How
I Went From Being Flat Broke to Owning My Own Home, Mortgage
Free, in Just 5 Years.
Step Two: Buy a Cheaper House than You Can Afford.
The second step towards becoming mortgage-free is to take
out a home loan at the local bank. If your credit record doesn't
allow this, you may need to find a seller willing to accept
a contract, but they usually require a much higher down payment
and charge higher interest – so you may be better off
taking the extra time to repair your credit, instead.
The key to remember is to take a much lower mortgage than
your bank wants to give you. If your bank says you are eligible
for a $2,000/month mortgage, don't look for a house that uses
every cent of that loan. Find one for half that, if you can,
or even less. You then have at least $1,000 a month to help
with any cosmetic improvements, or to save toward your future
mortgage-free home.
One good rule of thumb is to buy a house that will still
be affordable even if you lose your job and have to go to
work for McDonalds. If you have two incomes in your family,
try to find a house you could still afford even if one of
you loses your job. You'll have a less impressive house than
your friends have, but you'll also have less stress –
and you can put more money in the bank than they do. It's
nice to have the bank pay interest to you, instead of the
other way around!
Why buy an inexpensive house instead of trying to find the
"best" house your bank will let you buy? There are
many reasons, but the biggest reason is that it will help
you achieve your goal of eventually owning a home without
a mortgage.
My philosophy is that your first home should be the least
expensive house in a decent but not exceptional neighborhood
- or the least expensive house in a neighborhood that is likely
to improve, if you are willing to wait for the neighbors to
fix up their houses a bit. Be sure to talk to a good real
estate agent and do your own research, so you will have the
best chance of selling your home later.
Many neighborhoods do improve, but other neighborhoods are
still on a downward slide. Home prices usually go up, but
they can also go down. Hopefully, you've spent the last two
or three years studying the local real estate market so you
can make a solid, informed choice when you're finally ready
to buy your first house.
If the neighborhood is currently a bit shabby but at least
a few houses are getting new paint, etc., it may be a good
area to invest in. Or you may choose to find a working class
neighborhood with inexpensive, owner-occupied houses where
the neighbors already take pride in keeping their homes in
good repair, even though the homes are not expensive or fancy.
Remember that there is no guarantee that you will be able
to re-sell your house at a profit, but the effort you put
into researching the area and the time you take to find the
perfect house will help improve your odds. If you do end up
holding onto your house longer than you intended to because
the housing market slows, you will still have the advantage
of an affordable mortgage - because you bought a less expensive
house than you could officially afford.
If you think a neighborhood is going to improve, buying a
house there before the neighborhood is "discovered"
will bring you the greatest profit when you sell, but it also
gives you the greatest risk if the neighborhood doesn't become
as popular as you expected it to - so do your homework, research,
research some more, and try to look at every angle before
you buy your first house.
In many cities there are special tax deferments and home
loan programs for improving neighborhoods. These locations
are usually closer to the downtown area and are slowly gentrifying.
The neighborhoods are often quite conveniently located and
near public transportation, and these areas are becoming more
and more appealing to people who work in downtown offices.
If you move into an area like this that has been slated for
improvement, special home loans may be available that allow
you to buy the house - and these same loan programs will also
make it easier for the next person to buy your house in a
few years when you're ready to sell.
I was eligible for an Oregon
Bond Loan, which reduced my interest rate and allowed
me to have a smaller monthly payment. Similar loan programs
can be found in other states. You should also consult with
a local real estate agent who works with first-time buyers
(even if you've owned a home before), because she may know
about local loan programs intended for specific neighborhoods.
If you decide to use one of these loans, be sure to read the
fine print so you don’t discover that you owe a penalty
when the house is sold.
If you find a local organization with classes or counselors
that help people through the process of buying their first
home, be sure to sign up for it, even if you've owned a home
before. Community colleges may also have classes you can take
so you can learn about home mortgages and the other costs
of buying and owning a house. The loans with the lowest initial
costs may not be the best long-term value – again, you
want to become as knowledgeable as possible so you "buy"
the right loan, when you buy the right house.
Try to get outside your normal comfort zone when you start
looking for a house. The best buys, and some of the easiest
houses to sell later, may not be in the same kind of neighborhoods
you're used to living in. Hopefully, you've done a lot of
research while saving up your down payment, so you already
know where you are most likely to find an inexpensive house
that could be sold at a profit when it's been fixed up a bit.
If you intend to resell the house in just a few years, look
for a neighborhood where most of the houses are owned by their
occupants, even if those home owners look different than you
do or speak a different language.
