Last We Left Off…

…we were still in a waiting pattern, learning a little more about our new house every day. New house, we still can’t believe this is happening.

I wasn’t sure if my silence last week was curious, but it was only because nothing dramatic has changed in our situation. The day after I shared our last update, we heard back from the seller’s attorney confirming that everything was legally binding and we could consider ourselves the official accepted offer. We also learned that our mortgage was a go-go, and we could definitely be approved for the amount we were asking for. Both approvals made us feel all joyous and elated. We celebrated with burgers.

It was a paperwork-intensive week, where we printed, signed, and scanned nearly 100 pages to get the details of our loan approved. Paperwork aside, we were back to sleeping pretty well at night.

We thought we had wrapped up the process of negotiating repairs that arose during our home inspection; we had asked for about $3,500 to cover venting, chimney, fire wall, electrical, minor plumbing, and sump pump repairs, but the sellers had negotiated with us until we reached an agreed upon $2,000 discount. Then something strange happened, the sellers went back on their word and decided to bid out the repairs and take care of many of them without involving us, presumably because they thought they could get them done for less than $2,000 and could get away with not offering us anything at closing. We let them go about their decision, expecting the whole while that the repairs they were offering to do would exceed $2,000, because we had priced our offer only covering with materials, and planned on being able to do most of the repairs ourselves to save on labor costs.

Turns out that we were right, and per the receipts we’ve been seeing, they did end up paying about that much to make some of the repairs with a local handyman. Additionally, they also provided us a quote for the chimney repairs–a whopping $3,750–and ended up crediting us $2,500 additional off at closing to help with those expenses. A.K.A. We think we’ve inadvertently won this battle, having most of the repairs made, and still ended up with a credit for closing.

Here’s some more beef that you don’t yet know about, but might benefit from learning from our experiences:

• We chose to get an FHA loan for this mortgage, but not because we were limited to a small downpayment. It’s because we went about getting this loan with cosigners, and no conventional mortgage allows cosigners. Don’t judge prematurely, there’s good reason.

• The FHA loan will require a new property assessment, which we pay for, and is used for the bank to guarantee a few things: that the home is in acceptable living condition (this is usually when they address things like missing railings, broken windows, and peeling paint, and require repairs to be made before closing), and more importantly in our situation, make sure that the property value aligns with the agreed upon price of the home. Banks are not inclined to give a mortgage to an FHA buyer if the sale price of the home (the amount financed) exceeds the property value, because they don’t want the buyer to be upside down.

Some fake numbers: Say you’re buying a home for $100,000, and you’re putting $10,000 as a downpayment (total mortgage, $90,000). The bank only thinks your house is worth $85,000, and therefore doesn’t want to give you a loan for the full $90,000 that you are asking for. You can use this information as leverage to get the price of the home down further, and maybe you’ll be lucky and the seller will drop his price to meet the appraised value, or maybe he won’t, and you’ll have the opportunity to walk away from the sale. In some instances if the seller won’t drop his price enough and the buyer won’t bail, there ends up being an exchange of funds at closing that aren’t related to the loan paperwork; a payout if you will. At least this is how we’re understanding it… at the moment we are anticipating having to be in a payout situation that will lessen the amount we can put down against our mortgage.

It’s not common for this to happen, at least not in the housing market we’re dealing within, and it’s probably even more rare for property value to be so much in question when there wasn’t a bidding war to drive up the price of the home.

If you follow me so far, this is sucky. And there’s a few more reasons I’m bringing it up.

• One good thing about the FHA appraisal, is that it will stick with the house for the next six months. So, the sellers will be obligated to share it with any future offers if ours falls through; for anyone else looking to buy with an FHA loan, they’ll know upfront what the appraised value is so that they can negotiate accurately from day 1. If the appraisal is substantially lower than the sellers want to earn from the sale, they’re bound to have a harder time selling. Reality check time.

