How We Bought Our First House With No Money
How We Bought Our First House with No Money Down, Got $7,300 at Closing, and Added Over $120,000 in Value Immediately!
Hi There BP Community! I am excited to share you this story about how my wife and I bought our first home together on August 31st. The date is significant, and I’ll explain why later. We absolutely are in love with our house! It’s a 1949 vintage colonial bungalow in the heart of downtown. 1,450 square feet, 3/2 with a fenced in backyard that our two retrievers love to explore. We are in walking/biking distance to several bars and restaurants. It’s beautiful, and we plan to turn it in to an investment property in the next few years. I want to share this story with you as our first home purchase story is very unique. We negotiated the deal with no money out of pocket, gained $7,300 through the sale, and immediately increased the value of our house by over $120,000!
How We Found the Place:
I took on a new job that caused us to move to a new city. Apartment complexes had been springing up all over downtown, and we were just tired of living in a one-bedroom apartment for the same price as a house with a yard. So we started hitting the refresh button on Craigslist and Zillow repeatedly for three weeks while staying with one of our good friends who already had a place in town. One night at midnight a new listing popped up on this house that we thought was perfect for us. It was a 3/2 downtown with a backyard for $1,500. We replied to the listing and said we would stop by the next day to tour the house. We showed up, met the cute family that was moving out, and said that we should get an application in quickly if we wanted the house. We filled it out that night and turned it in to them. The next day we received an email that we not be getting the house. Apparently, after we left that afternoon they had a business man tour the house from out of town who showed up with rent for a year in cash. Bummer.
This was obviously a really deflating experience, but we knew that we would find the right house and that were determined to not move in to another apartment. Late one next the next week, the house showed up. We replied to the post immediately, and sent them an application attached to the email. We told them we were able to stop by the next day and check out the house. We received and email back from the landlord saying that overnight she received six other applications for the house, but we were the first to apply.
My wife and I had won the rental housing war! We moved in the next day, even offering to pay a prorated amount through the end of the month on top of our one-month security deposit to ensure the landlord would not go back to anyone else. We were in.
Turns out, there was a major overhaul sewage project going on along the main road out of the neighborhood that began right as we moved in. The project would involve switching out the main plumbing line to the neighborhood and the installation of a bike path. After a year of renting the house without any issues, we realized how much we loved the area even with the construction project going on at the end of the street. We were a short 0.25 mile walk to an up and coming bar/restaurant scene. We were a $5 Uber ride to the main downtown area as well as several other trendy “it” spots where the home values were two to three times the price. This got us thinking about the future of our neighborhood. Eventually this construction project would be complete. Eventually, the home prices would have to go up because the neighborhood immediately outside ours were already $500,000 or more. We discovered this house was sitting in the exact bullseye of all the pricy areas and was destined to see an increase in value over time. We knew what we needed to do.
We renewed our lease for another year. The landlord agreed to continue to rent the house to us for the same amount of $1,600 per month since we always paid on time and we hardly ever asked her to fix up anything around the house. We were the ideal tenants. About four months in to our second year, I decided it was time to make a move. I emailed the landlord warmly asking her if she had considered selling the house, and if so, could we work on an arrangement to purchase the home at the end of our lease. She was shocked! The landlord had previously tried listing the home for sale, but it turned out that the construction project down the road would steer potential buyers away. She said she had been looking to sell the house since she moved out of town for a new job. I explained to her that we did not have the funds to purchase the house, and that my wife would be completing medical school at the end of the year. We were a mess on paper with a large amount of loans accrued. I asked if she would consider working with us on drafting up a lease-to-purchase option. She said she would ask her friend who was more knowledgeable on the subject and get back with us.
Lease-to-Purchase Deal
A week later, we got an email back with the terms. Here they are outlined below:
We agreed on a Purchase Price of $235,000, which was only $15,000 above where she purchased the home originally for back in 2010. The home would be sold to us as-is except for a few small items we wanted fixed up around the house—the largest of which was a new fence. We agreed to Option A as we did not have the funds available to pay any more than we currently were paying in rent. We agreed, and we were on our way towards home ownership, and the landlord began putting money away for us and started on the repairs.
