Affordable Home Loans: Fixer Upper Houses - Part II
by Rachel from Knoxville, TN
Ask Kate about affordable home loans for fixer upper houses: Renovation mortgages often provide affordable solutions for cash-strapped home buyers like Rachel and her husband who want to rehab a fixer upper. Even though the mortgage payment would be less than half of Rachel's current rent, her question leaves me concerned. I'll explain why in a moment.
Buying a Fixer Upper House as a Student By Rachel from Knoxville, Tennessee
My husband is currently a non-traditional student, finishing his undergraduate degree. We have two kids, and I am currently at home, but wanting to work.
We rent a house but want to buy a fixer upper.
The problem we have with getting a mortgage is that we have very little income since school loans do not count as taxable income. Even with the school loans, our income is still very low.
However, we are able to pay our bills and have a good rental history.
We want to buy a home because, with a mortgage, our housing cost would be cut in half, and where we live, there are several older houses that we love that cost close to nothing ($50-60,000).
I understand that there are options with renovation loans, but I still doubt that we could do so without an income. When I say that we do not have an income, I mean, most of our income comes from college loans. Neither of us have a nine to five job -- my husband is a musician, and I am still at home with very young children.
Here is what makes no sense to me about the borrowing world. Although my husband and I could buy a new car (though we choose not to have a car payment) and we could definitely afford a mortgage for the houses we have looked at (and houses do not depreciate like cars), we likely cannot get a lender to offer us a mortgage.
Ask Kate answers: Buying a Fixer Upper House as a Student
I understand how odd it must seem that you are running into problems getting mortgage approval when the proposed house payment on the fixer upper you want to buy would be lower than your rent.
But mortgage underwriters (employees with the authority to grant home loans) are required to follow lender guidelines. As you have discovered, proceeds from student loans are rarely considered qualifying income.
Beware of Exploding Mortgages
So here is my concern based on the last decade. Borrowers with non-traditional jobs, too much debt, non-verifiable income, less-than-perfect credit, and/or insufficient savings were eager enough to buy homes that they agreed to subprime mortgages with inferior terms.
Depending on the borrower's financial profile, mortgages with these terms can quickly become unaffordable, regardless of enticing initial interest rates and monthly payments.
Now don't get me wrong! There's a time and place for non-traditional home financing options. In fact, I outlined several for T. Ford at Seller Financed vs Stated Income Mortgages
But if you pursue one of these paths and are offered financing terms that seem too good to be true, read the fine print and proceed with caution. I also strongly recommend using a trusted adviser, familiar with your personal and financial situation, to peruse the paperwork.
Buying Fixer Upper Homes
You mentioned the home you want to buy is a fixer upper.
Don't think I am against buying homes that need renovation when I say, Be Cautious
Although the proposed house payment could end up significantly less than your current rent, you must also budget for future expenses that might not addressed in the renovation loan.
Common big ticket items include the roof, furnace, water heater, kitchen appliances, electrical system, plumbing, and outside drainage, to mention a few.
Hire Licensed Home Inspector
As a side note, beware of anyone who claims that a fixer upper merely needs cosmetic repairs or a little elbow-grease to make it livable. For this reason, you must insist on an upfront certified home inspection
when you make an offer.
Even if you don't end up buying the house, the cost of the inspection will be money well spent.
Affordable Mortgages and Affordable Homes
So be methodical about calculating affordability. Both the house and the mortgage must be affordable to ensure successful homeownership.
You just finished reading the second Ask Kate letter in a mini series on affordable home loans. Now go to Affordable Mortgage Payments After Divorce - Part III
for the third post in the series.
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