I had no idea where to begin with purchasing a house.
I had questions such as, “Can anyone view any house? Why do you need a real estate agent? Who pays the real estate agent? What qualifies you for a loan?” and maaaannny more. So here are the things we went through, figured out, maybe, along the way.
So, step number one: money! Got some? Because, we didn’t.
What’s Required To Purchase A House?
Cash Money Or A Loan
I suppose, in an ideal world, the purchasing process for buying a home would go as simply as paying with cash. However, that is just not how we could afford to purchase a home at this time. So, we borrowed money. Not an easy decision. Scripture gives some heavy caution to those who borrow money.
“The rich rule over the poor, and borrower is slave to the lender.” Proverbs 22:7
Proverbs aren’t commandments of God. Rather, they are wisdom passed down from our ancestors, and speak of the attributes of God. Therefore, Riley and I didn’t take lightly the pending consequences of borrowing money. In considering a living space, we saw our situation as either borrow the house by paying monthly rent, or potentially borrowing the money to invest in a house we will eventually own.
Down Payment (And Budgeting)
Step number one in preparation to buying our house was budgeting.
Our income hasn’t been consistent for longer than a year for our entire married lives. With ministry as our focus, our jobs have changed many times. The best way we’ve managed money through our various jobs has been to use this free budgeting software called, mint. It’s very simple and is easily adaptable to income changes.
Budgeting allowed us to save up some money for a down payment.
You’ve maybe heard from others that it’s becoming more common to get a loan for a house with under a 20% down payment. Yes, it’s possible. However, there is one large cost to not having 20% for a down payment. We found that, if one pays less than 20% they will pay for private mortgage insurance on the loan.
This insurance protects the lender if the borrower end up in foreclosure. The rate varies, depending on your credit score and loan amount, but the rate is from 0.3% to 1.5% of the original loan amount for the year. A rough average would be anywhere from $50 – $150 per month on top of your mortgage, homeowners insurance, and taxes.
After the United State housing market collapse, FHA-insured loans (which many first-time home buyers use) require payment of mortgage insurance premiums for the life of the loan. Prior to the collapse, your FHA loan lender canceled PMI after your outstanding loan balance drops to 78% of the original home value. Loans still do this, but not the FHA, tiny-down-payment kind.
Other banks or credit unions will offer smaller down-payment options though too, just with other catches like interest variable rates — which can be pretty dangerous.
You can see why we thought it was important to have a 20% down payment saved up for when we decided to purchase. The cost of PMI for the lifetime of your loan REALLY adds up! Our thinking was that if you can pay enough to not need the FHA loan perks (and there’s some good ones), then it’s actually better to not do FHA these days.
Spoiler alert: we started by pursuing an FHA loan, but didn’t end up getting one because of that pesky PMI that we’re planning to beat.
Bank’s Pre-Approval (And Your Personal Pre-Approval)
The bank pre-approves you for a loan amount based off your income and debt. After considering our future goals and our personal budget, Riley and I already determined the largest amount we could purchase a home for prior to getting pre-approval from the bank.
If we had not prepared ourselves for our maximum spending amount before going to the bank, we could have heard the number the bank gave us and thought it okay and ultimately been in a position we wouldn’t have wanted.
For example, Riley and I plan to only have one income in the future as I plan to be a stay-at-home mom if the Lord blesses us with children. The bank approved a loan amount based on our two incomes. If we had bought a house closer to the high-end of the range the bank approved us for, we then would have been in too much debt, making too large of payments, to later be able to live off one income.
More debt means less freedom.
We thought that we’d never regret having little debt, but we may regret having an oversized and over fancy house for our means.
So Then, A Fixer Upper?
With all the above said, our options for purchasing any house were limited. We tested the waters to see how much our first preference would cost (and by tested, we mean reeeally tested… but that’s another story for another time). Our dream would be several acres outside the city.
So after a couple pursuits with no avail in our budget range, we started looking at homes in town. Ultimately, we could only afford the smallest of homes in Lawrence. However, we still couldn’t even afford a 20% down payment on those. So we watched the market closely for nearly two years.
