Real estate dreams
November 6, 2010 7:09 AM   Subscribe

I dream of becoming a home owner, but I have a strange financial situation. Is it possible?

I am 99% sure the answer is "You're CRAZY" but I can't stop thinking about it, so please set me straight. I'm in the US.
My FICO credit score is 709. I have no debt, other than $2,500 of student loans which I can pay off immediately. However. I have no income. Not one that banks would care about -- I've returned to finish my degree, and am working part-time for an hourly wage for the next 18 months. I do, however, have 220k. (inheritance.)
I want to buy a very modest, affordable house. This would be 120k - 130k where I live. Anything lower and you're looking at handyman's specials. I don't want to be house poor and put all my liquidity into a house, obviously. If I put down a very large down payment (~60% of purchase price, let's say) would I be a candidate for a mortgage of ~60k? Or is it just absolutely insane that I do not have a salaried income?
posted by anonymous to Work & Money (22 answers total) 2 users marked this as a favorite
I don't know if a bank would approve you for a loan or not, but if you have 220k, why not put all 130k down in cash? You'd still have nearly 100k sitting in a bank, which should be several years worth of living expenses if you have no mortgage/rent to worry about and want to make it stretch. I would not call that house poor. And in any event, if you buy now and sell in five to ten years, you will almost certainly gain all of that money back, if not make a small profit.
posted by ohsnapdragon at 7:12 AM on November 6, 2010

One other note - if you buy a house, would it be possible for you to rent one or two of the bedrooms out (possibly to other students, since you are apparently near a university)? If you paid cash upfront, you wouldn't have to fear not being able to make the mortgage if someone flaked out on rent or something, but you'd actually be bringing money back in (versus now, where you are simply paying money out.)
posted by ohsnapdragon at 7:15 AM on November 6, 2010 [1 favorite]

I would pay cash for a house considering the vast liquidity you'd have left after you paid for it. Mortgage rates, especially any you'd get without income, are much higher than savings, CD, money market rates right now. So you'd be throwing money away if you took out a mortgage. A good amount of money.

I think if you had a liquidity crisis in say, 3-4 years (is this what you're worried about?) you would be in a better position at that point to get a home equity loan instead of taking a mortgage out now.
posted by kpht at 7:22 AM on November 6, 2010 [2 favorites]

I'm pretty confident that you would not be given a loan of any amount as long as you do not have a steady, reliable income from a full-time job.
posted by puritycontrol at 7:25 AM on November 6, 2010 [2 favorites]

While you could buy the house free & clear, I'd actually be more worried about the *other* expenses. For example, I'm about to close on a new house in an area with very low property values, but the property taxes? Yikes! Add about $5K per year. Plus home insurance. Plus predictable home maintenance (furnace inspection) and unpredictable (plumbing). Plus utilities and phone (another $3K or so per year, at least). You get the picture. Just how much of your part-time, hourly wage are you willing to devote to the house?
posted by thomas j wise at 7:26 AM on November 6, 2010 [2 favorites]

Frankly I'm confused by the assumptions in your question (I wouldn't consider owning a home with no mortgage and 90K in the bank "house poor"). Nonetheless, since your cash position is nearly twice the value of the house you are considering purchasing, why not reverse the transaction. Buy the 130K home with cash, leaving you with 90K in cash. Then, after you own the house outright, if you find that the 90K to be insufficient liquidity for comfort, take out a 60K loan secured by the value of the house. Barring differences in fees and interest rate, this puts you in the same financial position as your proposal. For a loan secured by an asset more than twice the value of the loan, I don't think you'll have difficulty finding a lending institution that cares about your lack of salaried income (particularly if you can show rental income).
posted by RichardP at 7:32 AM on November 6, 2010 [2 favorites]

I think you should pay cash. That said, it's costless to call a mortgage broker, tell him about your situation, and ask what the probability is you'll get the loan you want.

I don't think you're crazy, it's a reasonable thing to do if you're confident you'll want to live there for at least a few years, but trying to get a mortgage with no income when you don't need it seems ill-advised. If you're worried about depleting your liquidity to the point where you'd be in trouble in the event of an emergency, it's not that hard to pull equity out from a house you already own.
posted by deadweightloss at 7:35 AM on November 6, 2010 [1 favorite]

I was in a similar position a few years ago. I ended up buying the house outright and don't regret it. Unfortunately, once I finished the grad program I couldn't find a job there and the market sucks. I ended up renting it to a friend and moved to a job 7 hours away.

Be careful, try to find a realtor you can really trust, buy in a neighborhood you know well, get a friend who knows architecture/construction to look it over before you buy.

