By CPA SAM
House Hunting
Q. My husband and I are looking to buy our first home. We are currently renting and that lease is up at the end of May. Our credit scores are not terrible but they are not really good either. We have been looking at buying a HUD home and really have no money to put down on a house purchase. What can we do?
A. These are very good questions. The biggest red flag I see from your question is your lack of funds for a down payment. If you can’t afford a simple 3% down, how will you manage the added expenses that come with maintaining a home? Think about what is NOT included when you own the home:
- Taxes
- Homeowner’s insurance
- Mortgage insurance
- Maintenance
- Appliances and furnishings
The last two items are normally the most expensive. If you are not a “handy” person and can perform a lot of normal maintenance yourself (I am included in this category), then you will need to pay contractors to bring the home up to a livable condition first. Keep in mind that HUD homes are foreclosed homes that were insured by FHA loans. FHA loans are normally for first time home buyers. During the last2 or 3 years, many home owners in this program suddenly found themselves unable to keep up with payments on their homes, let alone keep up the homes themselves. For that reason, many of these houses are not well maintained. More about HUD homes here.
Before anyone launches into the home buying process, it is important to understand what you can afford. This will involve two steps. First, you need a personal budget. What are you spending your money on now? How much of your cash is spent on home-related purchases while you are renting? Are there any “leaks”, which is my term for money that could be more efficiently spent? Once you have followed this path for a couple months, you will be ready to determine the amount that you can comfortably spend in housing. Your situation is complicated by the quick lease termination. In this housing market, there are plenty of homes available that are sitting empty with great rates waiting for you.
The second step in the home buying process is pre-qualifying. You can’t buy a home if you don’t know how much you can borrow. Your circumstances affect this pre-qualification number. Do you have good credit? Do you have new outstanding loans? Does your outstanding credit limit your ability to repay a mortgage loan? As you can see, it is better if you can get your house in order (no pun intended) before looking to buy a house. There was a very good article recently on CNNMoney.com about steps to take before going after a home. The better financial position you can get before applying for that loan, the better interest rate you will qualify for. This directly affects your payment.
Get started on that budget. I wrote an article about the process a couple years ago. It should help you get started.