It may help to consider your first home purchase as a business
decision instead of a purely personal decision. If you take
this attitude, it's a bit easier to see if the house is really
the one that will help you achieve your long-term goals, or
if you're just letting your old expectations and prejudices
make the decision for you.
If most of the houses in the neighborhood are now rented,
but many of the owners are trying to sell them, you may be
one of the first people to buy in a rapidly improving neighborhood.
Often, when rental houses increase in value faster than the
rent can be increased, the owners will liquidate their holdings
and take the capital gains. These houses are often sold as-is,
but may not need extensive improvements other than replacing
the carpets and doing a bit of painting. Or they may have
a lot of "deferred maintenance" issues that will
cost you more than you can afford, so be sure to have the
house inspected.
Your home inspector will be able to tell you if there are
hidden structural faults, and you can usually buy an insurance
policy through the real estate company that will cover costs
of any repairs that weren't discovered before the sale. Some
sellers offer the insurance when they list their house, which
will protect them the seller well as their potential buyers.
During the years when you own the house, you'll still be
able to put money away for your final, mortgage-free home
because you have a much smaller home loan than other people
in your same salary range. And you'll eventually be marketing
the house to a large and eager group of buyers. Cheap houses
that are clean and solid are easier to sell, in my experience,
than larger, more expensive houses, as long as the houses
are located in a livable neighborhood.
Remember - there are a lot more working-class families in
the world than upper-class families. Many working-class families
are dreaming of finding a decent house they can afford, but
they're frustrated because most homes in the lower price ranges
have severe flaws, or they need a lot of cosmetic work. You'll
naturally avoid buying a house with structural damage, (too
expensive), but you will specifically look for the house that
needs new paint and flooring – the easy, inexpensive
projects that many people are afraid to take on, but which
quickly improve the value of your house with little effort
or expense. If your house is in the lower price ranges, your
fixed up house should appeal to a large group of eager buyers.
For my first house, I looked for a friendly working-class
neighborhood that was livable, but not expensive. I didn't
want to wait for a neighborhood to improve, so I found an
area that was already neat and tidy.
The neighborhood I moved into was quickly converting from
rentals to owner-occupied, and some of my neighbors had owned
their homes for years and took great pride in keeping their
homes looking nice. One new duplex was built on my block after
I moved in, and two rental houses were bought by a contractor
who did major repairs (including new roofs and siding). The
contractor's houses resold six months later for more than
three times what he paid for them, and the improvement in
their outside appearance helped increase the curb appeal of
all the houses on the block.
Contractors can afford to do this type of work, and may even
be able to afford holding the houses if they are unable to
buyers quickly. Since my house was smaller and more affordable,
and because it needed no major work, it was a safer investment
for me - and the value of my house went up because of the
work the contractor did on those two rentals down the block.
Almost all the money I saved in the three years when I was
renting went towards my down payment and closing costs, but
the low monthly mortgage allowed me to slowly improve my house
without going into debt. You will need to look at your own
set of skills and your own financial situation before making
the final decision about which house is a good investment
for your particular circumstances.
Some buyers have specific needs that are not met by the average
developer's house, so you shouldn't ignore houses that are
affordable but which seem a little different than the norm.
You may find a house that can easily be sold to one of these
buyers after you've made a few minor improvements, and you
could be getting it for a discounted price just because the
sellers and their agent didn't market the house to the right
group of potential buyers. Be thinking about these potential
niche buyers when you're looking for your first house:
- Once it's fixed up a bit, your house may appeal to a new
immigrant family who wants to settle down in an affordable
house that qualifies for an FHA loan.
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- Or you may look for a house that could appeal to a gardener,
or someone who needs a large garage or shop and who doesn't
care if the house is smaller.
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- Or you might want to buy in an area that is becoming popular
with gays, if it's still affordable.
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- Many developers try to follow the artists – they
know that the affordable lofts and houses that artists discover
will soon be growing in value, and the neighborhood will
soon appeal to the young professionals who enjoy the exciting,
edgy ambiance. If that is comfortable for you, try to get
in early, before the prices go up.
There are many different groups of people with special interests
who just aren't happy with the suburban tract house. Find
a house that could meet the needs of one of those groups after
you've done just a little bit of work, (assuming you choose
a niche market with people who have the money to actually
buy a house, of course), and re-selling the home will be much
easier when you're ready for the next phase of your plan.
Next: How
I Found My First House
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