FTHB in Austin, TX. Am I Crazy?

Question

Hi BP friends,

I’m a single 32 y/o looking to purchase a SFH as a primary residence + house hack in Austin, TX. I’ve lived here for 9 yrs and plan to stay long term - my work is split 50/50 between being virtual and location specific.

I am SE and earn 52k/yr gross. I work part time hours (~20hrs/wk @ $50/hr) and spend the other time developing skills to expand my business into new areas in the coming years. I currently turn down new clients/work in lieu of maintaining flexibility and free time in my schedule to develop said skills.

Here’s a quick rundown:

• Excellent credit 805
• DTI 7% (student loan balance of 5k - no other debt)
• Cash 42k
• Trade-specific assets 30k
• Investments 25k

My goal is to purchase a 3/2 SFH home for 250-300k using a 3% down conventional loan and to rent out the master BR/BA (I need 2nd BR for home office). I currently rent a SFH with a roommate for 1700/mo. Rents in my area are 1800-1900/mo. I am not looking to cash flow. I want to lock in my housing expense, avoid the uncertainty/instability of renting (landlord is selling the house I live in) and put down roots in the ever-increasing expensive city that I love and want to live in for years to come.

I realize that my situation is much less appealing to a lender than that of a high income-earning individual with less variables. I took a hit in revenue (along with the rest of the world…) in 2020, but things are back on track with Q1 of 2019.

• Am I foolish to try this? 
• Should I pay off debt (5k in student loans) in order to maximize lending potential?
• Have you presented a signed lease agreement with a renter to a lender? Lawyer friend told me that some may take into account 75% of rents collected.

I just need some advice and thoughts on the situation. Thanks for taking the time to read.

Sarah Davis · Answer

Hi Sam, I am in the same boat as you. Something you may consider is to use some down payment assistance programs to hold on to more cash. You can find them through the TSAHC, TDHCA, or the Travis County HFC. Your current income more than qualifies. I am looking to do this.

Good luck!

Jason Wray · Answer

Sam,

Before you make any moves in the direction of bank financing you need to make sure your bank/lender will accept your SE part time situation.  Self employed is tough all on its own to qualify as you need (two full years tax returns) with no declining income.  When you say you are SE but only work part time, what do you mean?  Do you do contract work for one or more companies that log or clock your hours?  If not I would not tell anyone you work part time because how often you work as self employed is really TMI.

Second are you 1099 or W2 paid through your own company or other companies?  You may bring in $52K a year but what is your total income after deductions and Non reimbursed business expenses?  The bank will use the adjusted amount after deductions and losses so your DTI may be higher than you think.  I am going into detail to help you avoid getting a decline or turned down by one or more lenders.

My advice is to make sure that your bank/lender or broker who is doing the approval is well aware of your SE/part time situation and that you have been in business for (x) years and no declining income.  I mention declining income because a lot of times when SE customers go form full time to part time they tend to show a decreased annual salary.  Ask these questions up front so that you do not spin your wheels with a lender who says they can offer financing but may not know their own or other investors guide lines...

As far as your debt do not pay it off just continue to make payments paying off dent can sometimes lower fico scores due to lack of revolving accounts and lack of open and active trade lines with high number of months revolving.  I am sure your lawyer friend is good at his legal job but a lender is not concerned with a lease agreement.  A new renter or lease agreement is considered "proposed income" and cannot be used on traditional loans.  Portfolio will look at the rent roll but will require 30% down to use that income and not your taxable income.

Last but not least your never foolish when it comes to buying real estate so long as you do your research and lean on others for help.  Just make sure you find a bank/lender preferably a Fully Delegated bank/lender.  That way there you know they underwrite all of their own files and are a Direct Endorser with little to 'No" overlays.

Jordan Moorhead · Answer

@Sam Nelson to buy a home in that price range in those areas is near/pretty much impossible. You could find a condo there that my fit your needs or you'll need to go out a bit further but even further out finding a house in that range is getting tough. Average price in Austin is right at $500,000 these days. Even Williamson county has an average price of $400,000. You'll see homes listed under $300,000 but those are going 10-30% over list price with full appraisal waivers meaning you get an appraisal but pay the difference if it comes in low.

Jordan Moorhead · Answer

@Sam Nelson Manor is a great option as is Kyle. Close to the city but more affordable!

Sam Nelson · Answer

Thanks @Jordan Moorhead and @Ryan Kelly for taking the time to reply and for the info. I am open to purchasing a home that needs some basic renovation, but don't want something that is uninhabitable. Looks like I'll focus on boosting my savings and income and I'll consider those other areas farther out.

Ryan Kelly · Answer

@Sam Nelson I agree with @Jordan Moorhead, you'll have a difficult time finding anything in Williamson County that will sell under $300,000. I would look farther east for more affordable markets (Manor, Hutto, Taylor, Elgin, Bastrop) to find properties you can buy under $300,000. The competition is simply too fierce closer to Austin to get a single-family home under that price point unless it isn't worth living in. You can consider condos if you want to be closer in, just make sure you have a condo-specific lender as many are non-warrantable which requires special financing. Hope this is helpful.

Jaron Walling · Answer

@Sam Nelson

https://www.nytimes.com/2021/1...

Not to discourage you but if you haven't read this yet I'd check it out. It's eye opener to say the least.

Bruce Woodruff · Answer

Don't wait, we don't know where this economy is going. Jump in now.....your situation sounds fine to me!

Dan Burstain · Answer

@Michael A. there are homes for sale in Cedar Park you can still get under $400K.  That won't be the case in 6 months probably but right now you can snag one in the mid to upper $300's.  Cedar Park has a number of big time projects going in that will boost those prices past $400K and closer to $500K in the next year or so.

Michael A. · Answer

Are homes in Cedar Park not obtainable for under 400k? I’m talking about a <1500 sq ft 3/2 house in a recent school district. Judging from recent sales history on Redfin it appears that Round Rock, Leander, Cedar Park, and the other surrounding areas have had some lower priced homes sell. I realize that this post was from months ago but would like to hear an updated opinion on how things currently stand in the market.

FTHB in Austin, TX. Am I Crazy?

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