It is now June. We had collected $3,000 already, and if we were going to close by August, we would have $5,000, enough to cover all our assumed closing costs. We decided to reach out to banks in or der to get the best deal possible on a loan. This is when the light bulb went off in my head. My wife, a soon to be doctor, was going to begin her residency program in July. I thought that since she would be working officially and no longer in medical school that we might qualify for a Physician Loan. I was right!
What is a Physician Loan?
In case you are reading this and do not understand what a Physician Loan is or how it works, here is your explanation:
A Physician Loan is a specific loan that most major banks can give to qualified doctors and, as I found out, even to residents who have been offered a position at a hospital upon completing their first four years of medical school. The loan is like a VA loan in that there is no required down payment and no PMI. The only requirement on the Buyer is the initial appraisal and inspection fees and buyer-related closing costs. We calculated this to be roughly $7,500 total, including our insurance for the first year.
The Physician Loan has another interesting benefit in that it can be transferred to another home so long as there is enough equity in the first home to easily turn the first home in to a rental property. Additionally, a qualified physician can purchase a home up to $500,000 with zero down, a $500,000 - $1,000,000 home for as little as 5% down, and a $1,000,000+ home for as little as 10% down. This allows the physician to not only purchase their first home, but gives them the opportunity to purchase a bigger and better second home in the future. The Physician Loan is good for up to 10 years after they complete their residency program, which can be anywhere from 3-5 years if they continue to specialize in a particular department. In total, one can have a Physician Loan and transfer the loan from one house to another for as many as 10-15 years!
Quick disclaimer: Check with your specific loan provider to double check they can do this for you before entering an agreement on a loan like this. Make sure it is transferable.
The Buying Process
This is the part where things got hairy. While securing a Physician Loan sounds awesome—be careful. The paperwork and documents required is definitely more painful than the normal requirements than a conventional loan. We were required to produce letters signed by department heads in the hospital that my wife was in fact employed. We needed to show proof of her offer letter. Pay stubs. We even had to produce a letter stating that the hospital’s intention is to keep her employed for the full three-year term, even though residency contracts are only offered one year a time. It’s kind of like asking your employer to put in writing that they want you to work for their company for three years.
Once we had the proof of her residency paperwork satisfied by the bank, we were able to focus on the more typical paperwork required by the bank. We provided paystubs, rental payments for two years, and bank statements. We conducted a home inspection and had an appraisal done, which I will discuss the results next.
The Appraisal Report
The house we were living in is mentioned on the tax card as a 3/2. What is not detailed is that the front bedroom, was actually more of a den. It did not have a closet. We were using it as an office and it had French doors leading in to the room. While it has two windows, providing two means of egress, the appraiser instead categorized the house as a 2/2 with den instead. This was particularly devastating news as we were really hoping to have some built-in equity on top of the deal we were getting on the house. The home only appraised $2,000 above where we were purchasing it. Still good, but not as great as we had hoped for our prized house in a market set to boom. We tried fighting the appraisal report, but did not have any success. We did however reach out to the repairman the landlord has been using for years, and he agreed to help us install a new closet and some extra shelving around the house at cost if I would help him. We now have a 3/2!
Negotiating More Money Within the Loan
As I was gathering all the necessary documents I began a dialogue with the lender about possibly overpaying for the house to get some additional money back at closing. After we learned that the bedroom that is not a bedroom needed a closet, I thought I could use another $5,000 to get this and a few other small wish-lists repairs taken care of. The lender said this was not possible, but gave me the idea of reaching back out to the Seller to see if she would instead write me a check after closing for $5,000 in a separate agreement from the contract. Surprisingly, she agreed! We then changed the amount on the 100% financed physician loan to be $240,000 instead, and I would receive an additional $5,000 from the Seller within two business days following the sale on the side.
