Mostly these will not get financed for you. The really bad ones are all-cash offers only. There’s a lot of money to be made in this area, but not for you. Not yet.
Bigger Homes Far Away
The farther away you get from employment and cities, the cheaper the big homes become. If you work remotely, this may be something for you to consider. Places in the middle of nowhere can sit for a long time on the market, and you may be able to get a real bargain.
However, I hope you’re not expecting your friends to come visit. People won’t cross certain freeways in LA or cross the bridge in the Bay Area. They’re not driving out of the vicinity to see you. Maybe once.
But maybe you don’t care. Maybe you want room for your young family to grow in. You’ll be far from anything cool, but who cares when your kids have their own rooms and a great backyard?
Tiny Places Really Close
In a lot of cities, there are super tiny condos going up. You like tiny houses? Really? I looked at a 280 sq. ft. studio in San Francisco. It was going for $180K in 2010. It’s now around $440K. It was nice. But cramped as you can imagine. Right on a great corner in SOMA, though. I ended up getting a place three times the size a bit cheaper in Oakland.
There are some really bad neighborhoods with a lot of opportunity. This one depends on you. You may be just as scary. You may own a scary dog and have scary friends. Otherwise I would avoid this. I’m 6' 2", and built kind of big. Do I feel afraid most places? No. But would I feel good walking home from the BART train at night for ten years in a row, statistically? Do I feel good leaving for vacation from a neighborhood with a lot of home break-ins?
I’ve lived in horrible neighborhoods before in both San Francisco and Oakland. But it was out of necessity. And I’ve had things stolen from me in great places. And now, I can’t afford the once-bad areas.
The only real reason I’m listing this here, is every major city has a neighborhood that is nice now, but used to be a big pile of shit. You won’t be able to afford it when it’s nice. But maybe now, if you can put up with it, you can have it.
You’re going to find a place and put in a bid. You’ll be excited. You’ll picture yourself in it. You’ll call your parents. And then you’ll be outbid.
Over and over. Don’t worry about it. It happens. Eventually, you’ll put in a bid, thinking you don’t have a chance, and they’ll say, okay.
And then your dream place will come on the market the next month for less money. Whoops! Don’t worry about this, either. It happens to everyone.
Then the lenders will look up your butthole when there’s nothing wrong with your butthole and ask things that make you think they think you’re the worst person ever with the worst financial life ever. This is normal. They’re just making sure you aren’t pulling anything on them.
It’s a lot of printing, scanning, faxing, emailing, e-signing, and digging up things you forgot about.
There’s an inspection. You pay for it. It’s a pain in the ass. But you need to do this. Holy crap this is important.
You’ll pay for this too. Some jerk shows up and tells you it’s worth what it’s listed for. I just paid $500 for this.
When you enter escrow, it’s a weird period where no one else can buy the place, but it’s not yours, either. More butthole peering occurs. You’ll be asked a weird question you don’t know the answer to, that you don’t understand. Everyone will act like it’s a normal question. It’s okay. You’ll find out the answers, and then you’ll know.
Getting the Keys
One day you get the keys. Then all of the people who were bugging you in the middle of the day to print something out, sign it, and fax it back in the next three hours, never ever talk to you again.
Now you have the whole other process of figuring out what repairs you make, and what repairs you pay someone for. And you find out how expensive plumbers are, and how much it costs to repair all that stuff you wore out in the last place you rented.
But you can also do whatever you want. You can paint your walls black and buy a new dishwasher. You can buy a heavy ass couch that you don’t have to worry about moving later.
Get Your Shit Together
Maybe you didn’t prequalify. Here are some things you can do.
Relieve Your Debt Load
Start paying those down, either by being more frugal, or by taking another job or more shifts or whatever. Consolidate debts. Quit buying expensive crap you don’t need. I literally know people who bought Giants World Series tickets for the same amount I put down on my place. They put it on their credit card. Watch the game on TV in a house you own.
Fix Your Credit
I don’t know how to do this. I built mine from nothing the second time around. But I don’t know how to repair it.
Git Some Learnin’
If this helps, do it. I was a college dropout. It took me two years of going to school at night to finish, eight classes away. I got a degree, which helped me get a better job.
Get some more training if you work such a job. Do whatever you can to qualify for promotions or better pay.
Move Somewhere Cheaper
This is a hard one to think about. But you have a choice about where to live. If you’re getting crushed financially where you are, maybe you should go.
I would love to hear your personal stories, even if it’s just a paragraph, especially if I can add this in to the document.