My hubby and I are in the process of trying to buy our first home.  We currently live in a house that my parents own and we pay the mortgage directly to the bank for them.  Our house payment here is getting to be too expensive with the economy the way it is and not bringing in enough money.  In addition, we hate that the money we pay every month does nothing to help our credit.  We also just want a house of our own that is ours to do what we want with.

Both of us had this helpless feeling like there was just no way we could buy a home right now.  We really wanted to take advantage of the 2009 first time home buyer tax incentive/credit, but we just didn’t see how we could pull it off.  Since we can barely pay our bills now, we have no extra money to build up in savings to buy a home.  My husband only has about 2 years of established credit, but nothing bad on his report.  But because it’s so limited, he has a lower credit score just below what is needed to qualify for an FHA loan (620 score).

However, I want to share with all of you what we recently discovered.  Even if you have absolutely no extra money saved up and you have a lower credit score, you CAN buy a home now!  This is how…

For us, the thought of buying a home meant thousands of dollars in expenses that had to be paid upfront.  We assumed that we would never find a way around that.  The whole process of buying a home is complex and scary.  They certainly don’t make it easy to understand.  I took some time to sit down and try to wrap my head around exactly what buying a home would entail.  And to figure out just what we had to have in order to make it happen.

We wanted to be realistic and choose a home that would give us an affordable monthly payment.  Because times are tough, we want to make sure that we still have extra money every month to save up for whatever we want.  Right now we are paying $815 per month for my parent’s mortgage.  It’s just too much with our other bills.  So, we decided to look for a home in the $50k to $70k range with the ultimate goal of the final purchase price being no more then $60k (remember that you can negotiate the purchase price lower).  I thought that all we would find were ugly, terrible houses, in bad neighborhoods for that price.  To my suprise, we found over 80 homes that were exactlly the price range we needed and they were good homes too!

Now, because we have low scores and little established credit, it seems that FHA is the way to go.  This is because an FHA loan is much more forgiving in terms of credit history then other loan programs.  It also allows for a very low down payment requirement of 3.5%.  Don’t let the down payment scare you off though!  Here’s why…

I’m sure you all have hear about the $8,000 2009 first time home buyer tax credit?  To be clear, not everyone will get the full $8k.  The deal is that you can get up to 10% of the purchase price of your home with a max of $8,000.  This tax credit will allow you to borrow against it and use the money towards down payment, closing costs, or principal reduction for buying your first home.

I needed to know exactly what expense we would be expected to pay and how we would take care of them.  Like I mentioned, there would be 3.5% of the purchase price for the down payment.  For our scenario, we will assume we are buying a $60k home which would give us a monthly house payment somewhere around $600.  So that means our downpayment will be $2,100.  Then we will estimate (on the high end) that our closing costs will be $3k.  This number is based off of the average cost for a more expensive home.  This gives us a total of $5,100 that we will be responsible for. 

The good news here is that the first time home buyer tax credit will cover ALL of these expenses!  Since our home is $60k and the tax credit gives us 10% of that amount, then we get a credit of $6,000.  That is more then enough to cover our closing costs and down payment!  The money that is not used will be included in our tax refund when we file our taxes.  So we would get an extra $900 cash back!

There are going to be a few other minor expenses that you might have to pay out of your pocket.  Some lenders make you pay for your credit report.  This fee can range anywhere from $20 to $45 on average.

You may also have to pay for your appraisal fee ($150 to $400 depending on the purchase price of the house) and inspection fee (up to $200, according to FHA, based on the size of the home).  I have read that FHA considers those to be closing costs though and so they may be covered by the tax credit as well.  I am trying to confirm this with our realtor and will update when I know for sure.

Everything else is considered a closing cost or is paid by the seller (including your realtor’s fee).  So it’s possible that the only thing you have to pay for is the credit report and gas money to go see houses.

Don’t let your credit report deter you from trying to buy your first home.  The minimum score requirement is 620.  If it’s lower, then that means you may have some bad things on your credit or you have no credit.  FHA will overlook some collection accounts.  What does have to be paid and current are any judgements, liens, or federal debts.  So, if your credit score is too low… then paying off some of those things will raise it.  Lowering your credit card balances will also increase your score (some times significantly).  If you have little to no credit, then FHA will allow you to use other accounts such as utillities, rental agreements, cell phone bills, insurance, etc to build a new credit report for you.  Those accounts can be added to your credit report and also raise your score.  I personally have done this for people when I worked for a mortgage company.  The best thing to do if you are concerned about your credit, is to speak to a mortage lender about it.  They will tell you what the best action would be to get to where you want.

Also keep in mind that for FHA your amount of debt (installment loans and credit account) cannot exceed 41% of your income.  And the amount of mortgage payment that comes out of your paycheck cannot exceed 29% of your pay.

For those of you who are concerned that you will not be able to buy your home before the first time home buyer tax credit expires, there are other options!  It is still in question whether or not there will be a 2010 first time home buyer tax incentive.  I can say with confidence that the government will probably not tell us until the current credit expires.  So, do not worry.  You are not completely out of luck if you cannot pull this off in time.  There are many other programs in place to help with down payment assistance and closing costs.  They may not be as good as the tax credit, but they do exist.  For example:  Here in Columbus, Ohio there are two programs that we can take advantage of.  One is with Franklin county and the other is the city of Columbus.  They both offer a set amount of funds that are given to you if you buy a home within their area.  You just need to research what programs are available in your area.

So to recap, don’t think that because your pockets are empty, that you cannot buy a house right now.  Obviously you have to have a job and it has to pay enough to support the amount of house you’re trying to buy, but you don’t have to have a bunch of money saved up and you don’t have to have great credit.  You don’t even have to make a lot of money either.  Keep in mind, all the money you pay towards rent each month is money you can pay on a house payment and you will get more for your money.