Have you checked out credit unions? They might be more willing to give you a mortgage.
posted by mareli at 7:45 AM on November 6, 2010

This could be something you might want to look into - If you find a private sale, sometimes the seller will hold the mortgage for you. .
posted by empatterson at 7:53 AM on November 6, 2010

You could get the loan if you wanted it (at some low percentage of the value), but I wouldn't do it.

If you buy at all, pay 100% cash for the house. This is probably your best bet, provided you also have the money for maintenance, repairs, etc., and are EXTREMELY confident that the house is in GREAT shape. This is NO time to buy a money pit with your income like it is.

The good news in this scenario is you're likely to get a great deal in this housing market.

The bad news is that even at best, home ownership carries hidden costs compared to renting. Renting is high, but it's generally an all-in expense. No chance of high repair costs, major appliances eating you alive, etc. So if you do this, budget for the inevitable insurance costs, repair costs, etc.

Another disadvantage is that if you're in school now, your life is likely to change once you get out. You might get a job offer and decide to move. If you wind up in that position, it's a lot easier to get out of Dodge if you're renting.

Also, be careful to do your budgeting so that with or without the house purchase, you're not eating into your cash position faster than necessarily, and that you can see the light at the end of the tunnel (a degree and a better job) before you're broke. Being debt-free is a big help in this, but expenses keep right on coming.

Also, take $2,500 out first and pay off the loan.

lastly, I recommend reading Dave Ramsey's "The Total Money Makeover" before making any big decisions.
posted by randomkeystrike at 8:03 AM on November 6, 2010

There exist mortgages where your credit/income isn't checked, put you pay for that with points up front and a higher rate. This would be, I believe, once you've already bought the home (say, in cash--getting that amount back via the mortgage). Mortgage brokers know this kind of thing.
posted by Obscure Reference at 8:11 AM on November 6, 2010

i agree. pay cash, and try to use the cash to secure a great deal in this buyer's market. virtually any seller would definitely find this highly attractive. You can be selective and make lowball offers.
down the road when you have a good job you can refinance and take the money back out if you wish.
posted by alkupe at 8:13 AM on November 6, 2010

You don't need salaried income. You just need income. Your part time job wages count, as long as you can produce pay stubs. Your income can also be in the form of dividends and investment returns. Or it could be in the form of rental property income. Keep in mind though, that if you buy the home and don't live in it, you don't qualify for the owner occupied mortgage prices.

But owning a home is a long term plan. If you aren't positive you'll be in the same place for five years, it's probably not a good move. I mean, if a dream job comes along that requires you to move 500 miles away, you'll be kicking yourself if you have to pass it up on account of owning the house. You want to keep your options open, partially because a great opportunity might come along, and partially because it's really hard to negotiate without them. But maybe real estate management is your goal and dream job, so nobody but you can really rule this out.
posted by pwnguin at 8:25 AM on November 6, 2010

Owning a house when you're not sure if you'll stay in the same place is bad IF you won't be able to get out of mortgage payments, or IF owning that house will mean you have no savings to start another life somewhere else. Neither of those would be true for you.

Worst case scenario, in two years you want to take your dream job in another city, and it takes another full year after you move in order for a realtor to sell your house. For many people, this would be crushing, because they could not afford to pay 2 mortgages or a mortgage and rent at the same time. You would not have this problem, as you would own the house free and clear. You should not (unless you are extremely bad with money) even be low on savings when you want to move, so should have no problem giving a rental downpayment, etc. In fact, if you rent the house while you live in it (or after you move) you will actually be improving your bank account.

If this is truly a dream, as you say it is, go for it. You will not be financially ruined, and we all deserve to live our dreams now whenever possible.
posted by ohsnapdragon at 8:40 AM on November 6, 2010

If the LTV is below 40 or 50%; a smaller (i.e. non-coorporate giant) bank might make the loan. ... because if you default; they will foreclose/repo and essentially have their money already compensated. Worth a few trips to smaller banks. Caveat... FICO below 720 or even 740 is going to be a ding on your chances.
posted by buzzman at 9:06 AM on November 6, 2010

Go ahead and buy the house free and clear. I did it when I inherited some money and while, yeah, I am pretty broke again now at least I have somewhere to live, an asset that I can either rent or sell or do whatever with and no landlord, which to me is worth a LOT. My homeowners insurance and property taxes are way less than I would be paying for a mortgage or for rent, so I consider myself extremely lucky. Also, why the hell would you want a mortgage? Mortgages come with interest. You end up paying way, way more - almost double, if I'm not mistaken - for the house over the course of your mortgage than you would pay upfront. Do you want to be paying extra money to the bank just because you think they need it more than you? No, I didn't think so.
posted by mygothlaundry at 9:36 AM on November 6, 2010

Not crazy at all. I agree with the others that if you buy, you should buy outright (assuming you find something you want at a good price - you can afford to be picky!). You'd leave yourself with enough of a cash cushion, and it sounds like your income situation is such that you wouldn't really benefit from the mortgage interest deduction. Plus you probably wouldn't get a great rate anyway.