• We’re those screwballs who appear to be willing to pay more than the house is worth. Want, want, want. We’re in the position where we already know that our agreed upon price is well-above the previously assessed home value (we unfortunately don’t know if it was assessed last year or last decade). We feel so stupid-greedy, but we swear up and down that the property has a lot of potential, and that it’s worth what we’re offering. The FHA loan has drawbacks, longer processing time, insurance premiums, but hopefully it’ll be worth it in the end. On the other hand, for reference, if we went with a conventional mortgage we would not held to the same loan restrictions; we would’ve been pre-approved for a certain amount with a certain downpayment and worked to stay within that pre-approved amount.

• Co-signers. Back to the topic that makes me feel oddly self-conscious of our situation, but I’m sure we’re not alone in exploring. Last fall when we got started in the mortgage process, the bank found a loophole in that Pete had been consistently an independent freelancer for many years. This discounted his total income, that’s for sure, it made him look like he made only about 20% of what he made at his full-time job, but because his last two tax statements didn’t reflect him being self-employed full-time, we were stuck with that reality. We had on record what he had been earning monthly for the first 9 months of the year, but it wasn’t enough for the bank to grant him a large mortgage himself. Too risky. Bringing me into the equation to have us both on the same mortgage application actually made us look worse. Because I didn’t have the freelance experience for 2+ years, they only looked at me with a person with one year of reported self-employed income at my then-and-now self-employed status, which made my debt-to-income ratio look wildly high when factoring in my car and existing mortgage debts. Everything on paper looks funny, I can assure you that we weren’t and aren’t in a precarious financial state. So, last fall, to make anything happen with the bank, I had the idea of bringing in cosigners, not anyone’s first choice for sure, but what we needed was a stable backer to make Pete’s financial situation look better on paper. Pete’s parents were happy to cosign (and for the sake of saying, we could have asked my parents too, although our mortgage team felt that the both parties having the same last name would make the process smoother). Miraculously, it worked, and all of a sudden we were approved for the mortgage we needed. I’m bringing this up because I think a lot of people shopping for homes–who are financially stable but not according to the bank–might overlook this option. Because something as simple as a cosigner can make or break your ability to buy a home, it would be worth looking into.

• Even though we don’t need cosigners on this new house, we’re still using them. This time around, on the house we’re in the process of trying to buy, our finances look a lot better on paper. With 2 years of solid self-employment 1099’s and tax returns, we would be fully qualified by the bank to buy a house together and afford something completely within the realm of what we are looking for. But here’s the thing: We have decided to keep our current house and use it as a rental property immediately after moving into the new house. By keeping the new mortgage in Pete’s name (again, with cosigners to make life with the bank a little smoother), and leaving me out of it completely, we didn’t have to bring the sale of our current home into the mix as a contingency for our new mortgage. Voila, we’ll own two homes (and hopefully with the addition of rental income, can pay off the first mortgage with the higher interest rate faster).

• Renters, huh? Yes, it turns out that you can watch too many episodes of Income Properties, and then do wild things like decide to sacrifice your beloved house to unpredictable renters. We repeatedly state that we are cautiously optimistic and willing to give it a try. The lot of our current house is small; just over 1/10th of an acre and requires minimal maintenance. The location, we think, is ideal for renters, and many other homes in our neighborhood are set up with rental units or two-family properties. As a single-family house for rent with a garage and fenced-in yard, we hope that it will be more appealing than other rentals in our neighborhood, and suspect that we can ask slightly more in rent than we pay in taxes and mortgage so that we can make a little bit of extra income along the way. I hope we’re not crazy. In any case, we won’t be putting too much effort into getting our house ready to rent until we know for sure that the other house is a sure thing. But we’re excited.

There’s for getting you up to speed; in the next few days, we’re anticipating learning more about the FHA appraisal and hoping to have one last chance to negotiate the price of the home. Excited as we are?

Read the next installment of our story right here.