Don’t Forget About the Termite Report!
Typically termite inspections are conducted annually. When we originally engaged the Seller about purchasing the home she had her termite company check the house again. This was done in April. Fast forward to August 18th. We were all set to close, when the lender came back to us the day before closing stating that our termite inspection was not valid since it was not conducted within 90 days of the sale. Yes, that’s right. We had to try and get the termite company to come out again ASAP just to tell us that we still don’t have termites, and that we could not close until this was completed.
The Final Results
Once the termite inspection was completed… again… we were back on track to close. Unfortunately, we were being faced with another issue. If we could not get the closing completed by August 31st, we would have to provide the bank with an additional month’s bank statements and paystubs. This would most likely have delayed our closing to mid-September. But at this point, we were determined to close on time and not ruin our upcoming Labor Day Weekend plans. We were going to buy this house now at any cost. At 5:30PM on dot August 31st, the final papers were signed. We had purchased our first house!
Here are the final stats of the most heavily negotiated deal in history:
Purchase Price and the Loan Amount: $240,000, 100% financed Physician Loan, No PMI
Seller paid $5,000 of the Buyers closing costs with the Lease to Purchase Option
Seller did not charge rent due during the month of sale
Buyer received an additional $5,000 through a separate agreement to fund minor repair work around the house
Buyer received $1,600 rental deposit back as the lease term ended with the sale
Buyer did not make a payment during the month of September while the loan accrued first payment interest and the sale was recorded.
Buyer paid $2,500 out of pocket at the final closing table to cover inspections, appraisal fees, and the first year of homeowner insurance upfront.
In total, inclusive of the two free months of rent and the security deposit back, the Buyer received a net gain of $7,300 with the purchase of the house!
Currently rentals in our immediate area are going for $1,900 - $2,500 per month for similar type houses and will continue to rise steadily, versus our mortgage, including taxes and insurance of $1,600. We are excited for the opportunity to turn this in to our first investment property in a few years. Also, recent sales in our neighborhood are now at $250 per foot for 3/2s. At 1,450 for our house, after the closet is installed, our home should be valued at $362,500. A gain in value of $122,500!!
… And then a week later a hurricane came through and knocked down half of our brand new fence…
Welcome to homeownership!
Moral of the Story:
- Be nice to your landlord. Make all payments on time.
- Offer to help do small repair projects around the house, even if you are renting.
- Make friends with the landlord’s vendors, especially the repairman.
- Understand your residential neighborhood’s rental prices and sale prices.
- Find pockets around the “it” areas that are walking distance, or a short bike ride away. If an area is hot, chances are the next neighborhood over will heat up too.
- Look on the city’s website and see where infrastructure upgrade projects are happening. There may be opportunities like ours where all you need to do it live in the house for a short time before reaping the benefits of the project being complete.
- Check the square footage of the house and look for opportunities to make an additional bedroom happen. A house listed as a 2/2 may have a den or bonus room that can easily be converted. Similarly, a 3/2 may not be a true 3/2. Take a good look at the posted pictures if you cannot see the house first.
- Don’t be afraid to ask your landlord if the house is for sale. You never know what situation they are in. Tell them your situation, and see if you can work together to buy the home from them like a Lease to Purchase Option.
- Get creative with the contract. Ask for a separate agreement to “overpay” for the house in some extent to receive cash immediately at the closing for those small repair projects you’ve been wanting to do.
- Try to close towards the end of the month. The landlord should be willing to forgo your rent for that month because of the sale. That’s money in your pocket!
- Prepare your documents for the bank ahead of time including anything extra you can think of that you may need to provide i.e. check images, signed letters of agreement.
- Don’t forget the termite report.
- Look for alternative loan financing methods. Don’t be afraid to reach out to multiple banks. It’s your loan, so get comfortable with the all-in monthly payments and total out of pocket costs to close. This will give you an idea of how much you will need to ask from other sources.
- Get your security deposit back!