Owning involves other costs besides the mortgage, yes, but presumably you pay something to live where you do now? You can find out what the taxes are for a property from public records, and ask around about insurance and utilities. It should be easy to come up with a ballpark estimate to compare to your current living expenses.

And down the line, if repairs or upgrades need to be made and you don't want to deplete your savings further, you'll be able to tap the equity, as others have noted.
posted by shrieking violet at 10:52 AM on November 6, 2010

In order to qualify for a loan, you must have 3C's:
- Character: this is your credit score, it tell the bank if you are a reliable person.
- Capacity: this if you can afford the loan payments. This is calculated as a percentage of your income: typically, your monthly payment should only equal or less than 30% of your monthly gross income (and less than 35% of your net income).
- Collateral: is your collateral (the house you buy) has enough value to cover the cost of the loan in case you default on your payment.

You don't have capacity -> you can't get a loan. But you can do this: buy the house in cash now, then rent it out. After 2 years, your documented rental income will be considered a source of income from which you can use to get a home-equity loan. Note that only about 80% of the rental income will be counted (to account for incidentals and vacancy); but it'll be some stable source of income for the purpose of getting a loan.

I don't fully understand your reasoning of buying a house now. The cost of owning a house is high (tax, insurance, maintenance); unless you get equitable returns (rental income, happiness and stability with a family, joy of ownership), I think it's an expensive possession. I can sympathize if you want to be a landlord; but do read up on what you are getting yourself into so you can make an informed decision. Don't let the feeling of too much "free" cash burning a hole in your pocket push you toward rash decisions. Buying a house should be a deliberate decision you get into, with full understanding of the trade-offs, not due to some vague feelings. Some possessions can end up possess you!
posted by curiousZ at 11:00 AM on November 6, 2010

The question to ask is not, "can you get a mortgage?" but "why would you want one?"

In a roughly similar situation ~15 years ago, I bought a modest house for cash. It was the very most bestest thing I ever did. When buying for cash, you can often negotiate a better price, and you can get through the transaction much more quickly and with lots less annoying paperwork. You will also save truckloads of money, up front and even more so over time. Financially, it's hard to imagine any disadvantage to avoiding the mortgage. And psychologically, it's really neat to sit in your house and know you own it. IFF it's a place that you want to be living in. And if you're willing to be one who has to figure out what to do when the furnace craps out in the middle of the night.

But, be aware of the extreme squirreliness going on the real estate market. This could affect you even if you buy for cash, and especially if you buy a house that has a foreclosure or subprime mortgage in its history. Protect yourself by getting a good lawyer as well as a thorough inspection of the house. Yes, you DO need title insurance. AND homeowner's insurance.

Lots of people will be falling all over themselves to get their hands on some of your money, and some of them may not be honest, or may not have only your best interests at heart. If you're reasonably careful, you could get a very sweet deal.
posted by Corvid at 11:23 AM on November 6, 2010

Not having a salaried income doesn't disqualify you from getting a loan. I'm a freelancer and haven't had received a regular W2 in decades. I have bought a house, sold it, and bought another.

But that's different from your situation, where you've got no income to speak of. I can't speak to that.

One thing to consider, apart from whether you can afford to buy a house, is whether you can afford to keep it. What are property taxes where you live? Might you be buying a condo, co-op, or house in an area with a homeowner's association that would impose additional recurring costs on you? Can you budget for, say, $3000/year in repairs and upkeep? You don't want to exhaust your remaining principal just staying in your house.
posted by adamrice at 12:13 PM on November 6, 2010

I had a friend that did this while a grad student a few years back - she put 2/3rds of the price down in cash, then got a 15 year mortgage for the remainder. That was back when mortgages were easier to get, but still. The mortgage lenders will know how much money you have (you disclose it), and thus that you Could cover the whole price of the property without an income.

That said, I'm with those who say to pay cash if you buy. Look at an amortization chart and you will see how much you're saving (tons!) by not paying all of that interest.
posted by ldthomps at 3:27 PM on November 6, 2010

You not only save the interest on the loan, you save the points and expenses of getting the loan. With such low interest rates, your savings are probably not earning much. Get the house appraised by your bank's appraiser, and get a home inspector. The 400 I spent on the appraiser got me a 10,000 return. Once you're working, you can get a mortgage if you have other financial needs.

There's a lot to be said for taking the money you would have spent on mortgage payments, and saving/investing.
posted by theora55 at 6:14 AM on November 7, 2010

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