I’ve heard lots of people tell me how they would love to buy their first home. They tell me how they want at least 3 bedrooms, 2 bedrooms, a garage, etc. When I ask them what percentage they are willing to put down, they often tell me they don’t have anything to put down, or just a few thousand dollars. This won’t even pay the fees for the mortgage.
So, what do you do if you want to buy a home and put yourself on the path to a comfortable life, but don’t have money to put down? Well, let me begin by saying that banks like to see you have at least 10% of the value of a house as a down payment, and strongly prefer 20% down. If you don’t put 20% down you will probably need to purchase Private Mortgage Insurance (PMI), which protects the bank (not you), in the event of foreclsure. This can be avoided by using creative financing, such as owner financing or an additional loan to make up the down payment and satisfy the banks desire for a 20% equity stake. Although, this isn’t that great either, because you’ll probably have to pay a higher rate on that additional loan ni place of the PMI.
You might be able to find a bank or mortgage broker who will finance the entire purchase price, but beware. In order to make the mortgage more affordable for the borrower (and ensure a commission), they may mention negative amortization mortgages or interest only loans. Without going into detail, remember this: With an interest only loan, you will NEVER own your house or build any equity unless you pay additional money to chip away at the principle. With negative amortization, your mortgage balance will actually RISE and you will owe more than you paid (if you make minimum payments).
So, what are your options? Well, ideally you would put 20% down, get a 15 or 20 year mortgage, and try to pay the loan off early. Unfortunately, ideal doesn’t normally happen. You’ll probably end up getting a 30 year mortgage, which is quite popular and will give you cheaper payments. Since rates are historically low, I would recommend a fixed rate loan over an adjustable rate, especially iif you don’t like taking risks (if rates rise, your monthly payments could rise substantially). As for the downpayment, try to save as much as possible. You might not have 20%, or even 10%, which will increase your payments, but you can work around this.
Remember how I described the lovely single family home that it seems everybody wants? Don’t fall for it. If you are starting off with a high rate, low equity, high payments, and more than 30% of your earnings going to the mortgage payment (including taxes and insurance), it is a foreclosure waiting to happen. My advice to you: Buy a multifamily property. A 4 unit property to be exact.
You might have just turned up your nose and said you don’t want to be a landlord, which I can understand, but look at the positives. A 4 unit is the largest propertty you can buy which is still considered residential. Once you move up to 5, you move up to commercial, and you move up to larger mortgages, more insurance, more taxes. Just stay away. With a 4 unit house, you can live in one unit and rent out the other 3. Let’s take a look at the benefits.
Let’s say your mortgage, taxes, and insurance is $2000 per month. That’s a lot to pay, but what if you were getting $700 per month, per apartment?
3 x $700= $2100 rental income
$2100-2000= $100 profit
If you look at this carefully, you will see that the tenants just paid your mortage, property taxes, and house insurance, and you still have $100 left over. Oh, by the way, did you notice that you are liveing rent/mortgage free? Other people are paying your expenses! Now let’s say that you were spending $600 on rent before you purchased the property. You are saving that money, plus the $100 profit.
$600 + $100= $700 actual profit.
If you can save this money each month, it will amount to $8400 per year. If you can save it for 2 years, you are looking at almost $17,000 to use as a down payment on that single family home that you really wanted. But wait! We’re not finished.
The biggest mistake you couold make is to sell the 4 unit. The smart thing is to buy another house (prefereable another 4 unit, but that’s up to you), then RENT your apartment in the four unit. Now, you will be making your original $100 profit, plus the $700 from renting the other unit. This money could be saved or used toward the mortgage on the next house. Gradually, you will build equity, and benefit from several tax breaks. In addition to writing off mortgage interest, insurance, taxes, and tenants utility bills, you can also deduct any repair expenses incurred in a rental unit, common area (ex. halls, stairways), or the exterior of the house (painting, landscaping, etc).
You could conceivably keep moving every two or three years, purchase new property, and steadily see your income increase. Then you can stop worrying about whether social security will be around when you are ready to retire because you will have a portfolio of properties that are paid off and earning you income.