Ultimately, by purchasing a fixer-upper, we saw an opportunity to profit from our investment, the capability to make it our own style, and affordability of a larger house in a better location.
SO WE BOUGHT A MAJOR FIXER-UPPER!
We still haven’t given up on the dream of owning some land and building our own type of house! Actually, a smart investment sets us up for a better future towards that goal. Stay tuned! We are even considering putting our house on AirBnB once we are done renovating. The possibilities excite us! So, see now why we chose a fixer-upper?
What Did Our Purchasing Process Look Like?
We started with the FHA (Federal Housing Administration) for our first loan pre-approval. Since we were looking for a house that needed renovating, Riley did the research and found that FHA offered a renovation loan called, FHA 203(k) loan.
After some brief emails back and forth with our gal at the FHA lender office, it was apparent that she was not interested in doing a FHA 203(k) loan. In hind sight, we see why not. She referred us to a local bank that offered only renovation loans then sent her customers back to the FHA lender for the end loan.
The bank would only gain profit from the renovation loan since they would send us back to the FHA lender for the mortgage (now see why FHA 203(k) was of no interest for our contact — she had a good partnership with this bank and they both made more money this way).
For the bank though, they only profit from the renovation loan and it isn’t much. It’s not worth risking much, in other words. Therefore, the bank will COVER their butt and put you in a bind to make them feel SUPER safe. In other words, they aren’t as giving because they don’t benefit much.
In one perspective though, you can see the benefit of this process for us, because after the renovation loan, we can gain enough equity in our house to remove the PMI. Getting a renovation loan, doing the work, re-appraising the house, acquiring more than 20% equity, then losing PMI is great! So we decided to go this route as guided by these two entities.
To make a story short, a week before our closing date, the bank would only loan us the renovation money if we put a sum of money (equal to our down payment) on “hold” while we renovated. This hold would be a safety net for them if we went over our budget. Then we could pull money from it to use on renovating the house.
Do you see the problem? We paid 10% down on our loan, and if we put the same amount of money on hold while we renovated, it’s essentially putting 20% down — eliminating worry of the PMI from the beginning. Only problem was that we didn’t have another down payment to put on hold?!?
One week before closing, we switched banks. Yup.
Bank #2 was willing to do all of the loaning — renovation loan and end loan — and do it FAST.
Get this, for them to be able to loan us money for a home, in a week, they gave us a 30 day note. For real! Then after a week or two they did some paperwork, we signed a few things, and poof, they transformed the loan into the renovation loan. All made possible because our “loan officer” turned out to be the bank owner and president through a series of fortunate events! So, what he said to do, happened.
After our first meeting and agreement, we shook hands with David, the bank owner, and said, “Thanks so much!” to which he replied with a frank salutation, “Oh yea! Thank you! Glad this is a win for both of us!”
No extra money on “hold” and a better interest rate was our win. David, his win, was getting a better deal by having the end loan with him as well versus the first bank only having our renovation loan. He earned a long-term customer from us!
What Does It Look Like To Renovate On A Budget?
Currently we have an itsy-bitsy, tiny renovation loan to use while we upgrade our home. One of our friends exclaimed, “Ugh! That’s only enough to do one bathroom!”
You know why? Because when hiring remodel work, one pays exactly that. And so, we be doin’ it mostly all by ourselves!
We made an itemized budget and even did most the decision making upfront to determine costs. We’ve also shopped our local listings to get used pieces.
The End Goal?
The pay off?
While we will spend so little on renovation, we’ll have to work really hard! And, at the end of our renovation, the value of the house will be well over what we paid. We’ve been told, “You’re gaining ‘sweat equity’!”
There is no doubt we will be consumed with working on this material item in our lives for the next 6 months. However, after this process we will have more freedom to be more people-focused and to serve others better in the long run.
God has been good. As we’ve begun working, others have already been a huge part of this process, and I’m very glad as it makes it not so material after all!