Please join me in welcoming Anum from Current on Currency to the blog today! She writes about personal finance for millennials, and shares some great tips on how to achieve the American dream in a non-traditional way. If you've ever wanted to purchase a home, but didn't have enough savings or good credit, this one's for you!
But buying a home today is not as easy as it was 7 years ago.
Many banks tightened their belts and severely limited their lending and mortgage underwriting after the 2008 collapse. People who may have qualified for a mortgage in previous years found themselves no longer eligible – forcing them to keep renting. As the number of renters increased, so have monthly rent fees. And many first time buyers are finding it harder and harder to qualify for a traditional mortgage.
Now that I’m well into my 20s, between scrolling through engagement photos and baby pictures on Facebook, it has also become normal for me to read updates on friends becoming new homeowners. Of course, like any good friend, I share their excitement on reaching this significant milestone.
But I also started noticing that quite a few of them were achieving this all-American dream in less traditional ways. All they did was use a little research and an open mind to find a way to own the roof over their heads.
Here are the tips I learned from my frugal-minded friends:
1. Get Help from Your Banker
Your credit does not have to be perfect to get a mortgage. A long work history and an established relationship with a banking professional goes a long way toward securing a mortgage. There are many programs that a loan counselor or mortgage broker could recommend that may work within your income, credit history and lack of savings.
Fannie Mae also recently announced a new program that would allow borrowers to put as little as 3% down toward a home purchase. Called the HomePath Ready Buyer program, it is meant to help first-time buyers enter the housing market. Closing cost assistance is also being offered for first time buyers interested in purchasing a HomePath-approved property.
There are other low-down-payment mortgage options out there as well, so be sure to ask your banker about them when researching your purchase.
2. Seek Alternative Financing
Sellers may be willing to finance some of the balance for you as a way of getting the home sold and generating income for themselves. It’s also possible to negotiate that the seller cover part or all of the buyer’s closing costs as part of the purchase negotiations.
A highly motivated seller might be willing to help you find ways to afford the house and obtain a mortgage. If the current mortgage agreement on the home permits assumption of the mortgage, talk to the seller about that possibility. You would have to secure enough funds to compensate the seller for the equity they built in the home, but you could then assume their mortgage payment and rate.
3. Move to a New Area
The U.S. Department of Agriculture currently offers zero-down financing through their Rural Development Guaranteed Loan Program, making your lack of savings no longer an issue. Many homes eligible for the program can be found on the outskirts of major cities in more rural areas, and could be your ticket to homeownership.
There are income eligibility standards and purchasers must be U.S. citizens to qualify, but it's worth applying to see whether or not you would be accepted into their program.
4. Attend Auctions
Auctions are a great alternative for those who can’t secure a conventional mortgage but have substantial savings. The entire purchase price of the home is usually required when buying at auction, and there are usually great bargains to be had.
From fixer-uppers to foreclosed properties, buying a home at auction eliminates a monthly mortgage payment for the buyer and offers the opportunity to buy a much nicer home than you could normally afford.
There are countless DIY home improvement projects to fit any budget or skill level, so if cash is not your problem, check out local real estate auctions to find out what’s available for purchase in your area.
5. Consider a Mobile Home
Manufactured homes are getting better every year — some people can't even tell the difference between a manufactured home and a site-built one — making them an excellent option for first-time homebuyers.
They not only allow the buyer to build equity with their monthly payments but cost considerably less than a traditional, single-family home, sometimes up to 20-25%. And since they vary greatly in style and cost, those with tight budgets can almost always find one in their price range.
6. Purchase a Prefab
Prefabricated homes, or modular homes, are another option for first-time homebuyers. These aren’t the same as mobile homes; they are permanent residences that are appraised, insured and mortgaged the same way as standard on-site homes.
Buyers will basically be building a customizable home tailored to their needs and expectations, but it can actually cost less. Rather than have an hourly paid contractor on site building the home for you, each home is made in a facility that streamlines the process.
Remember, if a traditional mortgage doesn’t work for your current situation, don’t abandon your dream – just alter it slightly!
Keep saving, keep researching, and do your best to repair or improve your credit. Buying a home may seem impossible to someone just starting out, but it isn’t. And with today’s soaring rent costs, a non-traditional way to become a homeowner may be the only thing that makes sense for you.