One of the questions that Roland and I tend to get often when people hear about our story is “how did you guys buy a house at such a young age?!” We definitely don’t come from money so we did not inherit our house or have it gifted to us (ha). It took a good bit of research, shopping around for a broker, and hard work. BUT I am here to tell you that we absolutely DID buy our first house on our own at age 19 without traditional credit or a down payment out of our pockets! And sharing is caring my friends, so I’m going to detail for you exactly how we did it!
This will be a long one, but I wanna be thorough so hopefully this can help someone who isn’t sure if they can do it (answer: YES you can!) At the end, if you have additional questions, just comment on this post and I’ll do my best to answer it! Ok, here we go…
#1: Figure out how much house you can afford
Most online resources say that a very rough estimate of how much house you can afford is your annual income times three. So if you were making $40,000 a year, you may be approved for around S120,000. Does that mean you *should* buy a $120k house? That depends. What really matters is what your monthly payment will look like. Many online sites have calculators to help you estimate how much a mortgage payment will be (careful though! Many of these only account for principal and interest on the loan. Most don’t take into account taxes and insurance, which I highly recommend you have added to your payment through an escrow account). Once you start looking for a bank/lender, they will generally see what amount you’re pre-qualified for (not to be confused with pre-approved. I’ll explain the difference in a bit). Do some searching to see what interest rates look like for a 30 year fixed rate mortgage (which is probably your best option as a first time buyer).
In our case, we determined that we could afford a monthly payment of about $650 (a little higher than what our rent was). With 2009 interest rates and taxes, we determined the highest we could go to stay below $650/month was about $80,000. We got pre-approved for $87,000, but chose not to look at houses near the top of our budget to avoid being house poor.
#2: Get copies of your credit report
Even if you think you have NO credit, you’re gonna want copies of your report because there may be some error that hurts your score. In our case, Roland had unpaid balances on his report that were actually from a different “Roland”. So we had the wonderful task of contacting the credit bureaus and proving through snail mail via multiple documents that those charges didn’t belong to this Roland. Fun stuff, I tell you. We *finally* got the charges removed—if we hadn’t, we wouldn’t have been approved. That’s how important that stuff is.
Once the negative junk was gone, both our reports were actually blank because we were babies with no credit! I quickly learned that although unpaid things end up on your report quickly, not everything you pay on time gives you credit. Our rent, utilities, cable, phones….none of it was there. Ain’t that some ish? No credit for being a good bill-payer. That’s where step 3 comes in.
#3: Alternative Credit
If you have NO credit (good or bad), some lenders may accept alternative credit. We were turned down by two places. I’m glad we didn’t get discouraged and kept looking because the third time was the charm! Alternative credit is basically you making your case to a lender that you are credit-worthy by providing letters from creditors along with statements showing on-time payments for the last 12-24 months. Some sources are rent statements/ landlord statements, utilities (water, gas, electric), phone, and cable bills. We used our rent history, water, electric, cable, and Roland’s cell phone bills. At age 19, we had just enough history to show for 12 months. Me being type A, we had never been late on ANY payments ever. And I had a file cabinet with all our statements. Needless to say, I think the lender was a little surprised when I walked in with a binder with EVERYTHING he needed on the first day. You can guess how smug I looked. Hehe. Many lenders will also want to see bank statements. They’re not looking to see if you’re rich. Rather, they want to see that you’re not constantly over-drafting or mishandling your money and that you’re getting regular deposits.
If you are considering the alternative credit approach and you have missed payments, been late, or have bank statements constantly in the red, you will have to do some work for several months to get all your statements current, paid, and balanced before you have a decent chance of being approved.
#4: NO new lines of credit!
One of the cardinal rules of lenders is you are forbidden from opening new lines of credit while attempting to get a mortgage. This means no buying a new vehicle, opening new credit cards, or making large purchases on credit. Basically, any of these things could tip the scales away from your chances of approval. Lenders need to see that you are financially responsible, that you can afford a mortgage (which is harder to do if you take out a massive car loan!), and that your debt to income ratio isn’t too high. Wait until after you have purchased a home and closed before doing any of these things!
#5: Down payment options
This one will vary depending on where you live and your circ*mstances, but in many cases you can either purchase a home with no money down (meaning the costs are rolled into the mortgage) or you can find assistance if you are a first time buyer, have modest income, or if you are disabled or a veteran. There are many government programs and grants available to help people who fit into these categories. In our case, our city offered a grant of $5,000 towards closing costs if you met certain qualifications and attended a two day class. We were able to take advantage of that and as a result, we didn’t have to make a down payment! Because we were approved for an FHA loan (which requires only 3.5% down vs 20% with a conventional loan), the $5,000 grant covered it.
#6: Pre-qualified vs. Pre-approved and House hunting!
Being pre-qualified does NOT mean you are approved for a mortgage. It’s sort of a first look into your financial situation to see if you *could* be approved for a mortgage. Once you are prequalified, I recommend getting pre-approved BEFORE you start house hunting to ensure you don’t run into heartbreak if you’re not approved (or approved for less than you expected). Pre-approval occurs when a lender actually runs your credit and verifies that all the income information you’ve provided is accurate. If your stuff checks out, they’ll give you the green light to start the fun part: house hunting!
#7: Tips for the Hunt
I found that I was so caught up in the romance of getting our first house that I loved almost every house. I didn’t care if it was a dump or smelled funny. Wall paper? No problem. Creaky doors? Character. I just imagined all the potential and possibilities. Roland was much more realistic (thank goodness). He would walk in, look around a bit, and say “No” at like 95% of the houses we saw. In retrospect, had he not been so level-headed, we might have said yes to one of the first places we saw rather than being picky and finding our awesome house.
On that note, let me reiterate what anyone in real estate will tell you: location, location, location. We could’ve easily purchased a home twice as big as ours with amazing finishes IF we were ok with living in the middle of nowhere an hour outside the city next to some cows. That just wouldn’t have worked for us. Also, there were some homes that looked nice because they’d been flipped, but they were in sketchy areas. Don’t let fancy finishes distract you from where you’re actually going to be. Is the home close to work? Your kids’ school district? Are you near parks or restaurants? Is the neighborhood right next to a highway or airport? Be sure to keep all of these things in mind as you hunt. You can change paint and light fixtures. You can’t change your neighborhood.
#8: Making an offer
Once you know you’ve found “the one” it’s time to make an offer! Your real estate agent can better inform you here, but your strategy will depend on your location and market conditions. If you find a gem of a house in a neighborhood where houses are snapped up the day they’re listed, you’ll wanna go in with your best offer right away. If the market has slowed down and the house has been sitting for months, you can do like we did and submit an offer well below asking price. The seller will either reject, counter, or accept your offer. In our case, they countered and we countered back multiple times before we accepted. Once both parties accept an offer, it’s time to schedule a closing date.
If all goes smoothly at closing, you receive your keys (and hand cramps from signing mountains of paperwork) and CONGRATULATIONS! You are a new home owner!
I feel like there’s so much more I could write (about getting a home inspection, getting home owners insurance, what to do as soon as you close, etc.), but I don’t want you to starve before getting to the end of this thing. I’ll likely do some follow up posts with more details and tips to consider.
But for the most part, that’s it! Start to finish, I think it took us about three months from walking into a lender’s office to getting the keys to our home.
Trust me, if we can do it, you can too! I hope this post helps anyone out there who is dreaming of home ownership but doesn’t know where to start. If you have any questions, shoot me a comment below!
‘Til next time,
