Buying my first house: is seller financing my best bet? Need tips

[Chris M.]

Hey guys, I'm on a mission to purchase my first home (to live in, house hack, renovate and eventually rent out completely) by the summer of 2017. Here's the problem: I'm self-employed with a credit score hurt by student loans and a NET profit (income) that probably won't qualify me for the mortgage I would need at a bank. So, I started studying and figuring out how someone in my position could best attain a house, and these are the options I found:

a) Use seller-financing to avoid needing a credit check/big down payment

b) Get my dad or another trusted family member to co-sign onto a traditional mortgage with me to qualify

Frankly, option a) (seller financing) sounds infinitely better to me as I would prefer to avoid banks. But here's my issue: I live in Portland, Oregon, a bustling real estate market with very high prices.

From everything that I have gathered, owners of a home usually won't bother with seller financing in a strong market and that if a house IS offered via seller financing in a strong market, that means there is likely something fundamentally wrong going on... like a giant repair that needs to be done.

Are you guys able to find good seller-financing deals in expensive markets like Portland? Am I way off the mark here? I've narrowed down my paths to buying my first home next summer with either option a or b, most likely, and seller financing seems like the way to go, but I want to make sure I don't get myself into a bunch of trouble by doing so.

Thanks guys and I truly appreciate any feedback on seller financing in expensive/bustling markets. I know many real estate investors started their journey by purchasing a home with seller financing, so I'm figuring I can do it too. Look forward to your thoughts.

[Steve Milford]

Chris,

You are putting the cart before the horse. When I got into real estate the first thing I learned right off the bat is that good credit allows your to get what you want and gives you options. 

Yes the market is cooling here. In Vancouver, WA we are connected to the Portland, OR market like a red-headed step child. Yet the prices are increasing because there is little inventory, in the less than $250,000 range. Get into the upper $200's and $300's and there is a lot more inventory. You also might consider Vancouver as an option versus because the inventory problem is less, keeping prices more reasonable.

I have a lender with a 1% conventional down payment, but it requires no other mortgages, a few months of PITI in the bank at closing, and requires, you guessed it, good credit.

I would suggest making your life easier and concentrating on the credit first. I know people first hand that have had major increases in their score in 6 months. Remember, your credit score is the litmus test of how much of a risk you are. By your note, student loans are an issue. If they are in default get them out. If you have little income, tell them that, work with them. Once out of default, consolidate to lower the interest if possible. And then think that way for all your debt. 

Also think about debt-to-income ratio. I am not a lender although I think it maxes at around 45% with some exceptions for FHA. Make sure that your's falls in line with that.

There are 2 ways to fix these issues. One way is with more income and the other is to cinch the belt a little tighter. To me easier is to cinch the belt, and then when that is as tight as it can be, more income obviously is needed. Trust me when I say, most people that I meet prefer "other than W-2" income, yet sometimes it is needed to help you meet your goals. 

It also sounds like you need to meet with a lender and really get your options. If you are asking general FHA questions here, then I am going to assume that you haven't gone down that route. Remember that many different lenders have different programs available just like different Realtors offer different options. When I bought my latest house, I had 7 hard inquiries on my credit as a result of shopping for the "right" mortgage.

If you were my client here would be my advice:

1) Find your local (HUD) housing counseling center and let them help you fix your credit. Don't pay for any service and they will do it for free, except that you need to pay for a credit report. A classic credit repair service, I have been told by my lenders, slams your credit hard. The HUD center is subsidized. The one here is Clark County is great!

2) Remember that your wholesale credit score is lower than the retail one. Check with a lender. Find a program that may work for you like the NHF Sapphire Grant. Only some lenders are certified to offer it.

3) Sign up for CreditKarma.com and watch your own credit. This is a retail score although it will help you monitor and learn how different things being reported to credit help and hurt you.

4) Become a quick study and your own expert on your own credit. And watch it like a hawk. 

5) Start thinking smaller scale and babier steps. What about buying something smaller like a condo, and ask the main office or association about renting it out after a short time. Again, check with HUD to make sure it qualifies first for an underwritten loan. If you need help here, contact me. I tell my clients, to think about what you need now not 5 years from now. Statistically, you are going to sell and purchase again in 4.5 years.

6) Be realistic. People get all jazzed and excited from the media and are misled. On average, people get an apartment for what they need, but turn that on its head and buy what someone else thinks they need in a house. 

7) Get real tax advice from a service that does it full time - not H&R Block, or any other service that only does it near tax time. Underwriting is based on your income minus your payments for housing and those that hit your credit. Having more deductions from your taxes is NOT a bad thing. It means you are acting smarter. Why give Uncle Sam your money if you don't have too?

This discussion is no different than one I have a lot where first-time home buyers want to buy a foreclosed home as their first, yet forget that they need a bare minimum of $25k liquid after closing to make most houses live-able - let alone decent to live it. 

In summary, what you want is doable although really look at what is required. Is the money you toss at it and the headache created worth more than the trouble of fixing what you need to fix anyways - your credit.

Let me know if I can help you.

Steve