First Time Buyer catch 22

OnTheWay · Joined: 15 Jul 2007 Posts: 6

I have a couple quick questions, you all have been so helpful. We have found a reo home we are interested in. They are asking a little over 300k, the house has been listed since Jan. Is it reasonable to offer less initially? We are meeting to apply for a loan today, we're hoping to qualify for a fha and a city first time buyer assistance on the down and closing. What confuses me is that in order to qualify for first time buyer help (city/county) you usually have to make less than 65k per year, we're just under that. Yet lenders want you to make more to afford the mortgage. Any advice for how to approach this issue when we meet with the lender? As for credit score, hers is 642 and mine is not so pretty at 560. I just want to prepare myself in case we don't stand a chance. One last question, in regard to the house. It is in a historical district but not on the local register. It is a definite fixer, but we're concerned the historical society in the area is going to try to micro-manage us. Do historical societies have a lot of pull? i.e. can they fine us for paint color, etc.?

Thanks.

ken(TX) · Joined: 23 Sep 2005 Posts: 184 Location: Dallas, TX

I really encourage first time homebuyers to avoid foreclosed properties. Now that's a blanket statement and of course there are exceptions. However, your post is a good example of why many bank foreclosures are best for those with financial stability and ability to put additional funds into the home after closing.

First of all, the city's first time buyer wants to help low to moderate income families become homeowners. It defines those people by household income. Make too much...you don't qualify. There has to be some way to delineate and that's it.

Mortgage lenders are looking to make sure you qualify for the loan based on the 4 Cs of lending....credit, capacity, collateral and cash.

Credit - do you show a willingness to pay your other bills. This tells the lender your willingness to pay their loan.
Capacity - can you actually afford the new monthly payments. Are you maxed out now? This is where debt-to-income ratios come in.
Collateral - what condition is the property in and what is its reasonable fair market value in its current condition. With the exception of specific programs for rehabbing a property, lenders are going to want the home in liveable, safe conditions when you buy it.
Cash - Can you make a down-payment? Will you have money left over after you buy the home (reserves).

Your post tells me that Credit is a little dinged and if you are using a home buyer grant then perhaps cash is an issue as well. You describe the property condition in a manner to suggest the collateral may be a problem and as for capacity? 65k per year is $5,415 per month, so if you borrow 80% of the $300k ($240k) you are looking at payments including taxes and insurance of say $1800 per month. So unless you have no other bills you can only afford say another $650 per month in expenses before you are over 45% debt-to-income.

I don't mean to sound defeating, but looking at what I've laid out perhaps looking at a smaller house in ok condition is a better idea for you at this time?

I could go into the additional reasons that bank foreclosures require savvy, knowledgable buyers but I think I've given you enough to ponder. If you aren't working with a real estate agent you need to start. That doesn't mean your sister or your aunt Wynona is the best person for you either. Interview a couple of realtors and find one that works with first time buyers and understands your questions, concerns, etc.

good luck.

OnTheWay · Joined: 15 Jul 2007 Posts: 6

Thanks for the response Ken. We haven't worked with a realtor bcs we're still working on the loan part and don't want to waste anyone's time. Though the house is reo, it appears to be up to code and liveable. The fix is cosmetic, it is priced 90k below the last appraised value. We haven't contacted the seller agent to tour the inside bcs I read that if you view a house without an agent, then get an agent to rep you there may be a problem with them collecting a fee. Is that true? By CA standards it is below market, and there isn't much out there below the 300k mark be it condo, smaller house or otherwise. We have enough to do 5% down, but the 1st time city assist would cover the down and closing. Leaving our 5 % as safety. The dings to the credit are old. Is the debt to income ratio of 45% the standard? Doesn't HFA have a 3% down loan with an income qualification?

Haplo · Joined: 20 Jan 2005 Posts: 2406 Location: Springfield, IL

Quote: It is in a historical district but not on the local register. It is a definite fixer,

You may want to consider an FHA 203k Rehab loan. This would allow you to make those cosmetic updates that you're talking about, and finance it into the loan.

FHA is a bit more forgiving on the credit standards from your traditional conventional loans, and many DAP programs work with FHA loans. They may not be ok with the 203k version of FHA however, so you'd want to double check this with the specific program you are looking at.

45% is still the "exception" cap of FHA, so you may have some concerns there, but you can use a non-occupying co-borrower (family member) that can help to bring up your income. The down payment on the FHA is based on your state, and I believe for CA it's 2.25% on your loan amount. There is a 3% investment requirement, but the additional .75% would be made up in your closing costs (as long as the seller doesn't pay for ALL of your costs.)

OnTheWay · Joined: 15 Jul 2007 Posts: 6

Thanks for the info Haplo. Is a "non-occupying co-borrower (family member)" somewhat like a co-signer?

On the offchance we were approved, would it be better to schedule a tour of the home or interview a realtor to rep us first? I guess what I'm asking is, would meeting with the seller without a realtor pose a problem if we found one once we decided to make an offer?

ken(TX) · Joined: 23 Sep 2005 Posts: 184 Location: Dallas, TX

Neither Haplo nor I can give you real estate advice without being licensed real estate agents in CA where you live. My personal opinion is you should interview several realtors and look for one that specializes or has lots of experience with buyers like you and properties like the one you are considering. Get representation first.