Hey BP folks! I'm a long time fan, first time poster. I hope I'm in the right forum. I bought my first home last year in December, mostly to get out of renting (it was a condo in Montgomery County, Maryland with a low condo fee, not a super great deal but very reasonable). I'm working on increasing my income to hopefully invest in future properties, and trying to help my friends and coworkers on the path to home ownership since many of them are renters in their 20s and don't know the options that are really out there.
Here is where I'm stuck: someone I know is currently renting. Let's call her "Jane". She has a w-2 job but doesn't make a lot from it (somewhere in the $30-$35k range). She's been there a few years so she'd have tax returns, and her credit isn't great but it can be boosted pretty easily by paying off her $300 credit card debt. She bought a preowned car last summer, and the car payment and credit card (which she opened 2 or 3 months ago) are the only items on her credit report. She has 2 kids and her salary is the only source of income in her household, and she's in her late 20s. She has no savings and no investments (yes, I know, we are working on fixing that) but fortunately she has no student loan debt or anything besides her car and credit card payments mentioned above.
Now, I'm aware of some on the low and no down payment options for her (FHA, USDA, I'm almost positive she can't get a VA loan but I'll double check), but the sticking point would be the monthly payments. Right now she can afford her rent due to a low-income housing program, but even that is a struggle. The program is also tied directly to her income, so when her income increases, her rent does as well so she isn't any better off. Many of the low and no down payment options I've seen require mortgage insurance, which would probably raise her monthly payments past what she can afford, but if she tries to get a conventional mortgage, she'd have to come up with a down payment which she doesn't have. She could borrow it, but then she'd have to pay it back, which again would mean she's paying more every month...
The best option I could think of would be the FHA 203K loan which would let her buy a property that's really cheap and fix it up. Hopefully she could find a property with enough of a discount that the PITI and the repair costs together would still be affordable, but fixing up a house with 2 kids living there while working a full time job would be challenging for most people, let alone a first time homebuyer. In any case, I'd love hear any sage wisdom that you folks might have. Maybe there are better paths for her? She's currently in the Olney area of Montgomery County, MD but she's not far from Silver Spring or some parts of Gaithersburg or Germantown, and she works in Rockville. Thanks everyone!
Enjoy the government rent subsidy and sit pretty. Not everyone needs to open a home... With such low income, how will the person cover the mortgage if they're between jobs.
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Hi @Sergey Pshenichkin , here are my thoughts.
Go for an FHA, a regular FHA, no 203k. The 203k portion requires that all the work be done by an approved general contractor, so she wouldn't be the one doing the work anyway. However, there would be a requirement that the work be completed within a certain amount of time (6 months I believe), so there would be some pressure to find a contractor and get that work done.
Find a property that she could reasonably live in. Maybe it needs a little cosmetic work, but let's assume it's all things she can do on her own as she felt like; no need for the 203k. I don't know what home prices are in your area, but if you were able to find a duplex in the $90,000 range, you would only need $3,150 down ($90k * 3.5%). What about closing costs? Ask for seller concession in the offer to cover the closing costs. The seller concession limit on an FHA mortgage is 6%. All of this essentially means you are financing in the closing costs, so the closing costs wouldn't be cash out of pocket. Here is how it would look:
Purchase Price: $90,000
Plus 6% Seller Concession: $5,400 (this means $5,400 of the closing costs would be covered; no cash out of pocket by the purchaser).
Minus 3.5% Down Payment: $3,339 cash out of pocket
Total Financed: $92,061
P&I Payment at 3.5% interest (FHA offers pretty favorable interest rates): $413, then add PMI (probably about $55), taxes, and insurance onto this to get your total monthly payment. You will pay PMI any time you put down less than 20%.
Theoretically, in the situation above, the purchaser only has to come up with $3,339 out of pocket to purchase this house. The $5,400 seller concession should cover most, if not all of the closing costs. The trick here is to find a multifamily that will cover the mortgage, insurance, and taxes for her. You can use an FHA on up to a 4 unit residence. If she has kids and is really busy, she may want to consider finding a duplex where once side rents for $750 or $800/month. There are of course other hurdles here: debt to income ratio, credit score, cash in the bank, etc. But you will encounter those hurdles with any mortgage application.
Hope this helps.
With the credit card debt (and there is more to the story there I suspect - just having a $300 balance on a credit card does not cause bad credit) and car debt, she has dug herself a hole. The first step to climb the mountain is to get out of the hole. Focus on paying off the CC and car loan (both sources of bad debt), and eliminating bad money habits - this is absolutely fundamental to long term financial success. Then it certainly sounds like she needs to invest in her own skill set & find a better job.
Don't be distracted about buying a house before the fundamentals are established.
yeah I will have to agree with
@Ryan D. it doesn't seem like she is in the best position to buy a home now . The duplex / house hacking thing could work but what happens if there is an issue with a tenant , eviction or a bunch of damage to unit or a big ticket item needs to be replaced just seems to risky .
Working on the getting a higher paying job or income should be a priority right now I'd say .
I know Dave Ramsey brings this up pretty often . Best to have a decent emergency fund before buying a home .
You can't buy a port-o-potty for $90k in this area.
Some details are missing from the whole story but based on the numbers that you provided she will be a renter for a long time. I request that you share your source of affordable properties in Montgomery County, as all that I can touch in Southern Maryland for a price that is affordable on a 30-35,000.00 salary is trailer rentals, rooms for rent, and empty land that is wholly unimproved.
My best advice is to help Jane understand that due to the economics of the region that home ownership is not a reality in her current position and that she needs to focus on her children as you only have the time with them once. If she can work into her schedule college or some other education that can help her advance in her career or to change fields do so. That is the best advice that you can provide.
Lots of great advice, but I will tell you what I did. I make about $33,000/yr. I had more debt than the woman with two kids. I have no children. I was tired of paying of rent (no subsidized housing).
I spoke to a mortgage broker who educated me a lot. So, I took out a personal secured loan for $4500 plus a little over $1000 that I had saved. I let it season for 3 months and then had enough for a down payment. I bought a duplex for $59500. It turned out I only needed $1000+ to close. The seller covered the closing cost. Plus it already has a tenant that had a lease and pays $520/mo. I also paid back money on the loan to lower my debt. It's a work in progress, but I don't regret it one bit. I plan to cotinue investing.
Hope this helps.
Hey @Sergey Pshenichkin ,
The book I would recommend before doing anything is Dave Ramsey’s Total Money Makeover. Your friend’s story isn’t far off from millions of other Americans. Dave has helped countless folks out of this exact same situation.
While a higher income is ideal, it isn’t necessary. It is all about making the most of what you have, and understanding what you can and cannot afford. In order to be in the top 1% of income earners in the world, you only need to make $32,400 per year. We are all incredibly blessed and fortunate.
Personally, I accumulated a net worth of a little over 200k without ever making over 40k. My position has changed now, but only because I made the most of every single dollar coming into my home.
My favorite analogy about making and keeping money is that of a broken vase. If you pour water into a broken vase, water will come out. It doesn’t matter how much you pour in, it will be empty. It’d be wise to fix the cracks in the vase prior to pouring in more water. Likewise, one can make as much money as imaginable, if they don’t understand how to retain the money earned, not really any sense in making more money.
@Sergey Pshenichkin There are several programs in MoCo that offer grant assistance for down payment, as well as several in DC. PM me and I can recommend a few experienced loan officers for guidance.
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